A new tax on online real money gaming (RMG) companies under India’s Goods and Services Tax (GST) regime has left the once-sunrise industry in a state of panic, with market players announcing layoffs and closures, revenue projections dropping significantly, and the whole sector preparing for legal battles against exorbitant tax demands worth over 1.5 trillion rupees ($18 billion).
India’s GST Council in July passed a resolution imposing 28 percent GST on the full face value of bets placed on RMG platforms. This new law has been enforced as of Oct. 1, and tax authorities have sent a dozen pre-show cause notices to online RMG companies such as DreamSports (which runs Dream 11), Games 24x7 (which runs RummyCircle and My11Circle) and Head Digital Works, with demands totally worth over 550 billion rupees.
The biggest concern for the over 900 RMG companies in the country is the application of the tax on the full value of bets as opposed to the gross gaming revenue, which was the case previously, says an industry insider at one of India’s top real money online gaming companies, who requested anonymity.
In order to stay viable, the GST will be passed on straight to the users, making it difficult for companies to retain players on their platforms. Already within thin margins, companies will have to offer stronger incentives, including waiver of platform fees, higher prize pools, and more to ensure commercial viability.
Another alarming aspect of these notices is that they claim tax amounts from 2017 onwards. This is due to the Finance Ministry’s stand that the law is not prospective but clarificatory in nature – which effectively means it will apply retrospectively.
The industry insider says that this retrospective application of the tax will destroy the industry, particularly the smaller market players. The tax revenues sought on the full-face value of bets placed was never collected by companies from the period, and winnings were all distributed, as per the laws and policies at the time.
Following the implementation of the new tax rate, companies and investors are scampering to find ways to stay afloat or exit the market.
One of India’s largest RMG players, DreamSports, expects an 80 percent drop in EBITDA following the tax hike. Global gaming giant Super Group announced earlier this month that it has ceased services in the India market due to changes to the GST tax. “The newly effective tax rules make the Indian market no longer commercially viable for Super Group,” it said in a statement. Indian gaming firms had raised $2.8 billion from investors across the globe in the past five years, including from Tiger Global and Peak XV. Gaming companies, in an open letter to the Finance Ministry, said the tax would deter potential investors, both domestic and foreign, from considering the online gaming sector in India as a viable investment destination. The industry source also believes the decision to levy 28 percent GST will encourage illegal offshore gambling operators, drive Indian users to them and ultimately lead to neither optimal tax collection nor the growth of the legitimate industry.
Despite several appeals from the industry to reconsider its decision, the government has remained firm, saying the new tax streamlines the collection process. Companies then had no choice but to move courts seeking remedial actions.
LEGAL CHALLENGES AHEAD
Companies such as GamesKraft and DreamSports have already filed writ petitions challenging the applicability of the GST regime. Petitions filed aim to challenge the pre-show cause notices issued to the companies for evading GST since 2017 and failing to pay the 28 percent on the nominal value of bets.
Apart from challenging the hike, legal experts also say that companies are strongly urging courts to order the tax to be paid prospectively, which will save RMG companies from immediate financial hardship.
There is a mandatory minimum 10 percent deposit of disputed amount in order to challenge a demand order under the GST regime. Companies need to be careful in how they draft their complaints as writ petitions to avoid making these deposits, a Mumbai-based lawyer working with RMG companies said.
In the long term, companies must work with the GST council to find a neutral, viable solution, the insider said. The solution lies in understanding the aggressive approach of the GST council and negotiating a better, mutually beneficial deal, which will play out as court decisions come through, he added.