Are gaming firms facing retrospective taxation? Maybe in essence, but not in law

The flurry of tax notices that started before October 1, include one for Rs 25,000 crore served on fantasy sports platform Dream 11.

A host of online gaming companies were slapped with exorbitant show-cause notices worth Rs 55,000 crore over the past couple of weeks for allegedly evading dues arising out of the goods and services tax (GST), with some demands dating back to 2017. This sparked speculation that retrospective taxation is making a comeback in India.

A government official, who spoke on condition of anonymity, admitted the current predicament in the gaming sector was “like the Vodafone tax issue.”

Experts said though the GST law amendments, which pave the way for changes in the tax treatment of online gaming companies are prospective, the flurry of notices pertaining to the period before the implementation date of October 1, 2023, may have adopted a retrospective approach.

The nature of demands against these companies may not be retrospective in a strictly legal sense, but they do raise concerns that the practice of using new rules to rake in old dues may be returning. The government is using a “very stretched interpretation” of the GST law to issue demands for the period prior to October 1, one of the experts said.

Also Read: Death knell, fight for survival: Retrospective tax haunts India’s real-money gaming sector

“The total income of gaming companies in 2022 was around Rs 20,000-22,000 crore, but the tax demand raised against them is to the tune of Rs 55,000 crore. If the sector’s value is less than the demand raised, then there is a problem,” Sudipta Bhattacharjee, a partner at Khaitan & Co., a legal firm, told Moneycontrol.

Bhattacharjee is representing Gameskraft in the Supreme Court on the ongoing Rs 21,000 crore GST matter and several other gaming companies across various High Courts

Muddy waters

In August, the GST Council amended the indirect tax law to clarify that all online games involving wagers, irrespective of whether they are based on skill or chance, will attract a GST of 28 percent on the full value of the bets placed –not on the gross gaming revenue – from October 1. However, the notices for the period before this date seem to be stemming from these amendments, with tax officials saying they calculated the dues by levying a 28 percent tax on the full value of the bets placed.

Previously, online gaming companies paid 18 percent tax on the platform fees because the law was ambiguous, while betting and gambling always fell under the 28 percent slab. The provision under the GST law on taxing betting and gambling is now being invoked in the case of online gaming platforms.

Also Read: Online gaming to attract 28% GST from Oct 1: CBIC

The flurry of tax notices that started before October 1, include one for Rs 25,000 crore served on fantasy sports platform Dream 11. Demands alleging GST evasion have been raised against online gaming companies Delta Corp and Gameskraft as well.

The government maintains that the show-cause notices follow a clarification of the law rather than a change and the demand for dues is not retrospective in nature. However, experts said if the law is the same, the clarification could have come three years ago.

“Since it comes under betting, which is taxed at 28 percent, there has been an evasion. So, the indirect tax department has calculated 28 percent on every bet. Even if the money won is used to place another bet, there is tax of 28 percent on it. Each and every bet made is taxable at 28 percent,” a senior government official told Moneycontrol.

If the companies pay up within 30 days of the tax demand, there is a penalty of 50 percent, and thereafter, it is 100 percent. The adjudicating officials will go as per the law, a second official said.

“Despite the noise that was made against earlier instances of retrospective taxes, this, in essence, is also a retrospective application. One can take a technical stand that the amendment (on GST levy for real money online games) applied from October 1 does not have the word retrospective, but the way it is being applied, it is in spirit retrospective,” Bhattacharjee said.

On September 14, Moneycontrol reported that 40 online gaming companies are likely to receive show-cause notices for facilitating online betting through money games and avoiding paying 28 percent tax on the gross value for the period from 2017 to June 30, 2022.

Vodafone déjà vu

India’s income tax department was given the power to retrospectively tax merger and acquisition deals after an amendment to the Finance Act in 2012.

The trigger was a tax demand stemming from Vodafone's acquisition of the Indian mobile assets from Hutchison Whampoa in 2007. The Indian government raised a demand of Rs 7,990 crore in capital gains and withholding tax from Vodafone, saying the company should have deducted the amount at source before paying Hutchison.

However, the Indian government found itself embroiled in legal arbitration cases abroad as some global companies refused to entertain retrospective demands raised by the department.

In 2021, in a significant U-turn, the central government withdrew retrospective taxes, with finance minister Nirmala Sitharaman terming the practice as “bad in law” and “bad for investor sentiment.” This came after Cairn and Vodafone won international arbitration cases against the levy of retrospective taxes.

However, barely a few years since then, the horror of retrospective taxation seems to have resurfaced for the country’s gaming sector.

Ashneer Grover, former co-founder of digital payments platform Bharat Pe, took to social media site X on September 26 and called the notices a ‘retrospective tax’ similar to what applied in the case of Vodafone.

While in the Vodafone case, the income tax law was amended to apply retrospectively, the GST amendment this time was a clarification on the application of taxes on real money games. But given the earlier stand, experts said the government’s approach to collecting dues from online gaming companies appears to be bringing back retrospective taxation in spirit.

Calculation confusion

There is no confusion over the applicability of the amended laws from this month. However, experts argued that with the amendment clarifying the 28 percent GST levy will not be applied on winnings that are redeployed, even the notices for past dues should not include winnings for re-entry into a game.

“The notices that have been issued include taxation on the winning amount that were deployed as well. Since the government has mentioned the winning component won’t be taxed, there is a good case for the industry to say that the winning component should not be taxed even for the past period,” Pratik Jain, national leader, indirect tax, at PwC India, told Moneycontrol.

Jain added that a penalty should ideally not be imposed in such situations because it is clearly a matter of interpretation.

Khaitan & Co.’s Bhattacharjee explained that one reason for the high tax claims is the inclusion of levies on redeployment of winnings.

“The exclusion for redeployment of winnings has only come in from October 1. So, for the past, the entire amount due is being calculated on face value of entire bets raised as well as winning by levying a 28 percent GST. So, every time a win is being redeployed, 28 percent is levied on each amount,” he said.

Court's call
Experts agreed there is little room for argument on the legal aspects of the amendments.

“This is not a case where the law was retrospectively amended, therefore making it slightly different from the Vodafone case. Even for the law that existed earlier, the government believes it was always a game of chance and therefore fell under the 28 percent tax bracket. This was only an interpretation issue,” according to Jain.

The Supreme Court on October 10 is likely to hear the case pertaining to a GST notice for Rs 21,000 for alleged evasion by Gameskraft, which was earlier quashed by the Karnataka High Court. According to PwC’s Jain, it is now up to the courts to decide whether the freshly amended law can apply retrospectively.

Until the Supreme Court decides the matter, the ambiguity may continue. While the top court has laid out general principles to determine games of skill, the tax department is treating every online game as a game of chance, which is contrary to the settled legal position, according to Asish Philip Abraham, a partner at Lakshmikumaran & Sridharan.

“If the Supreme Court clarifies that every online game is not betting or a game of chance, the tax department may have to identify the demand after ascertaining it as per the public gambling act 1867,” Abraham added.

Even as India’s fledgling online gaming companies termed the notices a death knell for them, the authorities seem to be in no mood to step back. According to finance ministry officials, writing off the dues may not be an option due to the nature of the sector. The revenue department has and will send notices to establish claims as there is no room for negotiations.

To be sure, the GST Council will review taxation on online gaming, casinos and horse racing six months after its implementation, which is around April 2024.

As the debate continues, all hopes are pinned on the top court’s interpretation that could come either as a major relief or an even bigger disappointment for the country’s gaming companies.