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Govt’s GST claims from gaming firms may touch ₹1.5 trillion

Ishaan Negi by Ishaan Negi
September 27, 2023
in Business, Gaming, Markets, News, Startups, Tech, Trending, World
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The Directorate General of Goods and Services Tax Intelligence (DGGI) is currently looking closely at India’s booming online gaming sector in an effort to recoup allegedly unpaid taxes and penalties. This action follows closely on the heels of a writ case filed in the Bombay High Court by Dream11, one of the industry’s powerhouses, contesting retrospective show-cause notifications for the fiscal years 2018 and 2019. The industry’s key participants, including Games24x7, Head Digital Works, Junglee Games, Baazi Games, Mobile Premier League, and smaller companies like WinZO, are anticipated to be affected. In this post, we’ll analyze the circumstances, look at the companies involved, and talk about how this tax dispute might affect the online gambling industry.

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Until FY23, the online gaming sector, which includes companies offering real-money games to users, paid GST at 18% of its net earnings. (iStockphoto)

Credits: Livemint

The DGGI’s Taxation Crusade

The DGGI has been busily drafting letters for various businesses in the online gambling sector, alleging underpayment of taxes and levying heavy fines totaling an astounding 55,000 crore. These claims span several fiscal years, with the last year’s tax claim anticipated to be in the range of 40,000 crore. It’s a hefty 100% of the unpaid taxes that must be paid as a penalty. However, because the case is still pending, it is unclear how the government will proceed with recouping these purported tax debts.

Companies in the Line of Fire

Dream11: As one of the industry leaders, Dream11 is facing a significant tax claim of ₹1,005.77 crore for FY19 and ₹216.94 crore for FY18. The DGGI argues that the amounts pooled in the company’s escrow account constitute an actionable claim, thereby making them subject to a 28% tax rate.

Games24x7: Another major player, Games24x7, is also bracing for a substantial tax notice, reportedly amounting to ₹19,000 crore.

Other Notable Companies: The list of companies targeted by the DGGI includes Head Digital Works, Junglee Games, Baazi Games, Mobile Premier League, and smaller entities like WinZO.

The Legal Battle and Its Parallels

The current legal conflict between tax authorities and online gambling corporations is eerily similar to the well-known Vodafone purchase tax lawsuit against the Indian government in 2012. The DGGI’s retroactive claims, which are based on the new GST rate that was implemented in August, are the root of the problem. As the Supreme Court has already ruled in favor of defining fantasy and real-money games as games of skill, as opposed to gambling and lottery, industry experts contend that such assertions are in contravention of legal precedent. The application of taxes is impacted by this distinction, making it essential.

Industry’s Response

Online gaming companies are not taking these tax notices lightly. They are actively seeking recourse through legal avenues, much like Dream11’s petition in the Bombay High Court. Many believe that the taxation issue threatens to become a protracted legal battle, echoing the Vodafone case, and are confident in their ability to challenge these claims.

The Burden of Retrospective Claims

The tax claims’ retrospective nature is the root of the problem. The online gaming industry was subject to an 18% GST rate on its net earnings up until FY23. However, the DGGI’s notices set the “platform fees”—earnings that are referred to as “platform fees”—at 15% of the entire sum that a platform collects, even though estimates from the sector show that the true value is more like 10%. As a result, there is a noticeable difference: while historically businesses have paid 1.8 as GST for every 100 earned, the DGGI’s claim predicts a staggering 28 for comparable revenues. These enterprises’ financial health may suffer as a result of this abrupt and significant increase in tax obligations, which could also restrict the expansion of the industry.

The Possible Impact on the Industry

The online gaming industry has witnessed remarkable growth in India, driven by increasing smartphone penetration and a burgeoning youth population. However, the looming taxation controversy threatens to disrupt this trajectory. The companies targeted by the DGGI contribute significantly to the sector’s revenue and employment generation.

If these tax claims are enforced, it could have several adverse consequences:

Financial Strain: Online gaming companies could face severe financial strain due to the retroactive nature of the tax claims, potentially impacting their ability to invest in innovation and expansion.

Deterrence for Investors: The uncertainty surrounding taxation could deter potential investors, affecting the industry’s access to capital for growth and development.

Legal Costs: The prolonged legal battle could incur substantial legal costs for both the government and the companies involved.

Market Contraction: Smaller firms, which constitute a significant portion of the industry, may face difficulties in meeting the tax obligations, leading to market contraction.

Job Losses: Reduced growth prospects may result in job losses within the sector, which has been a significant source of employment for India’s youth.

Conclusion

The taxation controversy surrounding India’s online gaming industry has cast a shadow of uncertainty over its future growth prospects. The industry’s current legal battle with the DGGI raises important questions about retrospective tax claims and their impact on a burgeoning sector.

Tags: bettingDream11GamingGSTtax
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Ishaan Negi

Ishaan Negi

Ishaan is a student at Sri Venkateswara College, University of Delhi. Throughout his school days, he has been an avid reader, writer and speaker. He has led multiple sessions concerning varying issues under his non profit organization: 'Candescentt'. With unbiased opinions and varying sources, he reports all sides of any topic relating to the tech industry.

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