GST authorities, e-gaming companies in race against time

In less than two months, the taxman would have to convert a string of show cause notices (SCNs) into final demands on several Indian gaming companies belonging to a business that is stuck in a mire of a steep tax, ambiguous rules, and a make or break tussle at the apex court.

At least three online gaming firms have received adjudication orders — spelling out the tax demand — by the goods and services tax (GST) authorities for 2017-18, the year when the new indirect tax was rolled out, sources told ET. Unless the orders, confirming the tax demand are issued by February 5, 2025, the SCNs will lose their validity — a deadline that the tax department, in all likelihood, would try to meet.

Once an order is passed, an e-gaming company has to approach the appellate authorities or move the Court to challenge it. This would require depositing 10% of the disputed tax demand, besides factoring it in its financial statements.

Unless the Supreme Court — which is currently hearing that case where multiple petitions challenging the tax office have been clubbed — passes an interim order before February 5, this may be the only recourse for the gaming platforms. There is very little possibility of the Supreme Court giving its final verdict before February 5.

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The dispute, largely concerning three games — Poker, Rummy, and Fantasy Sports — relate to two issues: first, whether a game is pure gambling or a game of skill; second, whether 28% GST should be imposed on the entire betting amount or only on the fee that a gaming platform collects from gamers. This fee could vary from 5 to 20% (in few cases even more) of the money one bets.

The decision of the court would spell out the future of India’s fledgling gaming business that is operating in a regulatory twilight zone. If the Court decides that the games are simply wagers (or a game of chance that is devoid of any skill), it could deal a body blow to the popular offerings by these platforms. However, if the court endorses them as games of skill but upholds the tax department’s stand, it would significantly change the arithmetic of the trade and even diminish the interest of many gamers. But if the GST is confined to only the fee charged by the platform — as the gaming firms are demanding — the platforms would be in a position to grow and attract investors.

Several companies had challenged the SCNs before multiple high courts with some obtaining stay orders which the tax department has challenged before the Supreme Court. The latter has argued that the games, involving prize money, does not let one player match and weigh the skill set of the opponent as the opponents on the faceless online platforms are randomly picked by the software. Besides the three favourite games, the verdict on other games — whether chance or skill — would have to be decided later through separate legal proceedings.

In the wake of some of the companies having received adjudication orders, the gaming industry lobbies have reached out to their members, to share their views. The multiple trade bodies may submit a joint petition to urge the Central Board of Indirect Tax and Customs, the apex body, seeking its intervention until the matter is resolved by the Supreme Court. According to industry circles, this may be aimed at thwarting tax officials from taking aggressive recovery actions or freeze on bank accounts till the matter is decided by the country’s highest court.