gst: E-gaming companies plan to move court against GST demand

Online gaming companies, including the likes of Dream 11, Games 24×7 and Head Digital Works, which are facing cumulative demands for goods and services tax (GST) demands of over Rs 55,000 crore, have sought or are planning to seek redressal from the courts after they were served pre-show cause notices in the last week, multiple people aware of the matter told ET.

Industry executives termed this as a big blow to the industry, as it grapples with the risk of bankruptcies. Risk capital investors are concerned that the uncertainty could further dampen the already sluggish funding for Indian startups in recent months.

People in the know of the legal discussions within gaming companies said these platforms are primarily looking at contesting the GST being applied “retrospectively” on their revenues prior to the GST Council’s decision in July to impose a 28% tax on full-face value.

Dream11, among the largest gaming startups valued at $8 billion, has already filed a petition with the Bombay High Court against the central government and its various authorities, as reported by ET in its September 26 edition. The company has argued that the notice and investigations “give retrospective effect to the amendment which has been made” effective from October 1, 2023.

Further, the tax amount being sought by the authorities was “insurmountable” and could potentially lead companies into bankruptcy, executives noted.“There is no option other than going to court…the tax demands are massive compared to the revenues being made by companies. These firms can amend their business models to pay tax as per the new regime but paying tax on previous year’s revenues is insurmountable,” said one person cited above.

ET reported on Tuesday that the Directorate General of GST Intelligence (DGGI) has sent out a dozen pre-show cause notices to online real money gaming (RMG) companies, including Dream11, Games 24×7 and Head Digital Works over goods and services tax dues of about Rs 55,000 crore. These include a GST notice of over Rs 25,000 crore to fantasy sports platform Dream11, possibly the largest indirect tax notice served in the country.“I think the rough consensus among investors is that this is retrospective taxation, similar to the Vodafone case a few years ago. The larger point is that this changes the unit economics for future investments, because the way you look at cash flows and the way you look at underwriting an investment changes,” a Bengaluru-based venture capital investor told ET.

“We have seen deal flow in the RMG space almost entirely stop recently. Even the gaming focused funds are strictly looking at casual and non-RMG games,” the person added.

Games 24×7 and Head Digital Works did not respond to queries. A Dream11 spokesperson declined to comment.

Retrospective action

Following the GST Council’s decision to levy 28% tax on full face value of bets placed instead of the platform fee collected by gaming firms, the government said that the decision was merely clarificatory in nature.

Revenue secretary Sanjay Malhotra had said on August 2– following the GST Council’s meeting, where it was decided that the tax will not be applied repetitively—that “any amendment is prospective it is not retrospective but as mentioned…this amendment is more of a clarification because betting has always been included…as actionable claims and our belief is that even online gaming or the betting going on in online gaming, casinos and horse racing…are also in the nature of betting and so they are taxable at 28%.”

“This has been our stand but the High Court of Karnataka has not upheld that stand,” he added.

He was referring to the Karnataka High Court’s order in May this year quashing the GST notice of Rs 21,000 crore issued to Bengaluru-based Gameskraft. The central government earlier this month appealed the order in the Supreme Court, which stayed the high court’s verdict paving the way for more notices to be issued.

An emailed query sent to Malhotra did not elicit a response by press time.

Expert views

Legal and tax experts are of the view that while the government’s stance has always been that the amendments were only clarificatory in nature, “there are substantive amendments to the law” indicating that online gaming companies will have enough grounds to challenge the notices at legal fora.

Abhishek Jain, national head and partner, indirect taxes, KPMG in India said: “While the GST legislation for online money gaming companies has been amended with effect from October (expected), the revenue authorities have been alleging that the online platforms were always liable to discharge GST at 28% on the value full value of bet vis-a-via industry position of 18% on platform fee only”.

“While this, most online gaming platforms should have strong arguments like them not being suppliers of actionable claims (for triggering GST on full value of bets), their games not being in the form of chance, etc. to substantiate the position adopted by them,” Jain added.

A tax lawyer, representing one of the gaming firms on the recent GST changes, said, “The government has not made the law retrospective but under the existing law, it is saying that the industry has to pay 28% of full face value (on previous years’ total transaction value), whereas the industry is saying it is supposed to pay 18% on gross-gaming revenue. That’s where the legal dispute lies between the government and the industry”.

“In the case of online gaming platforms, the platform merely organises the game and the games are not played inter se the platform – much different from a classic lottery,” he added.

Insurmountable claims

Even as the government has remained firm on its stance of recovering the tax dues arising from previous years revenues for which the industry was paying 18% on the gross gaming revenue, players in the space believe the insistence could lead to several companies shutting shop.

This is based on the tax demand far exceeding the revenues collected by these companies since GST replaced the service tax regime from July 1, 2017. Dream11, backed by Tiger Global, TPG, ChrysCap and Kalaari Capital, made Rs 9,467 crore in aggregate revenues from FY18 to FY22.

Similarly, Games 24×7, which counts Tiger Global, Malabar Investment and Raine Group among its investors, clocked Rs 5,603 crore in revenue during the same period. The firm was last valued at $2.5 billion. Gameskraft, which is a bootstrapped firm, earned Rs 4,095 crore in revenue between FY18 and FY22.

Gaming unicorn Mobile Premier League, which was last valued at $2.2 billion, recorded revenues of over Rs 1,100 crore between FY19 and FY22, according to data sourced from Tracxn.

Head Works Digital, which runs the A23 Games platform, earned Rs 2,751 crore in revenue during the period.

These revenue figures are the platform fees earned by these companies, which ranges between 12-18% of the contest entry amount – on which the tax is being levied.