India's online gaming sector is navigating uncertain waters as it grapples with a higher 28% tax and state bans on skill-based games, sparking concerns about its future. Additionally, short-term funding has started to dry up.

"It's surprising that in India a ₹2 sachet of ketchup has an FSSAI (Food Safety and Standards Authority of India) label, but online games don't have any security or quality seal," said Anuraag Saxena, head of E-Gaming Federation, in a conversation with Mint.

The industry body, which has outlined voluntary standards for India's online gaming sector, is among petitioners that have legally challenged a higher goods and services tax for the industry and the authority's tax demands adding up to nearly ₹1.5 trillion.

"Consumers are ending up losing lakhs on unscrupulous games with no redressal mechanism. The country must have a whitelist for gamers to be able to distinguish which is legal and which is not," Saxena said.

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Self-regulatory bodies  have been proposed earlier as well to promote ethical practices by online gaming platforms and create a stable and predictable regulatory environment. These will also ensure quick resolution of grievances and implement standard operating procedures that meet global standards. 

But there has been no government nod yet for this. Currently, the government serves as the regulator for the online gaming industry. The ministry of electronics and information technology (MeitY) has said in the past that it will develop a framework for permitting and certifying online games involving monetary transactions.

Despite these hurdles, the legitimate gaming industry in India is expected to grow by 20% until the end of 2024-25, reaching a value of ₹23,100 crore, according to Saxena.

A taxing hurdle

"Globally, the gaming industry has seen exceptional growth, with over 1.2 billion players worldwide. India has been a key contributor, with 500 million active gamers, and 200 million of them willing to invest in enhancing their gaming experiences," Saxena said, referencing a report co-authored with Grant Thornton titled 'Guardians of Safe Play: Ethical Gaming for Vibrant Bharat'.

Over the last five years, India's online gaming industry has raised $2.8 billion from domestic and global investors. However, funding activity in the short-run has slowed down, said Saxena.

Last year proved particularly challenging for the skill-based gaming sector, which faced the dual impact of a higher 28% GST rate and multiple state bans. Following the 50th GST Council meeting in July last year, the tax authority proposed implementing a uniform 28% GST rate on the full-face value for online gaming, casinos, and horse racing. 

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This significantly impacted the online gaming sector, leading to widespread layoffs and the closure of several startups due to the increased tax burden.

Following an outcry from the industry and multiple petitions, the Supreme Court in April  consolidated 27 writ petitions challenging the GST hike into a single hearing. This legal action, spearheaded by Gameskraft and supported by writs filed by the E-Gaming Federation and Play Games24x7, marked a crucial step in the industry's fight against the tax increase.

Need regulations that can spur investments

The E-Gaming Federation's joint report with Grant Thornton highlighted the importance of distinguishing between games of skill and games of chance to regulate the real money gaming industry effectively.

Games of skill rely on a player's abilities, while games of chance are predominantly driven by luck. Under Indian law, games of skill are generally considered legal, while games of chance are not. 

This distinction is pivotal for making informed decisions about the legal status, taxation, and regulation of gaming activities. Understanding these differences can help create rules that address the specific risks associated with each category while supporting innovation and growth within the gaming industry, according to Saxena.

The industry's contention is that skill-based games are being taxed in the luxury category, while offshore illegal betting companies, operating servers in other countries, are building a strong network in India without scrutiny. Despite several advisories from the government stating that betting and gambling are illegal in most parts of the country, advertisements for betting platforms continue to thrive.

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India's online gaming industry is now pushing for a more rational approach to GST collection. 

"An industry must contribute to GST, but the question is how much and on what basis it should be levied. This should be a process of conversations and consensus. We are confident that this will resolve itself through policy and legal channels," Saxena said.

"We need gaming regulations that serve both national and consumer interests," he added. "Regulations will soon catch up with the seriousness this industry deserves. Once that happens, investments will become more favourable. The size of the Indian gaming market is too significant for global investors to overlook."