December 9, 2023 06:14:13

The Tax Conundrum in Online Gaming: A 1.5 Trillion Rupee Challenge?

What’s the DGGI’s Tax Claim?

On September 12th, the Directorate General of Goods and Services Tax Intelligence (DGGI) issued a show-cause notice to Mumbai-based Dream11, asserting that it should be classified under the same GST category as gambling and lottery companies. The notice demanded taxes amounting to ₹217 crore for Dream11’s FY18 revenue of ₹228 crore, and ₹1,006 crore for FY19 revenue of ₹802 crore. In September of the previous year, Bengaluru-based Gameskraft was asked to pay ₹21,000 crore in GST for its FY22 revenue of ₹2,112 crore. Multiple lawyers representing gaming firms and a senior government official have confirmed that additional such notices are in progress, potentially leading to a total tax claim of ₹1.5 trillion for the entire industry.

Is There a Legal Basis for DGGI’s Claims?

In its September 2022 claim against Gameskraft, the DGGI contended that the startup had misrepresented its business classification, asserting that it operates as a gambling entity rather than a gaming firm. A lawyer representing a prominent gaming company mentioned that the DGGI is initiating retrospective claims based on the government’s new 28% tax rate for the sector. The notice sent to Dream11 argued that “the entire contest entry amount constitutes the value of taxable supply,” emphasizing that while gaming companies previously calculated tax at 18% (the former tax rate) of their net earnings, the DGGI’s calculation is based on 28% of their gross revenue. This represents a significant increase, potentially 15-16 times more than what companies had previously paid in taxes.

How Is the Tax Difference Calculated?

Under the previous tax structure, if a gaming startup received ₹100 from a user as a fee to participate in a game, they earned approximately ₹10 as a platform fee. Prior to the new tax regulations, startups paid GST at 18% on this ₹10, amounting to ₹1.80 in tax. However, the new tax regime mandates a 28% GST on the entire ₹100, resulting in a 15-fold increase in the DGGI’s tax claim compared to previous tax calculations, a significant disparity.

How Has the Gaming Industry Responded?

Several top lawyers have criticized the tax claims as disproportionate, given that the demands far exceed the revenue of these companies. Two other lawyers have suggested that Dream11 could face retrospective claims of up to ₹40,000 crore, in contrast to its FY22 revenue of ₹4,056 crore. Games24x7, which reported FY22 revenue of ₹1,169 crore, may be subjected to a demand of ₹19,000 crore. An executive from an online gaming firm noted that Finance Minister Nirmala Sitharaman did not recommend retrospective claims after the 51st GST Council meeting on August 2nd.

Is There a Legal Foundation for These Claims?

Lawyers have drawn parallels between these tax claims and the government’s previous retrospective tax demand of ₹11,218 crore on Vodafone, accompanied by penalties of ₹7,900 crore. In the gaming context, courts, including the Supreme Court, have ruled that these startups offer games of skill, which do not constitute gambling. This is why there is ongoing debate about the appropriateness of a retrospective GST claim at the same level as gambling. The segregation of games of skill and chance is expected to help distinguish startups such as Gameskraft, Dream11, and Games24x7 from gambling and lottery entities.