Explained: Why are gaming companies being investigated for GST evasion?

After Gameskraft, the largest player in the online gaming industry Dream Sports has reportedly received a show cause notice for alleged GST evasion. As 40 more firms are being investigated, more notices are expected in the coming months

By Naini Thaker Forbes India Staff

Published: Sep 26, 2023 04:35:27 PM IST

Updated: Sep 26, 2023 04:54:52 PM IST

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Dream Sports (Dream11's parent company) filed a writ petition in the Bombay High Court challenging the show cause notice issued by authorities for alleged GST evasion, by not paying 28 percent on the face value of bets; Image: Shutterstock

There are more than 40 skill-gaming firms that are being investigated with regard to GST evasion, as per news reports. Earlier on Tuesday, Dream Sports (Dream11's parent company) filed a writ petition in the Bombay High Court challenging the show cause notice issued by authorities for alleged GST evasion, by not paying 28 percent on the face value of bets, according to Moneycontrol. The amount of tax claim in the show cause notice is unclear, reports suggest it is much higher than Gameskraft's Rs21,000 crore.

This comes weeks after Finance Minister Nirmala Sitharaman announced that online gaming, casinos and horse racing will be taxed at a uniform rate of 28 percent. She stated that the tax will be applicable on the face value of bets placed (in case of online gaming and horse racing) and chips purchased (for casinos), with no distinction between games of skill and chance. Later it was clarified that this 28 percent was to be charged on the initial deposit, and not on the Contest Entry Amount (CEA) or every bet.

Also read: 28 percent GST on online gaming: Industry cites ambiguities even as clarity emerges

The industry which has already been struggling to cope with the soon-to-be implemented amendment is all set to receive many more notices around GST evasion.

Why are skill-gaming companies being pulled up for GST evasion now?

Earlier, the view taken by the authorities was that games of skill and games of chance (betting and gambling companies) were not taxed at the same rate. Which means, betting and gambling companies were charged a 28 percent GST on the gross gaming revenue. “On the other hand,” explains Abhishek Malhotra, managing partner, TMT Law Practice, “the companies that were offering games of skill were exempted from this particular heading, known as 'actionable claim'. So they were being treated as services and charged an 18 percent GST on the commission they earn.”

Last year, the Directorate General of GST Intelligence (DGGI) issued a Rs21,000 crore show cause notice to Gameskraft for alleged indirect tax evasion on a betting amount of Rs77,000 crore between 2017 and June 2022.

With this Gameskraft case, explains Malhotra, “the GST authorities changed their approach and decided to look at games of skill and chance under the same category.” This meant that as per law, the earlier exemption was no longer valid, and Gameskraft had to pay the 28 percent GST since 2017—making it a case of GST evasion. Following this, the company approached the Karnataka High Court, which quashed the notice. Earlier this month, the Supreme Court stayed the Karnataka High Court’s judgment.

Cut to the most recent Dream Sports case. Now that the official amendment is to be implemented from October 1—where the uniform 28 percent GST is expected to be charged—why are online gaming companies being pulled up for GST evasion now? Malhotra says, “The government is taking a specific stand that the amendment that they brought about is only ‘clarificatory’, meaning it only clarifies what the legal position always was. This is why they want it to be applicable not just from October 1, but prior in time as well.” The only way forward is to challenge these, and as Malhotra says, “let the courts decide". Dream Sports has declined to comment on the matter, for now.

Also read: Dream11 turned fantasy (gaming) into reality. Now it's eyeing a diversified sports tech future

Many more notices are expected in the near future, which, as per experts, is expected to further deteriorate the state of the once-called “sunrise sector". Soon after the GST Council’s decision to increase GST, MPL laid off 350 employees, Spartan Poker laid off 40 percent of its total workforce last month, real money gaming company Quizy shut operations and Fantok halted operations. Reports suggest that even Gameskraft has decided to discontinue its fantasy offering, Gamezy Fantasy.