Tax certainty has once again emerged as the top concern for investors and the industry. Experts say the GST notices sent to the online gaming and casino industry have brought back the ghost of the controversial Vodafone retrospective tax case, which had soured both foreign and domestic investor sentiment.
The recent slew of notices has raised demands for the past five years, from July 2017 to March 2022. Experts say notices coming after five years, actually point fingers back at the government and its administration.
Questions emerging are, “Why was the government sleeping? These companies have been in business for a long time, as per the law of the land. These companies have been filing monthly returns, followed by annual returns, filed after due reconciliation with the financial records. Then there is a process of audit and scrutiny too, which happens every year. Despite all these practices, why have these notices suddenly appeared?"
“There was enough time with the tax administration to assess these returns and if they were of the view that the filings have been made with an 18% rate and the rate applicable should be 28%, then they should have flagged it then?” said a senior tax advisor, who did not wish to be quoted.
Delta Corp on October 14 disclosed that the company has received fresh notices of alleged shortfall in the payment of Goods and Services Tax (GST) to the tune of Rs 6,384 crore. The notice was received by Deltatech Gaming Ltd, a subsidiary of the company, from the Directorate General of GST Intelligence, Kolkata, on October 13.
Prior to this, there were two notices issued – the first pertaining to a tax demand of Rs 6,236.8 crore for the period between January 2018 to November 2022, and another notice of Rs 147.5 crore for the period between July 2017 to October 2022, the company said.
On September 25, Delta Corp received a notice from the Directorate General of GST Intelligence (DGGI) for a tax shortfall of Rs 11,140 crore, whereas, three of its subsidiaries were issued notices for an amount totalling Rs 5,682 crore. The notices pertain to the period between July 2017 and March 2022.
Online gaming companies, Gameskraft, Dream 11 and Games 24X7 have faced GST notices.
In September last year, a similar show cause notice was served to online gaming company Gameskraft for recovery of Rs 21,000 crore GST. The company had approached the Karnataka High Court which had quashed the show cause notice.
Following this, the revenue department in July filed a Special Leave Petition in the Supreme Court on the Karnataka High Court ruling in the Gameskraft case.
Given this, where are we?
Experts, who are not only questioning the genuineness of the notices but also feel that these demands are excessively arbitrary in nature, believe that the government might not even be able to realise these demands.
A former GST officer who did not wish to be quoted told CNBC-TV18, “The rate and the value to be applied for online gaming and casinos, have got clarity only in July 2023 by introduction of specific amendments to the law. Applying this amended provision for the past 5 year period, especially when the courts have held online gaming as a game of skill and therefore would not fall under actionable claims, these high-pitched demands appear to be arbitrary and brought uncertainty in the new tax regime, which has is touted as a forward-looking tax regime.”
“Even the amendments brought in which prescribe the valuation rules, even they will face legal challenges, with respect to the amount refunded, as this cannot be treated as a transaction value unless it is applied for playing games.”
Not just the tax officers, even legal experts feel the same.
Abhishek A Rastogi, founder of Rastogi Chambers, who argued for the gaming and casino companies, said, “The tax effect for the period prior to October 2023 will have to be decided by the Supreme Court based on technical, judicial, interpretational and constitutional aspects. The moot point to value the entire amount will have to cross the constitutional validity test on several counts including valuation of actionable claim.”
“Even prospective amendments tax the gaming companies in a particular fashion and inconsistently for the prior period will certainly raise concerns, thereby making the valuation as not only manifestly arbitrary but also against the GST framework which taxes consideration received by the service provider as a basic rule,” added Rastogi.
“Legally they (tax authorities) can send notices but arbitrary notices are subject to judicial review and that is the main question,” Rastogi said.
Another tax practitioner, who is working with a leading tax advisory firm, added, “In wake of significant demands being raised on the gaming industry, it may be worthwhile to note that the recent amendments to GST laws empowering taxability of online gaming industry should have a prospective application only. Moreover, it is rather suggestive that GST was applicable on the GGR (ie service fee or commission) prior to the said amendment, akin to any other service sector.”
“The legal framework of classifying such online games and casinos as actionable claims, explicitly, for the purpose of taxability was not in place. At best, the tax formations can argue that GST was payable retrospectively on the amount deposited in wallets/ value of chips or tokens purchased (as the case may be) and not on deal/ bet value. It may be critical for the government to provide a clear line of sight by way of a clarification on the taxability of past transactions which should provide adequate relief to the industry, and unnecessary litigation could be done away with.”
The fear in the industry is such that many of them while talking to CNBC-TV18 requested anonymity.
Another tax expert, with a global MNC firm, shared, “While the Government has been remarking changes made with effect from 1 October as being clarificatory, the said is not completely aligned to the pre-amendment legislative provisions. Pre-amendment, the deemed value of GST being payable on the face value of the bet was on the supply of actionable claims only and clearly, the platforms are not engaged in the supply of actionable claims. They are a mere platform which arranges various online games.”
“The Government always well recognised the distinction between a platform which merely arranges a supply and the supplier themselves and which is why various provisions were explicitly introduced to hold online platforms in certain cases accountable for payment of GST on certain supplies like Uber/ Ola for passenger transport, Zomato/ Swiggy for restaurant supplies through their platform, etc. No such provisions were prescribed pre-amendment for making the online platforms accountable for supplies, if any made through their platform.”
He further added “Separately, there was a tacit acceptance already under the pre GST regime where platforms have always been paying on the platform fee earned by them. And even beyond, the deeming fiction of face value of bet was always only applicable to games in the form of chance and now the stand on creating an artificial distinction between online and offline modes of conducting such games with unsettling settled jurisprudence on these being games of skill is irrational and reprehensible. Such large demands with lingering uncertainties have entailed this blooming industry falling prostrate to India’s taxation mandate.”
So was the decision of the GST council to come up with tax clarity for the online gaming and casinos, retrospectively, right or wrong?
This was the next question that CNBC-TV18 asked.
Here’s what experts had to say.
A former taxman, again who did not wish to be quoted, clearly said, “I don’t blame the DGGI - they are merely implementing the decision of the GST council. I think the decision of the Council is wrong. To suggest that the clarification being given in the 51st & 52nd meeting which needed amendments in the law is reiterating what was always the intention of the law is quite astonishing. The DGGI had no choice but to issue the demand on the full value from 2017.”
“In effect, the clarification made the demands retrospective. The Council could have instead said that this would be prospective only. Yes, there would have been challenges since some notices had been issued, there was no uniformity of practice etc. But this is still better than the present situation where there is bound to be long litigation & uncertainty for the trade till the final outcome.”
Expressing similar sentiments, Dinesh Kanabar, founder and CEO of Dhruva Advisors, a tax and regulatory boutique firm, shared, “The notices sent by the authorities to the gaming companies are of an astronomical amount. If these demands are sustained, many of these companies will not be able to survive. While per se that cannot be the reason why these demands should be criticised, the fact is the law was amended to tax gaming companies in a gross amount at stake. Until then, there was a belief, duly supported by judgements that this stand of the authorities was incorrect.”
“No such demands were raised by the authorities until the amendment to the law. The law is clearly not retrospective and to say that even before the amendment the law always so applied is, in effect, making the law applicable retrospective!! The gaming companies have not collected this tax from their clients shows that this was not their interpretation prior to the amendment. The government needs to seriously rethink the issue.”
Pratik Jain, Partner, Price Waterhouse & Co LLP, added, “ Industry was hoping that 28% GST on the gross amount would be imposed going forward and for the past, the Government might accept the earlier practice. However, it appears that there would be a long-drawn litigation for the past which would get settled only at the Supreme Court level. The GST council should perhaps reconsider this issue again as it may be virtually impossible for the authorities to recover huge demands which have been raised.”
So now, what? What will happen to these demands? Will it just increase litigation? What about the industry, how will they function?
Well, a former tax officer said, “Given such slew of notices, the absence of the GST Tribunal, which has to start functioning urgently because all these notices will be going to the Tribunal. And in case the tribunal is not going to be there the high courts will get clogged unless the Supreme Court can give a decision before that.”
Amit Maheshwari, Tax Partner, AKM Global, a tax and consulting firm states, states that “The 28% GST on the entire bet value, compared to just the platform fee, amplifies the tax liability for online gaming platforms. Implementing such a structure, especially with retrospective effects, could financially strain many industry players. It is imperative to maintain tax compliance, but when tax demands overshadow a company's actual revenue, the system appears imbalanced.”
“Drawing from lessons like the Vodafone case, it's evident that clarity, consistency, and fairness in taxation are paramount to fostering trust and promoting business growth in any sector. A balanced approach, which ensures rightful revenue to the government without hampering business prospects, would be more conducive to fostering a thriving online gaming ecosystem in India.”
Furthermore, Anita Rastogi, an Indirect Tax partner at PWC, commented on this issue, saying, "Amendments in GST law are usually prospective in nature. Online gaming companies are in the process of implementing these going forward. However, GST notices for demands relating to past periods have been issued. The legality of past-period demands will be decided by the court. Having said that, these demands pose a huge practical challenge for the online gaming industry because taxes for past periods cannot be collected from customers now. The fact that these amounts do not represent the revenue earned by such companies, if they are forced to pay it out of their pockets, their survival is at stake as amounts involved are humongous.”
To be seen is which way these notices finally take the industry.
(Edited by : Anand Singha)
First Published: Oct 17, 2023 6:15 PM IST
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