Tax demand on online gaming companies likely to top Rs 1.5 trillion

Dream11 and other companies seek legal recourse after DGGI slaps GST notice

The Directorate General of GST Intelligence (DGGI) has issued notices to several online real money gaming firms for alleged tax evasion and the total goods and services tax (GST) demand could exceed Rs 1.5 trillion once all the pending notices are served, industry players indicated on Tuesday. Some of these companies, including fantasy gaming platform Dream11, are taking the legal route to contest the notices.  

Pre-show-cause notices have already been sent to Dream11 and Games24x7 — two of the three gaming unicorns in India. The third gaming unicorn, MPL, is expected to receive a notice by next week, people close to the company said.

While Dream11 has reportedly received a GST notice for an amount between Rs 25,000 crore and Rs 40,000 crore, Games24x7 has been slapped with a notice for dues totaling Rs 20,000 crore. In September last year, a notice was served on Gameskraft for recovery of Rs 21,000 crore GST. The case is currently pending in the Supreme Court.

Another company, Head Digital Works, has received a tax notice for Rs 5,000 crore.

“Most of the major gaming players are expected to receive a notice in the coming week. The total GST dues might exceed Rs 1.5-2 trillion…The government expects companies to pay as much as 20 per cent of the dues at the beginning. A failure to pay might see some of the executives do jail time as well,” an executive of a large gaming firm said, requesting anonymity.   

The notices come after the GST Council, in July, decided to impose a blanket tax of 28 per cent on online gaming. Skill gaming platforms currently pay 18 per cent GST on the platform fees, also known as gross gaming revenue (GGR).

The new rules, which do not make a distinction between games of skill or chance, will come into effect from October 1.

To contest the recent notices, many companies are seeking legal recourse. Dream Sports, the parent company of Dream11, for instance, has filed a writ petition in the Bombay High Court against the notice issued by tax authorities, sources said.

“At this stage the only recourse available to such online companies is to challenge the show-cause notices before courts. While a challenge against the pre-show-cause intimation being sent by way of DRC-01A may be dismissed as immature, a writ against show-cause notices issued under Section 73 or Section 74 of the CGST Act, 2017, would certainly be maintainable,” said Abhishek Malhotra, managing partner, TMT Law Practice.

The notice against Gameskraft was quashed by the Karnataka High Court, and the court’s decision was challenged by the revenue department. Earlier this month, the Supreme Court stayed the high court ruling and decided to hear the matter later this month or early next month. The apex court's decision is expected to set a precedent in such matters.

“The issued GST notices are 2-3 times more than the revenues of the companies they have been sent to. It's not realistic for them to be able to pay,” said an industry executive.

For example, Dream11 had posted a net profit of only Rs 142 crore and an operating revenue of Rs 3,841 crore in FY22.

Apart from online gaming platforms, the DGGI is cracking the whip on casino operators as well. Last week, Delta Corp, a hospitality firm that owns and operates casinos, received a tax notice for Rs 11,139 crore, along with interest and penalty, for allegedly not paying GST on the gross bet value. According to the company, it will pursue all legal remedies available to it to challenge the action and proceedings.

“One of the biggest impacts of the show-cause notices is likely to be the reduction in FDI inflows for the online gaming ecosystem as a whole, which may consequently lead to job losses, shutting down of companies, etc,” Malhotra added.