A slew of retrospective tax notices by India's goods and services tax (GST) authorities against real-money gaming companies could spell the death knell for the nascent but fast growing sector, industry sources told Moneycontrol.
"This is now a fight for survival. Even if the entire industry is wound down and liquidated, it will be enough to cover only a fraction of the tax demand,” a top industry executive said.
The forthcoming 28 percent GST tax regime, combined with potential retrospective taxation dues, will make the overall operations unfeasible, likely leading many companies to wind down their businesses, the executives said.
"Balance sheets are going to get destroyed. The government wants to kill the golden goose," a second industry executive said on the condition of anonymity. "This is not just a bad look for gaming but for India,” the executive added, referring to the ramifications this move will have among foreign investors.
Show cause notice against Dream Sports
On September 26, Moneycontrol reported that Dream Sports (Sporta Technologies), the parent company of fantasy sports major Dream11, has filed a writ petition in the Bombay High Court challenging a show cause notice issued by tax authorities for alleged GST evasion and non-payment of 28 percent GST on the face value of bets.
The GST department has demanded tax of Rs 216.9 crore for the financial year 2017-2018 and Rs 1,005.8 crore for the financial year 2018-19, plus interest and penalty, according to the petition, a copy of which was viewed by Moneycontrol.
This indicates that the department is sending tax demand notices in batches to the fantasy sports major. The department is still investigating Dream Sports’ tax payments for the subsequent years.
According to CNBC-TV18, the Mumbai-based firm has received four notices from Directorate-General of Goods and Services Tax Intelligence (DGGI) so far, seeking about Rs 18,000 crore, including Rs 6,000 crore tax demand and Rs 12,000 crore in interest and penalty.
Sources told Moneycontrol that the overall GST demand against Dream Sports will be higher than Gameskraft's Rs 21,000 crore, which is currently the biggest such claim in the history of indirect taxation. It could go up to as high as Rs 40,000 crore, they said.
Dream Sports declined to comment on this matter.
Dream11 posted a net profit of Rs 142 crore on operating revenue of Rs 3,841 crore in FY22. Fantasy sports platforms such as Dream11 allows users to pay an entry fee to participate in paid contests and they take around 15 percent cut from the total prize pool, distributing the remaining to the winners.
Earlier this month, Moneycontrol reported that the Central Board of Indirect Taxes and Customs (CBIC) is planning to send show cause notices to 40 real-money gaming companies for alleged tax evasion.
This was after the Supreme Court stayed a Karnataka High Court judgment, quashing a GST notice against Gameskraft for alleged tax evasion to the tune of Rs 21,000 crore, thereby paving the way for the GST department to initiate proceedings against these companies.
Also Read: SC ruling on Gameskraft GST case could decide fate of India's real-money gaming industry
These tax notices against real money gaming companies are reminiscent of the Adjusted Gross Revenue (AGR) dues issues that plagued the country’s telecom industry for more than a decade a few years ago.
These notices and tax demands have also raised concerns within the finance ministry that they could seriously cripple the real money gaming industry and that a more "considerate view" may be needed to be taken to ensure that the sector remains sustainable, Moneycontrol reported on September 25.
“Demand should be of a nature that industry will be able to sustain. We do not want to kill any industry. The idea is not to shut down the industry. We do not want to create a situation where the business ceases to function. That call the government may have to take,” a senior government official told Moneycontrol. But writing off these demands, once they are made, will be a challenge, the official added.
Industry fate hangs on Supreme Court’s ruling
The Supreme Court is set to hear the Gameskraft GST matter again in the coming weeks. Skill gaming executives and legal experts have previously told Moneycontrol that any unfavourable ruling from the apex court could be the final nail in the coffin for the skill-based gaming industry that is already reeling under the GST Council’s recently announced 28 percent GST regime.
In July 2023, the GST Council decided to impose the top GST slab of 28 percent on the full face value, irrespective of whether it is a game of skill or chance. On August 2, it provided partial relief by recommending that GST be levied on deposits instead of every bet placed, in order to avoid repeat taxation.
Skill gaming platforms currently pay 18 percent GST on the platform fees, also known as Gross Gaming revenue (GGR). Revenue Secretary, Sanjay Malhotra, however, said that GST rates on real-money gaming were always 28 percent on full face value and this amendment was only clarificatory in nature.
The council, headed by Finance Minister Nirmala Sitharaman, has asked all states to implement the new tax rates by October 1, 2023. It also agreed to review this decision six months after implementation. The next GST Council meeting is scheduled to happen on October 7.
This decision, however, has led to concerns among foreign investors who have pumped in billions of dollars into the Indian gaming industry in the last few years, industry sources said.
In July 2023, a group of 30 prominent domestic and international startup investors, including Tiger Global, Peak XV Partners, and Steadview Capital wrote to Prime Minister Narendra Modi saying that the forthcoming tax regime could lead to a "potential write-off" of the $2.5 billion capital invested in the sector.
"This will adversely impact prospective investments to the tune of at least $4 billion in the next 3-4 years and hence the growth of the gaming sector in India," the letter read.
It will also set up the "most onerous tax regime for the gaming sector" across the world, investors had said in the letter.
They also said the move would result in a loss of "over 50,000 high-skilled jobs and a loss of livelihood opportunity for over one million Indian citizens who are indirectly associated with this industry."
Roughly $1 billion spent by the sector on advertisements would also be wiped off leading to a cascading adverse impact on the larger media and entertainment industry, they warned in the letter.
Real-money gaming segment accounted for 77 percent of India's gaming sector revenues in 2022, which stood at Rs 13,500 crore, according to a recent FICCI-EY report. It is set to grow to Rs 16,700 crore in 2023 and Rs 23,100 crore in 2025, the report added.
The government is expecting a 10-fold increase in tax collection from the real-money gaming sector in FY24. In a recent interview with Moneycontrol, Malhotra said that the tax collection from the sector may jump to Rs 20,000 crore from Rs 1,700 crore in FY22.
There is also a moral dimension to this issue, as multiple state governments, including Tamil Nadu and Telangana, have banned or attempted to ban real-money games in their respective states.
They cite various concerns, including addiction, debt, and suicides driven by rummy losses in recent years. Some of these bans have been overturned by the respective state high courts, while others are still pending a hearing.
Many state ministers, who are part of the GST Council, are of the view that "betting on online gaming is a social evil, and should be discouraged," Malhotra recently told Reuters.
"Government believes social as well as economic purpose will be served as people will indulge in more productive activities if revenues (of real-money gaming companies) fall due to the new 28 percent tax. If demand is highly elastic, and revenues go down substantially, then a social purpose is at least served," he told the publication.
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