GST department plans flurry of notices against top online gaming firms

The online gaming sector in India must brace for a flurry of tax claims from GST authorities, on the same lines as the notice issued to unicorn startup Gameskraft Technology over the weekend. On September 25, the DGGI served a show-cause notice (SCN) of ₹21,000 crore on Gameskraft. The SCN came after another notice on September 8 said that the taxes paid by the company involve ‘misclassification’ as a service, instead of actionable claims, which are taxable at 28%.

According to a person aware of developments, hundreds of other such notices are in the works, and they include online gaming companies, casinos and other firms whom the department describes as betting and gambling firms. The person said that the DGGI has been working on these notices for over a year now, and the Gameskraft notice was just the first one to be sent.

Two lawyers for online gaming firms in India, also said that their clients had received “exploratory communications” from the GST department on these lines. One of them said that the client was able to successfully answer the notice and prove that they weren’t at fault. A spokesperson for the Ministry of Finance didn’t comment on the story.

“Rummy is one such game declared to be a skill game like horse racing, bridge and fantasy games. Therefore, the notice is a departure from the well-established law of the land. As a responsible start-up with unicorn status in the online skill gaming sector, we have discharged our GST and Income Tax liabilities as per standard industry practice, which is now over a decade old,” a spokesperson for Gameskraft said in a statement, yesterday.

“We are confident that we will be able to respond to this notice to the full satisfaction of the authorities since they have sought to apply 28% tax applicable to games of chance and lottery, instead of the 18% applicable to online platforms of games of skill," the spokesperson added. The company has also filed a writ petition at the Karnataka High Court against the notice today.

The notices in question are also in line with an ongoing tiff that online gaming firms have had with the GST authorities — that of what GST is to be levied on. Rule 31(A) of the CGST Act, which applies to betting, horse racing etc., allows GST to be collected on the gross gaming value (GGV) instead of the gross gaming revenue (GGR). 

In the online gaming industry, players combine their money to create a prize pool, which is then used to pay out winnings. The difference between these combined deposits and winnings makes the GGR. GGV, on the other hand, is the combined prize pool mentioned above.

While the sector currently pays tax at 18% on GGR, industry stakeholders said that they have accepted that taxes will have to be paid at 28%, in line with those levied on other non-essential services. However, they worried that applying 28% GST to GGV would more than double the tax the industry had to pay, and force some firms to shut down.

“The question of classifying the nature of game as ‘game of skill’ or ‘game of chance’ needs to be determined based on the principles and tests laid down by the Hon’ble Apex Court in the cases of R.M.D. Chamarbaugwala, Dr. K. R.Lakshmanan, K. Satyanarayana etc. As held by courts, a game of skill is one in which success depends principally upon the attention and adroitness of the participant. This will be equally applicable for online games of skill like rummy, fantasy sports, quiz etc. The mode of playing online or offline will not impact the observations of the Apex Court in relation to actionable claims for games of skill. GoM decision on valuation will have a direct impact on the current investigation,” said Asish Philip, partner at law firm Lakshmikumaran & Sridharan.

In May, the government had set up a Group of Ministers (GoM) to review GST on online gaming, gambling and horse racing in India. In a meeting on 5 September, the GoM decided not to club online gaming with gambling and horse racing, though the recommendation was not sent to the GST Council since the body wanted to seek legal opinion(s) before submitting its final report. Two industry executives, requesting anonymity, said that there has been no movement on the matter since then.

To be sure, while the industry may have ready responses to the issue of GGR-GGV based taxation, the GST notices from the DGGI also cite issues with invoicing and the discounts these firms give to customers. For instance, the Gameskraft SCN said that the company was violating Section 15(3) of the CGST Act, 2017 since it was not issuing invoices to customers. The first source mentioned above said that about ₹400 crore of the ₹21,000 crore could be related to these issues in Gameskraft’s case.