Nine Months Of New GST Regime: What Gaming Startups Feel About Retrospective Tax Demands?

“It’s not the end of the world, as we thought a few months ago,” a top executive of an online gaming company said following the meeting of the GST Council last month.

Reeling under the impact of the 28% GST regime, the online gaming industry saw a glimmer of hope after the GST Council meeting. While the Council didn’t review the contentious 28% GST imposed on the industry, it recommended the insertion of Section 11A in CGST Act to address the problem of retrospective taxation.

Section 11A gives the power to the GST Council to overrule retrospective tax demands in cases where lower rates were initially paid due to industry-wide trade practices rather than isolated instances. The gaming industry is hoping that this can address its woes.

But before we delve into this, let’s take a look at the current state of the online gaming industry. The sector has been under significant strain due to the imposition of 28% GST on the total value of bets placed. This taxation regime came into effect on October 1 last year.

This steep increase in taxation has been a subject of contention, with industry stakeholders arguing that it stifles growth and innovation. Compounding the issue, many gaming firms have been served substantial tax notices for periods dating back to 2018. This has created financial uncertainty and operational hurdles.

Despite these challenges, gaming companies have shown resilience. Over the three quarters after the imposition of the new tax regime, gaming firms have found ways to navigate the financial turbulence. Now, they are looking at the GST Council for a relief.

Decline In Revenues & Consolidation

While the new GST regime came into effect nearly 10 months ago, gaming companies have yet not started passing the burden of the higher tax to consumers. As a result, the top lines of all major players have been impacted, with operating revenue dropping by an average of 45%, an executive of a gaming unicorn said. In some cases, the decline has been as big as 60%, the executive added.

The companies have resigned to the fact that their growth estimates have been pushed back by two years. Before the new taxation regime came into effect, many gaming companies had started generating profit or were on the path to profitability in FY24, after enduring a long period of cash burn. Now, that progress has gone in vain, the executive said.

Among the major gaming startups, Dream11 posted a 32% rise in its net profit to INR 187.83 Cr in FY23 from INR 141.97 Cr in the previous fiscal year. Games24X7 managed to narrow its loss by 29% to INR 199.60 Cr in FY23 from INR 282.40 Cr in FY22. On similar lines, gaming unicorn Mobile Premier League (MPL) saw its consolidated net loss plunge 81% to $37.04 Mn during the year from $194.47 Mn in FY22.

While deep-pocketed firms still have cash to burn, the revenues of smaller players have seen a drastic decline following the increase in GST levy. Companies that only have rummy and poker in their portfolios have suffered a major blow, an executive of another gaming startup said. Many of these companies are now looking for acquisition by bigger players, the executive added.

Last year, Inc42 also reported that many online gaming companies were looking at sale or acquihire opportunities following the GST Council’s decision to levy 28% GST on full value of bets. The trend played out this year.

Earlier this year, metaverse and gaming tech startup OneVerse Gaming bought online poker platform Calling Station and fantasy sports platform BatBall11 to strengthen its foothold in the gaming space. OneVerse Gaming also acquired online game development studio Spartan Poker for an undisclosed amount. Last year, gaming unicorn Dream11 also acquired fantasy cricket platform Sixer.

In addition to the increase in GST rate, major gaming players are now involved in legal battles over retrospective tax notices sent to them. The finance ministry stated in December last year that 71 show cause notices were issued to online gaming companies for alleged GST evasion amounting to over INR 1.12 lakh Cr during the financial years 2022-23 and 2023-24.

Section 11A To The Rescue?

The insertion of Section 11A, if approved by parliament, can address some of the pressing tax-related concerns of the gaming industry and save them from the litigation wars.

“Once it is brought in, it will definitely help all those people who have not yet paid the additional taxation,” Abhishek Malhotra, founding partner of TMT Law Practice, said.

The government’s stance was very clear when it challenged the Karnataka High Court order in the Gameskraft case in the Supreme Court. But the recommendation to insert Section 11A has raised hopes, he added.

For the uninitiated, the Centre moved the Supreme Court last year, challenging the Karnataka High Court’s decision to quash the INR 21,000 Cr show-cause notice sent to Gameskraft. The apex court later stayed the High Court’s order.

The insertion of Section 11A will provide relief to companies from retrospective tax demands for lower tax payments made under previously unclear or unspecified rates..

“Given the evolving nature of the GST law in India, the GST Council recommended insertion of Section 11A in the Central Goods and Services Tax Act, 2017, which will now provide the government powers, on the recommendations of the Council, to allow regularisation of non-levy or short levy of GST, where tax was being short paid or not paid due to common trade practices,” Ranjeet Mahtani, partner of Dhruva Advisors, said.

Meanwhile, EPWA President Shivani Jha said that the industry is hopeful that the insertion of Section 11A will lead to the waiver of show-cause notices, sent to gaming companies for INR 1.2 Lakh Cr, during the next GST Council meeting.

“It is the most pragmatic way forward as there is no way the industry can pay the claim amount, as they are 15-20 times their revenues,” she added.

However, it is not certain yet if the gaming sector would be considered under the new section, if it is introduced. As per industry players, there has been no such indication from the government side yet .

“All companies are cautious and careful in their approach, and while the government is aware of our situation and at least open to considering new ideas, no one is entirely sure of the outcomes. We remain hopeful that the government will be mindful of our needs and request that they continue to consider our perspectives,” a gaming company executive, who didn’t want to be named, said.

With stakeholders cautiously hopeful for a relief, the path forward hinges on continuing ongoing dialogues with policymakers and proactive industry initiatives.

[Edited by Vinaykumar Rai]