New Frontiers: Online Gaming Report 2023 PDF

New frontiers Navigating the evolving landscape for online gaming in India December 2023  Foreword In the dynamic landscape of India’s thriving media and entertainment sector, the online gaming segment has emerged as a powerhouse, where innovation, engagement, and economic potential converge. Th...

New frontiers Navigating the evolving landscape for online gaming in India December 2023  Foreword In the dynamic landscape of India’s thriving media and entertainment sector, the online gaming segment has emerged as a powerhouse, where innovation, engagement, and economic potential converge. The recent years have witnessed a captivating surge in online gaming’s popularity, propelled by factors such as widespread smartphone penetration, enhanced internet connectivity, burgeoning youth population, heightened awareness and the development of local gaming content tailored to individual preferences. The online gaming segment has grown at a CAGR of 28% over the last 3 years to reach INR16,428 crore in FY23.1 Notably, the gaming phenomenon transcends beyond metropolitan areas, finding its impetus in the consistent growth of Tier 2 and 3 locations. The stage was set in 2020 when the pandemic confined people indoors, giving rise to a monumental spike in mobile game downloads. As the world sought refuge in the virtual space, the allure of online gaming offered a new avenue for entertainment and community engagement. India continues to be a ‘mobile first’ market with 94%2 of its total gamer base engaging in mobile gaming experiences. The audience is unique compared to other regions — predominantly young and male, particularly in popular genres like fantasy sports, adventure, battle royale and card games. Despite its rapid ascent in terms of game consumption, India’s online gaming segment constitutes a mere 1.1% of the global online gaming revenue. Advertisement-led monetization holds significance in India, as the paid user base is predominantly concentrated within the RMG segment. However, with the anticipated increase in supply of world-class titles, advent of cloud gaming and expanding scale of game development studios, India is poised to mark its global presence not only as a consumption hub but also as a monetization epicenter in the coming years. The online gaming segment has historically attracted substantial investor interest with investments worth INR22,931 crore3 from both domestic and global sources between FY20 and FY24 YTD. The recent year, however, experienced a lull due to macroeconomic headwinds and changes in taxation. For the segment to truly thrive, a stable regulatory and legal framework is imperative. Uncertainties can impede the realization of its full potential and hinder rapid scalability. This report aims to delve into the future growth trajectory of the Indian online gaming segment, drawing insights from global regulatory practices of leading nations. 1. As per the letter written by E-Gaming Federation (EGF) and the Federation of Indian Fantasy Sports (FIFS) to the GoI; industry discussions; EY FICCI report 2023 - Windows of opportunity; EY analysis 2. Kalaari Capital Gameconomy Report 2023 3. Tracxn database After the new online gaming regulations came into effect in April 2023, the Indian gaming segment has sought to resolve various questions surrounding the legal status of different online gaming formats. This marks a crucial step toward providing clarity to the segment, investors, state governments and other enforcement agencies. While the companies are gearing up to reinvent themselves in the online gaming 2.0 era, the endeavour is now to facilitate a smooth and robust execution of these regulations and redressal of implementation hurdles. Raghav Anand Partner, EY Parthenon Contents 06 Executive summary 08 Factsheet 10 India’s thriving online gaming landscape New regulatory framework and tax 18 regime in India and its impact International standards for regulating 28 and taxing online gaming Charting a path forward: building a sustainable 36 future for India’s online gaming segment Synthesizing insights and concluding 39 reflections 40 About the report  Executive summary The online gaming segment in India has seen remarkable growth with immense economic potential. The country boasts a substantial gaming community, comprising 42.5 crore4 gamers, the second largest globally after China. The sector holds the potential to boost Foreign Direct Investment (FDI) inflows, employment, and investments in various sectors. It will also catalyze ancillary sectors like fintech, cloud services, data analytics, and cybersecurity. From FY20 to FY23, the online gaming segment in India experienced a notable CAGR of 28% culminating in a market size of INR16,428 crore in FY23. Industry estimates suggest it will reach INR33,243 crore in FY28E, showing a 15% CAGR.5 The segment has attracted consistent investments totalling INR22,931 crore6 between FY20 and FY24 YTD from both domestic and foreign sources. Furthermore, it directly and indirectly employs around one lakh individuals, with the prospect of expanding to 250,000 job opportunities by 2025.7  The real money gaming (RMG) sub-segment constitutes a substantial part of the online gaming ecosystem, comprising 82.8%8 of the market share in FY23, with more than 400 RMG start-ups9. Industry estimates this sub- segment to contribute around INR6,500 crore-INR6,800 crore10 as direct tax revenues (comprising TDS and corporate tax), and INR75,000-INR76,000 crore11 as indirect tax revenue (GST) to the exchequer during FY24−28E. The Intermediary Guidelines and Digital Media Ethics Code Rules, 2021 (online gaming rules) for online gaming issued by the Ministry of Electronics and Information Technology (MeitY) is perceived by many in the industry as progressive. These guidelines aim to remove ambiguity, bolster investor sentiment, attract funding and encourage innovations in India’s digital economy while prioritizing user safety. Extensive deliberations within the GST council over the past 12-18 months have brought about changes in levy of GST on the online gaming segment. In August 2023, during the 51st GST council meeting, amendments were made to the GST laws to specify that ‘actionable claims’ offered by RMG platforms would be taxed at 28% on full-face value of deposits.12 On the backdrop of GST amendments online gaming platforms are reinventing their operating models and re-evaluating business strategies for sustained operations and growth. These include tradeoffs of absorbing the GST impact as compared to passing it on to users, product innovation and diversification and geographical expansion. 4. EY FICCI report 2023 - Windows of opportunity; EY analysis 5. As per the letter written by E-Gaming Federation (EGF) and the Federation of Indian Fantasy Sports (FIFS) to the GoI; industry discussions; EY FICCI report 2023 - Windows of opportunity; EY analysis 6. Tracxn database 7. Kalaari Capital Gameconomy Report 2023; EY analysis 8. As per the letter written by E-Gaming Federation (EGF) and the Federation of Indian Fantasy Sports (FIFS) to the GoI; industry discussions; EY FICCI report 2023 - Windows of opportunity; EY analysis 9. https://www.livemint.com/companies/news/top-investors-ask-pm-modi-to-review-online-gaming-tax-11689965504691.html 10. As per the letter written by E-Gaming Federation (EGF) and the Federation of Indian Fantasy Sports (FIFS) to the GoI; industry discussions 11. Industry estimates 12. https://gstcouncil.gov.in/gst-council-meetings Factsheet Key stats  An overview of the Indian gaming landscape 140 crore INR16,428 crore INR22,931 crore India’s population is second Online gaming market size Investments between FY20 largest in the world; 65% in FY23; CAGR of 28% and FY24 YTD aged under 35 years (FY20-23) 78 crore INR13,596 crore 1,400 Internet users in FY23; 55% RMG market size in Online gaming start-ups of total population FY23; 83% of total online in FY23 gaming market 54.8 crore 430 crore 100,000 Smartphone users in FY23; Gaming apps downloaded Employees in the gaming 38% of total population in FY23 industry in FY23 42.5 crore 10-12 hours 15,000 Online gamers in India in Average time spent per Game developers and FY23; 2nd highest globally active user on gaming in programmers a week Sources: Worldometer; EY FICCI report “Windows of opportunity”; Traxcn; EY analysis; Industry discussions  1 India’s thriving online gaming landscape India’s online gaming landscape is unfolding at remarkable speed, making it one of the most prominent gaming destinations on the global map At a CAGR of 28%13 The mobile gaming between FY20 and FY23, dominance in India persists online gaming has been with 94%14 favouring one of the fastest growing mobile platforms. The segments within India’s ‘mobile-first’ trend media and entertainment remains a powerful force sector driving the expansion of India’s gaming market 13. EY FICCI report 2023 - Windows of opportunity; EY analysis 14. Kalaari Capital Gameconomy Report 2023 10 New frontiers: Navigating the evolving landscape for online gaming in India India holds a strategic advantage in the gaming landscape innovative strategies. Among these strategies is the due to low data costs, public digital payments infrastructure, development of mobile offshoots for popular AAA PC and and lower barriers to entry in mobile gaming, attributed to console titles.15 fewer hardware and software constraints as compared to This advantage, coupled with the popularity of mobile Personal Computer (PC) and console gaming. gaming among the younger demographic, sets India apart Industry trends depict a slow growth in the PC and console from more mature markets like the U.S. and China, which gamer base, prompting game developers to explore have traditionally leaned towards PC and console gaming. 42.5 crore gamers comprise India’s gaming landscape With around 42.5 crore16 gamers in FY23, India boasts the second largest number of online gamers in the world after China, which has around 75 crore17 gamers. Number of gamers (crore) 53.8 48.8 51.3 44.3 46.5 39.7 42.5 FY22 FY23 FY24E FY25E FY26E FY27E FY28E % share FY22 FY23 FY24E FY25E FY26E FY27E FY28E Share of paying gamers 22% 25% 28% 30% 32% 33% 34% Source: EY analysis and industry discussions India’s online gamers are expected to grow at a CAGR of 5% India possesses a distinctive demographic profile, with and reach 53.8 crore by FY28E.18 65−70% of gamers below the age of 34.20 Leveraging the world’s largest youth population, this demographic The percentage of paying gamers among the total advantage bodes well for the country’s future growth in gamer base is anticipated to increase gradually, game consumption and positions it as a promising hub for reaching 34% by FY28E.19 This growth is primarily emerging gaming trends and innovations. attributed to: India’s gamer penetration rate hovers at around 30%21. an increasing interest in RMG among tier 2 and tier This figure, however, remains notably lower compared to 3 audiences China and the U.S., where the gamer penetration22 ranges between 53% and 56%.23 This indicates the scope for a surge in in-app purchases substantial growth of the gamer base and the segment in India. g  aming evolving into a lifestyle choice for many individuals, fostering willingness to pay and an inclination to invest in enhanced gaming experiences 15. 2023 Newzoo Global Games Market Report 16. EY FICCI report 2023 - Windows of opportunity; EY analysis 17. www.allcorrectgames.com 18. EY FICCI report 2023 - Windows of opportunity; EY analysis 19. EY FICCI report 2023 - Windows of opportunity; EY analysis 20. https://www.statista.com/outlook/dmo/digital-media/video-games/worldwide?currency=usd; EY analysis 21. Allcorrect estimates for the number of gamers; Worldometer estimates for population; EY analysis 22. Gamer penetration = number of online gamers as a percentage of total population 23. Allcorrect estimates for the number of gamers; Worldometer estimates for population; EY analysis New frontiers: Navigating the evolving landscape for online gaming in India 11  Demographic profile of gamers – India vs global peers 1-5% 1-5% 5-10% 20 -25% 35 -40% 35 -40% 65 -70% 50 -55% 50 -55% India China USA > 55 years 35-55 years < 34 years Source: Statista estimates; EY analysis Global gaming landscape: a comparative analysis of key metrics across leading gaming nations India USA China Japan South Germany Korea CAGR of gaming market (FY20-23) 28% 9% 7% 7% 5% 2% Gaming market size in the country 16,428 363,600 370,064 161,600 63,832 53,328 (FY23); INR crore Gaming market size in the country as a 1.1% 24% 25% 11% 4.3% 3.6% % of global gaming market (FY23) Number of gamers (FY23); Mn 425 191 750 102 34 50 Growth of gamers (FY22-23) 7% 1% 1% 5% 7% 3% Gamer penetration % (FY23) 30% 56% 53% 83% 66% 60% Mobile gamers as a percentage of 94% 37% 62% 48% 36% 43% total gamers (FY23) Sources: All correct estimates; Worldometer; 2023 Newzoo Global Games Market Report; industry discussions 12 New frontiers: Navigating the evolving landscape for online gaming in India  Online gaming’s diverse influence shapes India’s economy, society and digital inclusion Online gaming has emerged as a noteworthy contributor Growth in employment within the Indian to India’s economic growth, generating substantial revenue online gaming segment and increasing tax contributions. It has also created diverse employment opportunities in areas like game development, The Indian online gaming segment presently employs technology and marketing, in turn fostering innovation and approximately 100,000 individuals24 (direct and indirect roles entrepreneurship within the gaming sector. across core and support functions) — an impressive figure considering the segment’s relatively modest size 4−5 years Amidst pandemic lockdowns and in the subsequent post- ago. pandemic era, online gaming has instigated significant social changes. These platforms have become a conduit Early in 2023, industry professionals expected the number for social interaction and community building, facilitating of people employed in the segment to touch 250,000 job connections among players and the establishment of roles by 202525, focussing on highly skilled job profiles. gaming communities. Despite potential setbacks due to the expected slowdown of the segment, the high job creation rate is notable for India, Furthermore, online gaming has played a role in fostering especially considering its burgeoning youth population. digital inclusion by extending its reach to remote areas. This has contributed to technological advancement, empowering Moreover, given its robust interconnection with other individuals to engage with and embrace the digital segments of the digital economy, the expansion of the ecosystem. online gaming segment inherently yields positive network effects throughout the entire spectrum of the Information Technology (IT) and Information Technology Enabled Services (ITES) sector. Notably, game development necessitates: intensive collaboration integration of emerging among animators, technologies such as developers, and Artificial Intelligence (AI), engineers Machine Learning (ML), cloud computing, etc Machine learning Product design Artificial Intelligence Cyber security Data Science Web 3.0 Key skills in Cloud Fintech demand computing Online gaming – a catalyst for highly skilled jobs 24. TeamLease Digital Gaming Report November 2022 25. Kalaari Capital Gameconomy Report 2023; EY analysis New frontiers: Navigating the evolving landscape for online gaming in India 13  Charting the meteoric rise of India’s online Number of deals in the online gaming sector gaming start-ups in the era of Start-up India and Atmanirbhar Bharat 72 The online gaming segment is vibrant with 52 over 34 32 33 1,400 start-ups 26 15 The segment has attracted INR22,931 crore in investments from both domestic and global sources FY19 FY20 FY21 FY22 FY23 FY24 between FY20 and FY24 YTD27 YTD The last 2-3 years have seen the inception of Source: Tracxn; EY analysis numerous gaming start-ups, the rise of three gaming unicorns, more than six strategic exits, and a successful IPO. This growth aligns with the government’s Start-up India and Atmanirbhar Economic significance of online gaming Bharat initiatives, aimed at fostering a vibrant start-up culture and cultivating a robust, inclusive The online gaming sector in India is projected to experience ecosystem for innovation, self-reliance and a CAGR of 13%29 over the next five years (FY24-28E), entrepreneurship in India. surpassing the nation’s Gross Domestic Product (GDP) Despite the segment’s growth and successes growth estimate of 6-7%.30 This emphasizes the economic in previous years, the ongoing year has been importance of the online gaming sector, showcasing its challenging for Indian online gaming companies potential to generate significant revenue and attract substantial investments in the future. The current financial year was marked by a substantial funding decline from INR12,740 Fiscal fortunes from surging GST and direct crore in FY22 to INR835 crore in FY24 YTD.28 This downturn is primarily due to global macro- tax contribution of India’s RMG sector economic headwinds, including interest rate hikes, tightened liquidity, inflation, changes in taxation The GST collection from the RMG segment was and concerns about an imminent recession INR1,700 crore in FY23.31 Industry believes that with the new GST rate and valuation mechanism provided, the Y-o-Y GST collections will grow at a staggering Total online gaming funding Y-o-Y rate of 113% CAGR from the FY23 base to reach a (INR crore) cumulative of INR75,000–INR76,000 crore over the next 5 years from FY24E to FY28E.32 12,740 Additionally, the industry estimates that the sector is poised to contribute INR6,500-INR6,800 crore33 as direct tax revenues (comprising TDS and corporate tax) 7,639 to the exchequer during the aforementioned timeframe Moreover, the broader online gaming segment has indirectly augmented revenue streams for the exchequer by fostering 1,355 collaborations with technology partners, advertising 921 796 835 agencies, and other stakeholders. FY19 FY20 FY21 FY22 FY23 FY24 YTD Source: Tracxn; EY analysis 26. https://tracxn.com/d/explore/gaming-startups-in-india/__l0hd49FrHYYyE-hgF3d8DYfyM7vWKY8fAEFHgB103lo/companies 27. Tracxn database 28. https://tracxn.com/d/reports-feed-geo/mobile-gaming-india-feed-geo-report/KCRa2fr8wmYKdsIZzleMMc2XBRAus7-XZ110bJxRUl4 29. As per the letter written by E-Gaming Federation (EGF) and the Federation of Indian Fantasy Sports (FIFS) to the GoI; industry discussions 30. EY analysis 31. Revenue Secretary’s interview with CNBC-TV18 held on July 13, 2023 32. As per the letter written by E-Gaming Federation (EGF) and the Federation of Indian Fantasy Sports (FIFS) to the GoI and industry discussions. These workings assume a ‘deposit to GGR’ ratio of 2.7 33. As per the letter written by E-Gaming Federation (EGF) and the Federation of Indian Fantasy Sports (FIFS) to the GoI; industry discussions 14 New frontiers: Navigating the evolving landscape for online gaming in India Vanguard of India’s digital progress: Digital India narrative Beyond its economic contributions, the online gaming segment represents an innovative and technologically advanced India which aligns with the Government’s “Digital India” initiative, promoting digital literacy and boosting the country’s tech- infrastructure. Elements of Digital India narrative Digital Digital Digital content payments connectivity creation In-game purchases and deposits Online gaming industry Rise of gaming content creators are effected through UPI etc. encourages expansion / influencers, transforming India contributing to the government’s and utilization of digital into digital empowered society and push for a cashless economy infrastructure and ecosystem knowledge economy 8,370 crore Top 10 gaming influencers36 430 crore UPI transaction volume mobile game downloads in in India (FY23)34 India (2023); 15.3% of global35 3 crore+ 12 crore+ followers subscribers Regulations that are changing the game The last 12−18 months have seen the Indian Government taking proactive steps to introduce comprehensive gaming regulations to provide regulatory certainty to the sector and enable it to play a key role in India’s ‘techade’ and help achieve the “trillion-dollar digital economy” vision. These regulations by the Indian Government aim to establish an open, safe, trusted and accountable online gaming ecosystem in India by clearly differentiating online gaming from betting and gambling and by laying down a comprehensive set of measures to protect and safeguard the interests of the users. Further, the regulations also provide much needed clarity on tax structures. 34. Lumikai Gaming Report 2023 35. https://www.businessofapps.com/news/gaming-app-downloads-in-india-soar-taking-15-of-global-total-but-revenues-cant-catch-up/#:~:text=India’s%20 mobile%20gaming%20market%20is,as%20the%20US%20and%20Brazil 36. https://www.influencer.in/top-creator-in-india/gaming-influencers/ New frontiers: Navigating the evolving landscape for online gaming in India 15  GST MeitY framework Extensive deliberations within the GST council over the The IT Gaming Rules notified by MeitY establish past 12-18 months have brought about changes in the a framework for regulating the online gaming levy of GST on the online gaming sector. industry, including the mechanism for verifying an The GST Council has clarified that GST on online gaming online real money game as a permissible online (including value of actionable claims) shall be taxed at real money game. 28 % of the deposit value. One of the essential criteria for such verification is that the game must not involve any wagering on any outcome. The rules delineate the obligation AVGC taskforce as well as the additional obligations required and necessitated to be fulfilled by the online gaming Recognising that the Animation, Visual Effects, Gaming and intermediaries. Comics (AVGC) industry has tremendous potential to boost domestic capabilities, a task force on AVGC was setup by the Ministry of Information and Broadcasting (MIB) to TDS recommend initiatives around this. TDS was not applicable to those winning less than The taskforce compiled its insights and submitted its report INR10,000, but under the new tax proposal introduced in December 2022, which was broadly based on three in the Union budget for FY24, the Centre has proposed pillars – (i) create world class products in India, (ii) upskill that tax should be levied on the net winnings. and empower the youth, and (iii) technology and other incentives to promote the sector. TDS can either be calculated at the end of the financial year or at the time of withdrawal by a player. Source: Government websites – MEITY.gov.in; GSTcouncil.gov.in; incometaxindia.gov.in; mib.gov.in; EY analysis Transformative shifts expected in India’s online gaming segment: RMG sub-segment may be under pressure, while non-RMG and E-sports will continue to flourish Although RMG sub segment constitutes a substantial share of the online gaming segment in India, recent taxation regulations have cast a shadow on this segment of the market. Indian gaming market size (INR crore) 33243 CAGR for gaming segment 15% 28923 (FY23 – FY28E) 8167 25440 6534 22421 5269 19974 CAGR for non-RMG segment 4249 24% 16428 3455 (FY23 – FY28E) 2832 25076 20170 22389 16520 18171 CAGR for RMG 13596 13% segment (FY23 – FY28E) FY23 FY24E FY25E FY26E FY27E FY28E RMG Non RMG and E-sports % share FY23 FY24E FY25E FY26E FY27E FY28E RMG 83% 83% 81% 79% 77% 75% Non RMG 17% 17% 19% 21% 23% 25% and E-sports Source: As per the letter written by E-Gaming Federation (EGF) and the Federation of Indian Fantasy Sports (FIFS) to the GoI; industry discussions 16 New frontiers: Navigating the evolving landscape for online gaming in India  Per the industry estimates, the online gaming segment increasing in-app purchases (IAP) in India is valued at INR16,428 crore in FY23 and is expected to grow to INR33,243 crore by FY28E, at a CAGR of 14%.37 expected expansion in brand integration deals Presently, RMG revenues constitute a substantial 82.8%38 of the online gaming segment size. However, Revenue share of non-RMG subsegments, in % projections indicate a decline to 75.4% by FY28E,39 (FY23−28E): midcore and AAA games, along with owing the recent GST amendments and accompanying E-sports expected to surge notices. The resultant effects of these developments on the RMG sub-segment may include: Non-RMG FY23 FY28E sub-segments industry consolidation Casual and hyper 60% - 65% 40% - 45% casual games rationalization of customer acquisition spends as RMG players implement cost optimization measures Midcore and AAA 35% - 40% 50% - 55% games increased tax burden E-sports and others 1% - 4% 2% - 5% reduced inflow of investments Source: Lumikai Report; EY analysis and industry discussions possible impediment to the creation of new job Heightened user engagement and click-through are driving opportunities an increasing recognition among brand managers about the Return on Investment (ROI) potential of the gaming The non-RMG and E-sports segments are projected to segment’s marketing rates. This awareness is expected experience a growth of 24%40 between FY23−28. This to lead to a greater allocation of marketing budgets to growth is attributed to the following factors: the gaming segment in the coming years, consequently fostering its growth. escalating demand for mid-core and hard-core mobile gaming ad revenue is expected to grow at a games, fuelled by the availability of high-quality CAGR of 25%41 from 2023 to 2028E titles. Further, wider adoption of 5G will propel cloud gaming, in turn improving access to mid-core and in  game ad formats such as opt-in reward ads, playable hard-core games ads and personalized video ads have successfully made gaming ads a feature that gamers enjoy surging popularity of E-sports and the influence of the  gaming segment is witnessing an ad completion gaming personalities rate of 90%42 Real money gaming platforms at the forefront of India’s gaming sector growth INR1,60,000 crore 10−30% Total enterprise valuation of Top 2-3 RMG companies reporting healthy EBITDA margins; others India’s online RMG segment on the road to profitability (it is important to note that this range represents the current margins and may change in the future) 3 gaming unicorns INR19,897 crore 82.8% Games 24x7, MPL, and Dream11, The cumulative funding for Indian RMG share of total online all operating within the RMG sector, RMG companies over the past gaming market in FY23 have emerged as Indian gaming years (FY19−FY24 YTD) companies attaining unicorn status INR75,000−76,000 crore INR6,500−6,800 crore Estimated GST contribution to 400+ Estimated corporate tax and TDS Number of RMG start-ups in the exchequer by the RMG sector contribution to the exchequer by the between FY24-28E the country RMG sector between FY24-28E 37. As per the letter written by E-Gaming Federation (EGF) and the Federation of Indian Fantasy Sports (FIFS) to the GoI; industry discussions; EY FICCI report 2023 - Windows of opportunity; EY analysis 38. As per the letter written by E-Gaming Federation (EGF) and the Federation of Indian Fantasy Sports (FIFS) to the GoI; industry discussions; EY FICCI report 2023 - Windows of opportunity; EY analysis 39. As per the letter written by E-Gaming Federation (EGF) and the Federation of Indian Fantasy Sports (FIFS) to the GoI; industry discussions; EY FICCI report 2023 - Windows of opportunity; EY analysis 40. EY analysis 41. EY analysis 42. www.criteo.com New frontiers: Navigating the evolving landscape for online gaming in India 17  2 New regulatory framework and tax regime in India and its impact 18 New frontiers: Navigating the evolving landscape for online gaming in India  Announcement of new online gaming rules The central government announced online gaming rules The online gaming rules further establish a framework in April 2023 to establish an unambiguous and self- for regulating the online gaming segment, including the governance framework for regulating the skill-based gaming mechanism for verifying an online real money game as a sub-segment.43 The segment faced many regulatory permissible online real money game. challenges prior to the online gaming rules due to lack of These rules call for setting up SRBs which are empowered to a uniform framework. declare an online real money game as permissible if it meets The Public Gambling Act, 1867, adopted by many states, the following criteria: provides a broad framework for determining regulation of gaming, including betting and gambling, stipulating that games of chance are prohibited while games of skill are d  oes not i s in compliance is in compliance exempted from the purview of these acts.44 Betting and involve with due with a verification gambling is primarily a state subject which means that wagering diligence framework states have the authority to make laws and regulate betting  on an requirements as formulated by the and gambling within their respective jurisdictions. Some outcome provided in the SRB that addresses states have enacted their own laws, which vary widely.45 rules issues pertaining to, inter alia, user The judiciary has upheld and safeguarded the harm, addiction and constitutionality of games of skill and adherence to the financial loss established jurisprudence distinguishing between games of skill and games of chance. However, some states have amended the gambling laws to include games of skill and Through the SRB mechanism, the rules also aim at curbing prohibit the same in their states. For instance, Tamil Nadu the growing menace of offshore betting and gambling government attempted to ban Rummy and Poker. However, platforms by ensuring that non permissible games are the ban was lifted by the Madras High Court in November banned completely, including their advertisements. 2023 stating that Rummy and Poker are games of skill.46 However, the formation of SRBs is delayed because Various other state bans have been overturned by the High MeitY is in the process of seeking consensus from various Courts and some of them are currently sub-judice. ministries49 and addressing concerns around independence By adopting a unified approach, the recently notified of regulatory bodies.50 online gaming rules have brought in clarity to companies in this space. In furtherance of the central government’s commitment to advancing online gaming as a catalyst for “Digital India” initiative and to promote a safe, trusted and accountable online gaming ecosystem, the following steps were taken: On  December 23, 2022, the Government of India (Allocation of Business) (Three Hundred and Seventieth Amendment) Rule, 2022 (AoBR) was notified allocating matters relating to online gaming to the MeitY47 On  April 6, 2023, MeitY notified the online gaming rules to provide a responsible and accountable regulatory framework for the online gaming intermediaries48 43. ICLG - Gambling Laws and Regulations 44. ICLG - Gambling Laws and Regulations 45. https://www.cnbctv18.com/sports/madras-hc-on-tn-law-banning-rummy-poker-gameskraft-games24x7-junglee-rummy-18288171.htm 46. https://www.mondaq.com/india/gaming/1305570/meity-notifies-amendments-to-it-rules-2021-online-real-money-gaming-platforms-now-regulated-by-the-centre 47. https://www.mondaq.com/india/gaming/1305570/meity-notifies-amendments-to-it-rules-2021-online-real-money-gaming-platforms-now-regulated-by-the-centre 48. https://inc42.com/buzz/govt-delays-gaming-srb-plans-aims-for-unified-approach/ 49. https://g2g.news/online-gaming-laws/meity-may-shun-idea-of-self-regulation-if-srbs-are-dominated-by-major-online-gaming-firms/, industry discussions 50. https://gstcouncil.gov.in/gst-council-meetings New frontiers: Navigating the evolving landscape for online gaming in India 19  Three tier structure : Roles and responsibilities of online gaming intermediaries, SRBs and grievance appellate committee User education: Publish clear rules, regulations, privacy policy, and user agreements on the platform, and ensure accessibility. Tier 1 Data governance: Adhere to data policies governing collection, storage, and security and, implement measures to safeguard user data and privacy. Due diligence requirements: Manage user registrations, conduct KYC per RBI Online gaming guidelines, appoint a chief compliance officer and a grievance officer, publish regular compliance reports on received complaints and actions taken, and ensure user intermediaries awareness of deposit, withdrawal, and winning processes. Grievance redressal mechanism: Acknowledge complaints within 24 hours of receipt while resolving them within 15 days from the date of acknowledgment. Implement a user-friendly mechanism for receiving complaints. Set-up framework: Verification and certification of to be based on objective framework, which is to be implemented by SRBs. Review application: Review application for declaring RMG as permissible and ensure Tier 2 compliance with legal provisions related to age for entering contracts. Permissibility of RMG: Provide provisional permissibility for 3 months, while continuing to review game in the meantime. Self-Regulatory Verification oversight: Suspend or revoke verification of online real money games if Body (SRB) found non-compliant with the rules and provide written communication of reasons. Documentation: Maintain a public list of permissible online real money games on the website or mobile application. Grievance mechanism: Establish a grievance redressal mechanism and appoint a Grievance Officer based in India. Tier 3 Timely resolution: Expedite the appeal process, aiming to resolve appeals within thirty calendar days from receipt. Online appeal Resolution: Implement an online dispute resolution mechanism for the entire appeal process, ensuring a digital mode from filing to the final decision. Grievance Expert assistance: Establish a network of qualified individuals with expertise in the appellate subject matter, for potential use during the appeal process. committee Compliance: Every order passed by the Grievance Appellate Committee shall be complied with the intermediary concerned Source : The online gaming rules notified by MeitY on 6 April 2023 20 New frontiers: Navigating the evolving landscape for online gaming in India  Flowchart depicting the evaluation process for permissibility of online games in India Game permissibility process The OGI applies for permissibility with SRB ensuring due diligence 01 requirements are met Online gaming intermediary SRBs provide provisional certification valid for 3 months, based on 02 information submitted by the applicant, and then undertakes the final game verification process Self Regulatory Body Upon completion of game verification process, the SRB either 03 approves or rejects the game Verification process (3 months) Permissible Non game permissible game Source : The online gaming rules notified by MeitY on 6 April 2023 Key notes : 1. A ‘permissible online game’ is one that is either free-to-play or an online real money game verified by the SRB in accordance with the Online Gaming Rules. 2. The Online Gaming Rules do not delve extensively on the criteria and method for the SRB to verify an ‘online real money game’ and the process is expected to be based each SRB’s own game verification framework. 3. Incase, an OGI is not satisfied with SRB’s decision, it has the option to file appeal with MEITY New frontiers: Navigating the evolving landscape for online gaming in India 21  Navigating the game of indirect tax (GST) Extensive deliberations within the GST council over the past 12-18 months have brought about changes in levy of GST on the online gaming segment. In August 2023, amendments were made to the GST laws to specify that ‘actionable claims’ offered by RMG platforms would be taxed at 28% on full-face value of deposits. Before October 01, 2023, the RMG companies followed a practice of paying 18% GST on platform fees, also known as Gross Gaming Revenue (GGR). Timeline detailing the sequence of events that culminated in the enactment of this amendment June 2022 – July 2023 – July 2017 October 2023 47th GST Council 50th GST Council From GST perspec- GoM submitted its During the 50th GST New tax provisions tive, skill-based initial report to Council meeting, the for online gaming gaming was intend- recommend GST at 28 GoM suggested to supplies ed to be taxed under percent on Contest increase the tax rate A GST of 28% on 'Other Online Entry Amount (CEA). on online gaming to “amount deposited Content’, taxable at The subject matter 28%. However, due with supplier” came 18%. Online gaming was deliberated at to a lack of consen- into effect from 1st continued to pay length with different sus on the valuation October, applicable GST under this state representatives base, the GoM for online gaming classification, same putting forth their suggested that the and casinos. as under the service initial views. Subse- GST council should tax regime. quently, the GST make the final council recommended decision on this. to reassess the recommendations of the GoM. December 2022 – August 2023 – April 2024 – May 2021 48th GST Council 51st GST Council Review (tentative) The GST Council February 2023 – Decisions on implementa- The GST Council will constituted a GoM to 49th GST Council tion of increased rate and reconvene six examine whether value along with the months post any change in legal The discussion on proposed changes in the implementation to provisions is online gaming, GST law were finalised. review the matter. required for horse racing and The GST Council valuation of services casinos was not proposed specific provided by online taken up. amendments to the CGST gaming, racecourses Act 2017 and IGST Act and casinos. 2017. These amend- ments, including changes in Schedule III of the CGST Act 2017, aim to bring clarity to the taxation of supplies in casinos, horse racing, and online gaming. Source: Minutes of GST Council Meetings51 51. https://www.a2ztaxcorp.com/online-gaming-companies-plan-to-move-court-term-gst-demand-retrospective/ 22 New frontiers: Navigating the evolving landscape for online gaming in India  “ The GST department contends that the amendment is only ‘clarificatory’ in nature and that tax was always payable on the full-face value. Accordingly, the RMG companies have been served with tax demand notices for prior years. So far, the department has issued tax demand notices to the tune The chairman of the Central of INR1-1.5 lakh crore to more than 40 RMG companies.52 Board of Direct Taxes (CBDT) Industry stakeholders suggest that the GST amendment has impacted the unit economics of RMG companies remarked that the Centre has bringing down profitability, and therefore affecting collected INR600 crore from investor sentiment. the online gaming companies Discussions with stakeholders reveal that unit economics of RMG firms have been hampered by the amendment, leading as TDS in the first six months to a drop in Earnings before Interest, Taxes, Depreciation, of the current financial year and Amortization (EBITDA) margins, which will result in a subsequent impact on valuations. Source: The Economic Times55 In July 2023, a consortium of 30 prominent domestic and international start-up investors, including Tiger Global, Peak Key highlights of the TDS amendment XV Partners, and Steadview Capital, penned a letter to the Prime Minister’s Office (PMO)53, highlighting concerns that the amendment could potentially lead to a write-off of the Computation of net winnings INR20,000 crore capital invested in the sector, and is also TDS on net winnings will be computed either at the expected to impact prospective investments, estimated to conclusion of the financial year or at the time of user’s be at least INR32,000 crore in the next 3−4 years, thus withdrawal impeding the growth of the gaming segment in India. The detailed guidelines issued for computation along Industry professionals also believe that the anticipated with the amendments enhances overall compliance deceleration in the RMG sub-segment will impact non-RMG and E-sports, as the overall segment’s ability to attract funds Moreover, the “net winnings” approach allows players would reduce to offset their losses a relief to the players Removal of INR10,000 threshold TDS amendments The minimum threshold of INR10,000 for TDS (under the earlier regime) has been removed The union government carves out a clear distinction The TDS amendments aim to curb revenue leakage for between online skill-based games and other chance-based the government on user earnings from the prize pool games such as lottery, puzzles, and crossword puzzles for the purpose of TDS. New clauses in the Income Tax Act Platforms now bear complete responsibility and liability were introduced for online games which were put to effect for deducting tax at the highest rate, which is, 30% on from 1 April 202354: net winnings Industry professionals unanimously agree that this section 194BA section 115BBJ move provides much-needed clarity to the gaming pertains to TDS (tax relates to computation sector and is a win-win situation for gaming companies, deducted at source) on of income tax on users, and the exchequer net winnings from online winnings from online games games Per the new provisions, the gaming companies are mandated to deduct TDS at the rate of 30% from the ‘net winnings’ of the user account, on every withdrawal or at the end of the financial year in case of no withdrawals. 52. https://www.cnbctv18.com/finance/gst-online-gaming-venture-capitalists-letter-pm-narendra-modi-17294091.htm 53. https://www.taxmann.com/post/blog/analysis-changes-introduced-in-the-lok-sabha-approved-finance-bill/#:~:text=4.-,TDS%20provision%20under%20 Section%20194BA%20on%20winning%20from%20online%20games,w.e.f.%2001%2D04%2D2023%5D 54. https://economictimes.indiatimes.com/news/economy/finance/centre-collected-rs-600-crore-from-online-gaming-companies-in-tds/ articleshow/104317201.cms 55. https://pib.gov.in/PressReleasePage.aspx?PRID=1886679 New frontiers: Navigating the evolving landscape for online gaming in India 23  Recommendations from AVGC promotion task force Recognising that the AVGC industry has tremendous potential to boost domestic capabilities, a task force on AVGC was setup by the MIB in May 2022 with the vision to promote this industry as one of the 12 Champion Service Sectors.56 The task force compiled its insights and recommendations on strategies to enhance and uplift gaming and other sectors. The recommendations of the taskforce report, which was released in December 2022, were broadly based on three pillars: AVGC Task force 3 strategic pillars 01 02 03 Create world class Upskill and Tech and other incentives products in India empower the youth to promote the sector To do so, the task force recommended the following Infrastructure, Research Market development and development Implement awareness campaigns. Establish a National CoE for AVGC Host annual AVGC Expo, "Game India development. Hackathon," and other events. Create Regional CoEs at the state level. Ensure AVGC start-up and SME Set up R&D labs at IITs, NITs, IISC. representation at events. Develop Centers of Entrepreneurship. Establish an IP protection framework. Establish tech incubators and provide software access. Talent development AVGC incentives Implement a curriculum recognized by UGC. Offer tax breaks for 3-5 years to attract Establish degree courses with global players for setting up operations. standardized content. Provide grants for local production. Introduce scholarships for AVGC. Allocate R&D grants to support Form skill partnerships with the industry. the industry. Collaborate with industry players to create Extend concessions and subsidies a job aggregation portal. on power bills. Source : AVGC taskforce report available on MIB’s website The recommendations put forth by the AVGC taskforce report advocate for tax incentives and comprehensive support encompassing technical, financial and market access assistance tailored to the sector’s needs. Additionally, the recommendation report underscores the gaming segment’s pivotal role within the AVGC sectors, serving as the bedrock for overall ecosystem growth. 56. https://www.livemint.com/companies/news/top-investors-ask-pm-modi-to-review-online-gaming-tax-11689965504691.html 24 New frontiers: Navigating the evolving landscape for online gaming in India  Rediscovering the route to sustainability Regardless of the chosen option, these platforms must Strategic adjustments and business pivots by online revaluate their business model and implement necessary gaming companies post the GST amendment pivots (discussed in more detail later) from a financial viability standpoint Discussions with industry stakeholders indicate that, online gaming platforms are reinventing their operating Impending wave of industry consolidation models and re-evaluating business strategies for sustained operations and growth in response to the GST amendments. India boasts approximately 400 Although some outcomes may include consolidation and slower growth, the segment’s resilience is poised to redefine opportunities despite the challenges. Some of the aspects are highlighted below: RMG start-ups57. Evaluating the trade-offs: whether or not to The implementation of the GST amendment will potentially impact the free cash flows of both major and minor absorb the GST impact players, thereby presenting challenges for their innovation initiatives. Faced with an increased GST liability, there are two strategic choices that RMG platforms will potentially explore, Stakeholders and professionals anticipate industry depending on their product offerings, assessment of user consolidation, foreseeing smaller companies either winding sensitivity and financial position: up or undergoing acquisitions as they absorb the financial impact of GST while maintaining sufficient funds for a  bsorb the entire GST liability marketing and customer acquisition initiatives.58 p  ass on the burden partially or completely to the users GST on deposits (new regime) Taxing 28% on deposits Taxing 28% on deposits Taxing 28% on deposits (fully absorbed (fully passed on (partially passed on to by the platform) to the consumers) the consumers) Platforms would be A reduction in winnings Platforms can only mitigate challenged with financial could lead to low the impact marginally burden and liquidity issues motivation among users, which may in turn lead to Moderate risk of some Possibility of job losses in lower engagement users shifting to the sector offshore/grey market High risk of certain set of High user withdrawal and users shifting to redeposit rate will increase offshore/grey market the tax burden significantly Source : Industry discussions ; EY analysis 57. Industry discussions 58. https://www.thehindubusinessline.com/companies/real-money-gaming-companies-pivot-after-28-gst-ruling/article67430925.ece New frontiers: Navigating the evolving landscape for online gaming in India 25 Product innovation and diversification In response to the changing landscape, RMG platforms may consider innovative strategies to enhance spin rates, reduce Customer Acquisition Cost (CAC), and improve unit economics. Exploring the development of a multi-game platform to attract users and enhance engagement could also witness increased adoption. While perceived as an expensive undertaking due to elevated production costs, extended deployment times, and intense competition within the subsegment, exploring non-RMG gaming alternatives could provide a means to diversify revenue streams. For instance, popular genres like battle royale and casual titles involving in-app transactions could be explored. Geographical diversification The GST amendment provides further impetus for RMG firms to diversify operations into other geographies, offering a viable growth lever. as an example, Winzo has declared a significant investment of INR200 crore to enter the Brazilian market, where the tax levy stands at 2−5%.59 According to one of the co-founders, this expansion is particularly timely in the context of challenges faced by India’s gaming ecosystem due to increase in the GST60 Cost rationalization measures RMG companies are prioritizing cost-cutting measures to combat the challenging unit economics and achieve sustainable growth. Media reports suggest that companies such as MPL, Hike and Spartan Poker have implemented workforce reduction measures.61 Industry professionals indicate that despite the ICC World Cup and the ongoing festive season, RMG players have significantly scaled back on ad spending. Companies are also actively exploring the redesign of workflows to eliminate redundancies. This strategic shift is concentrated on optimizing areas such as data storage, enhancing capacity utilization, and undertaking other similar initiatives. 59. https://www.thehindubusinessline.com/companies/real-money-gaming-companies-pivot-after-28-gst-ruling/article67430925.ece 60. https://inc42.com/features/real-money-gaming-real-gst-problems/ 61. Official website of The Gambling commission of the UK 26 New frontiers: Navigating the evolving landscape for online gaming in India  The GST twist While on a single game basis, it may appear that the new GST regulations reduce the take home winnings for users, the answer however depends on multiple factors. Industry experts believe that a users inclination to withdraw and re-deposit money plays a critical role in actual GST incidence, as now the GST is payable only at the time of deposit. The below illustration showcases the GST incidence in a one time deposit scenario over eight games. GST amendments in action INR Prior to October 01, 2023 From October 01, 2023 Number of games played 8 8 Deposit per player (A) 10,000 10,000 Stake per player (B) 2,000 2,000 Pot (C) 4,000 4,000 Platform fee (D=C*15%) 600 600 Method of GST calculation (D*18%) (A/128%) * (28%) [A is inclusive of tax] GST (E) 108 2,188 (applies in every game) (per player, applies once on deposits) Total GST levied after eight games 864 2,188 Net winning per game (C-B-D-E*) 1,292 1,400 [*E applies only prior to October 01, 2023] Assumptions: There are two players participating in a game, playing a total of eight rounds. This illustration depicts a scenario for Player 1 with a win / loss ratio of 50% where one of the players wins the first five games and loses the next three games. Deposit amount is considered to be inclusive of GST Platform fee does not attract GST at 18% post October 01, 2023 All figures have been rounded off to the next decimal. New frontiers: Navigating the evolving landscape for online gaming in India 27  3 International standards for regulating and taxing online gaming 28 New frontiers: Navigating the evolving landscape for online gaming in India  Exploring exemplary approaches: an overview of global practices We conducted an analysis of global practices observed in advanced online jurisdictions, with a special focus on real money gaming. The analysis encompasses key aspects including the legislative framework, tax regulations, due diligence requirements, user safety and content regulation. The insights derived from this analysis provide valuable perspectives that can serve as a benchmark for the continuous evaluation and improvement of India’s online gaming rules. International policies are strategically crafted to foster the growth of gaming enterprises and related sectors. These initiatives aim to improve channelling rates, protect user privacy and data, and maximise tax revenues for the exchequer. After studying international experiences, it emerges that India stands unique from other leading online gaming markets since it is amongst the few jurisdictions that have looked to objectively differentiate games of skill from games of chance. United Australia62 Denmark63 Malta64 South Korea65 Kingdom (The UK)66 At a federal level, Danish Gambling The Gaming Act The Game Industry Gambling Act 2005 real money games Act is the primary (Chapter 583 of the Act is the primary is the guiding law are regulated by the legislation for real Laws of Malta) is the legislation for real for real money Interactive Gambling money games in primary legislation money games games in the UK, Legislation Act, 2001 (IGA) Denmark. for real money in South Korea supplemented with games in Malta, supplemented with other supporting Australian states It is supported by supplemented by other supporting legislations. and territories a series of specific other supporting legislations. separately regulate executive orders. legislations. online gambling in their respective jurisdictions. The Australian Danish Gambling Malta Gaming The Ministry of The UK Gambling Communications Authority Authority Culture, Sports, Commission Regulatory body and Media Authority and Tourism in is the main federal South Korea and regulator. Each state the Game Rating has a regulatory and Administration body, guided by Committee federal and state laws. 62. Report titled The Gaming Law 2022 by Chambers and Partners 63. Official website of The Danish Gambling Authority 64. Official website of The Malta Gaming Authority 65. Report titled The Gaming Law 2022 by Chambers and Partners 66. Official website of The Gambling commission of the UK New frontiers: Navigating the evolving landscape for online gaming in India 29  All real money All Real money All Real money All Real money All Real money Game coverage and licensing requirements games (games games (games games (games games (games that games (games with even a slight with even a slight with even a slight are speculative in with even a slight element of chance) element of chance) element of chance) nature) fall under element of chance) fall under the fall under the fall under the the purview of fall under the purview of these purview of these purview of these these regulations. purview of these regulations. regulations. regulations. regulations. No distinction However, online No distinction However, for the between game of No distinction gambling is between game of purpose of game skill and game of between game of restricted, skill and game of licensing, the chance. skill and game of permitting only chance. regulations draw a chance. All game Online gambling licensed regulated distinction between operators providing All game operators is largely illegal interactive gambling game of skill and above games in providing above for South Korean services. game of chance. the UK market games in Danish residents, with a Game operators require a license All game operators market require few exceptions such are required to from the Gambling providing above a license, either as the government- obtain licenses from Commission, games in Australian betting or online run Sports Toto and MGA with licensing depending on the market require a casino, from the Lotto. requirements being type of gambling license from the Danish Gambling more stringent activity. State regulatory Authority. for chance-based body. games. 10% – 20% on GGR 28% on GGR 5% on GGR No separate tax 21% on GGR Taxation rates for gambling, (Varies by state) and the general corporate tax in Korea will apply. I. Adherence to I. Prevention of I. Enablement of I. Strict user I. Strict user strict advertising gambling addiction user protection verification verification process standards through strict through self- process, including II. Assistance with responsible gaming exclusion schemes age verification II. Display gambling Self exclusion measures and risks of product information II. Anti-Addiction programs for users gambling is mandatory II. Strict user Measures by III. Installation of verification process, II. Prohibition of promoting healthier III. Tracking safe-gambling tools Standout social responsibility standards including age misleading and gaming habits of financial verification unfair promotional IV. Easy access transactions to III. Adherence to activities to responsible restrict money III. Clear disclosure strict advertising gambling resources laundering and of marketing III. Implementation standards gambling addiction material in a clear of a risk-based V. Tracking IV. Enablement and unambiguous approach in applying of financial IV. Assistance of self-requested manner AML measures transactions to with Self exclusion restriction from restrict money programs for IV. Self-exclusion IV. Installation of gaming, during laundering and users, along with programs for users safe-gambling tools specific hours gambling addiction counselling services (ROFUS) V. Strict age VI. Adherence to V. Installation of V. Collaboration with verification strict advertising safe-gambling tools addiction treatment processes to standards centres prevent minors from VI. Tracking gambling