Explained: The tussle over Rs 21,000 crore GST notice issued to Gameskraft

The Bengaluru-based online gaming company, Gameskraft Technology Private Ltd (GTPL), struck a dubious record by receiving a show cause notice by the Directorate General of GST Intelligence (DGGI) for not paying GST (Goods and Services Tax) to the tune of Rs 21,000 crore. An investigation by the DGGI alleged that the company wasn’t paying its taxes while also creating fake and back-dated invoices for its customers.

Gameskraft was formed in 2017 by a group of gamers who wished to provide card and number-based games on the web and mobile phone platforms. The company was notably different from other gaming websites by being one of the first entities in India that allowed players to bet and win with real cash. They made a debut with RummyCulture and saw immediate growth. Today, the company boasts 3 lakh subscribers on its platforms. Instant withdrawals, free sign-ups, sign-up bonuses and transparency with users were some of the factors behind its instant popularity.

“With Gameskraft, I wanted to bring the Indian context to the online gaming space. The games we develop are mainly targeted at Indian users. Since India’s gaming industry has a huge potential, I was pretty confident about Gameskraft,” Gameskraft founder Prithvi Raj Singh had said in an interview with StartupTalky.

From Rummy, Gameskraft soon expanded to offer a much larger variety of games under other platforms like Nostragamus, Rummytime, Pocket52, Rummyculture, and Gamezy, among others. The company’s portfolio of games expanded to poker, fantasy football, fantasy cricket, rummy, poker, 8-ball pool, carom and more. The expanding user base during the pandemic saw the company’s valuation soar to just under $1 billion in 2021 and finally, it became a unicorn soon after.

Capitalising on its rapid growth, the company embarked on an aggressive marketing campaign to onboard more players. Gameskraft partnered with Vijay Devarakonda’s Liger and roped in cricketer Suresh Raina for its ‘Culture of Champions’ campaign, and KL Rahul for its ‘Play Fantasy Cricket Hatke’ campaign. Other ambassadors of the brand include sportspersons like Harbhajan Singh, Mahesh Bhupathi, Abhinav Bindra and Pankaj Advani.

An investigation from the DGGI revealed that the company was allegedly promoting betting by allowing its players/gamers to place bets in the form of money stakes on outcomes through card, casual and fantasy online games. The DGGI also noticed discrepancies in its invoicing. The GST watchdog slapped 28 percent tax on the total gross revenue of Rs 77,000 crore and issue a show cause notice to Gameskraft for not depositing GST for the period between 2017 and June 2022. The revenue department stated that it had given the company the option of paying the Rs 21,000 tax along with a 15 percent penalty.

The main contention between the tax authorities and the company remains the definition of the gaming activities that Gameskraft offers. Tax authorities claim that the games offered by the company on its platform involve betting activities, which would attract a 28 percent GST, while Gameskraft emphasises that the games are skill gaming activities, which would attract only 18 percent GST.

“Insofar online gaming is concerned, I think the view taken in the investigation is that it involves an element of chance of winning the prize and therefore, I think it could be reasonably classified as the game of chance as well as the game of skill,” said DP Nagendra Kumar, a former member at CBIC, to CNBC-TV18.

“Now to what extent the skill is required, to what extent the game of chance is involved is a subject matter of a factual of verification and the detailing of that,” he added.

While the GST rules do not distinguish between games of skill or betting, numerous petitions in various High Courts and the Supreme Court are pending over the clarity on the applicable GST rate on online gaming and the modalities of the taxation.

“The GoM has been looking at this matter for close to a year and a half now on both the rate applicable for online gaming along with the valuation methodology. So, I think that is something we have had the opportunity to meet and make representations to each one of them and we await the decisions that would emerge hopefully in the next couple of months,” added Roland Landers, CEO at All India Gaming Federation.

The industry wishes to have the tax applied to its gross gaming revenue (GGR) at 18 percent, tax authorities may be looking to impose a 25 percent tax rate at the gross gaming value (GGV). GGR is the total money that the company keeps after paying out winners while GGV is the total money collected from participants by the company.

Gameskraft has already approached Karnataka High Court seeking to quash the DGGI order. The HC has issued a notice to the DGGI and it will take up the matter after Dussehra vacation. In its petition, Gameskraft also said that it had already paid Rs 1,500 crore in taxes against a total income of just over Rs 4,000 crore during 2017-2022, reported Financial Express.

With the matter all set to be battled out in a long legal tussle, many experts said that the government needs to bring taxation rates and methodologies more in line with global standards in order to promote the Indian gaming industry.

“Whether the rate should be the higher rate at 28 percent and what should be the value, now all of this rate and valuation must be seen from the global perspective. If you put a very high rate and that too on the gross value the business is not sustainable. None of these online gaming companies will be able to operate from India,” explained Abhishek Rastogi, Partner – Corporate and Commercial Practice Group, Khaitan & Co.

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