A host of online gaming, like Dream11, and casino operator, like Delta Corp, have received GST show cause notices last month for alleged short payment of taxes. File.
| Photo Credit: Reuters

GST authorities have issued show cause notices worth ₹1 lakh crore to online gaming companies for tax evasion so far, a senior official said on October 25.

The official, however, said that there is no data yet of foreign gaming companies registering in India since October 1.

The government has amended the GST law, making it mandatory for overseas online gaming companies to register in India from October 1.

The GST Council had in August clarified that 28% Goods and Services Tax (GST) would be levied on full value of bets placed on online gaming platforms.

“Online gaming companies served notices worth about ₹1 lakh crore by GST authorities so far,” the official said.

A host of online gaming, like Dream11, and casino operator, like Delta Corp, have received GST show cause notices last month for alleged short payment of taxes.

Separately, a show cause notice was sent to GamesKraft in September last year for alleged GST evasion of ₹21,000 crore.

While the Karnataka High Court has ruled in favour of the company, the central government in July filed a Special Leave Petition (SLP) in the Supreme Court.

‌Indian tax authorities have demanded approximately $150 million from Dream11 for alleged underpayment of taxes during the years 2017-2019.
| Photo Credit: Varun Krishan

The Story So Far: On September 12, tax authorities issued notices giving Dream11 30 days to explain why it should not be required to pay a shortfall of 2.1 billion rupees ($26.07 million) for 2017-18 and 10 billion rupees ($120.85 million) for 2018-19, along with interest and penalties. In response to these notices, Dream11 has taken a legal stance and filed a lawsuit in the High Court in Mumbai, challenging the tax demands.

‌What is the Crux of the Dispute?

‌The central issue in this dispute revolves around whether Dream11’s gaming platform should be classified as a “game of skill” or a game involving ‘”betting/gambling/wagering.”

‌Dream11 argues that it falls within the “games of skill” category, which merits a lower tax rate applied specifically to its earnings, particularly platform fees, as opposed to the entire prize pool. In contrast, Indian tax authorities insist on a higher 28% tax on the total gaming revenue generated from players.

What are the demands of the Indian Tax Authorities?

‌Indian tax authorities have demanded approximately $150 million from Dream11 for alleged underpayment of taxes during the years 2017-2019. Furthermore, they are conducting an investigation into Dream11’s tax payments for an additional four years, extending until March 2023, as indicated in the company’s court filing.

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What is the new law?

‌At the recently concluded 50th GST Council meeting, a significant decision was reached regarding the taxation of online gaming. It was decided that online gaming platforms, including Dream11, would now be subject to a 28% tax rate based on the full-face value of the placed bets.

‌Up until recently, skill games attracted GST at 18%, and chance games were taxed at 28% GST on the commission. The GST Council’s new laws do not differentiate between skill and chance and levy 28% GST on both!

‌Finance Minister Nirmala Sitharaman clarified that the intention behind this decision was not to harm the industry. However, she posed a moral question about whether the gaming industry, which includes casinos and horse racing, should receive greater encouragement than essential goods. The Minister also emphasized the aim of simplifying the taxation mechanism, eliminating complexity, and promoting transparency.

What are the implications for Online Gaming Platforms

‌Online gaming platforms like Dream11 typically charge an entry fee from users to enable them to participate in various games. For instance, let’s consider an entry fee of ₹100.

‌The platform operator deducts a certain portion of this entry fee to cover the costs of running the game and the overall platform, known as the gross gaming revenue (GGR). The remaining funds are directed towards the prize pool. In our example, let’s assume the GGR to be ₹20. Previously, GGR was subject to an 18% tax rate, which meant the operator had to pay ₹3.6 in taxes.

‌However, the new provision dictates that tax should be imposed on the entry bet itself, which is ₹100 in our example, at a rate of 28%, resulting in a taxation amount of ₹28. In essence, this translates to reduced resources available for essential platform fees and a diminished prize pool.

Image for representation purpose only.
| Photo Credit: Reuters

The Finance Ministry has notified October 1 as the date for implementation of the amended GST law provisions for taxing e-gaming, casinos and horse racing.

According to the changes to the Central GST Act, these supplies will henceforth be treated as “actionable claims” similar to lottery, betting and gambling and subject to 28% Goods and Services Tax (GST) on full face value of bets.

The amendments to Integrated GST (IGST) Act makes it mandatory for offshore online gaming platforms to take registration in India and pay taxes in accordance with domestic law.

In its meetings in July and August, the GST Council, comprising finance ministers of Centre and states, had approved amendments to the law to include online gaming, casinos and horse racing as taxable actionable claims, and clarified that such supplies would attract 28% tax on full bet value.

Parliament last month passed amendments to the Central GST and Integrated GST laws to give effect to the Council’s decision.

Also Read | A tentative rethink: On the Goods and Services Tax Council’s move 

The Finance Ministry has now notified that October 1 will be the appointed date for implementation of these provisions.

The GST Council in its meeting in August had decided that the amended provision to classify these supplies as actionable claims and clarifying the taxation provisions would come into effect from October 1.

A review of the implementation was proposed to be carried out after six months, which is April 2024.

Union Finance Minister Nirmala Sitharaman with Union MoS for Finance Pankaj Chaudhary and Revenue Secretary Sanjay Malhotra during the 51st Goods and Services Tax (GST) Council Meeting, in New Delhi, on August 2, 2023.
| Photo Credit: PTI

The GST Council on August 2 blinked a little on technicalities and kept the door open for a review down the road, but stuck to its earlier decision to impose a 28% levy on the full face value of bets placed on online gaming, casinos and horse racing, with an eye on implementing it from October 1.

Finance Minister Nirmala Sitharaman, who chaired the Council’s meeting, said the Centre would now strive to amend the Goods and Services Tax (GST) law in Parliament’s current session itself to enable the implementation of the levy, despite dissent from Sikkim and Goa over the modalities of the tax for casino users.

Tamil Nadu Finance Minister Thangam Thennarasu raised concerns about the levy’s impact on the State-wide ban on online gaming, which Ms. Sitharaman said would be addressed in the language of the new norms to explicitly state the tax cannot be levied where a ban is in place.

Also read: Explained | Will 28% GST on online gaming affect its growth? 

Delhi government’s representative sought a fresh review for the online gaming sector, but most other States leaned towards sticking to the Council’s decision last month which had been taken after three years of deliberations, the Finance Minister conveyed after the virtual meeting.

The online gaming industry, which had termed the Council’s decision a death knell endangering billions of dollars of investments and thousands of jobs in the sunrise sector, remained anxious but appreciated a critical clarification on the valuation rules for the 28% levy, approved by the Council on Wednesday.

Simply put, if someone enters a casino by buying chips worth ₹1,000, plays a round and wins ₹300, the tax will not be levied on ₹1,300, but on the entry amount of ₹1,000 alone, Ms. Sitharaman explained. In a joint statement, the E Gaming Federation and Federation of Indian Fantasy Sports welcomed this would address their concerns of “repeat taxation”.

“The new tax framework, while clarifying and resolving uncertainty, will lead to a very burdensome 350% increase in GST and set the Indian online gaming industry back several years. However, it will allow gaming companies a fighting chance to innovate and rebuild the foundation of gaming in India,” they added.

“…Because Goa and Sikkim [who wanted the 28% levy on casino bets to apply on gross gaming revenue and not the entire face value] kept appealing that they were small States and needed consideration, the Council agreed to come back after six months after implementation to review the way in which this is getting implemented,”

Revenue Secretary Sanjay Malhotra hinted the scope of the review will likely be limited to issues about valuation and the tax rates, which can be tweaked through notifications and rules, while the GST law changes will be broader “enabling provisions”.

Apart from the central GST law amendments, States will also have to amend their GST laws for the new tax to kick in, but Ms. Sitharaman expressed hope it can be implemented from October 1.

While the changes will not be retrospective per se, Mr. Malhotra emphasised they are more in the nature of a clarification because betting, gambling and lottery are already included as actionable activities under the GST law.

The Revenue Department believes online gaming, horse racing and casinos are also in the nature of betting only, he said. The High Court of Karnataka has not upheld that stand, dismissing a ₹21,000 crore tax demand against Gameskraft Technologies. “We have filed a special leave petition on the matter yesterday [Tuesday] and whatever the Supreme Court decides, will prevail,” the Revenue Secretary said.