Tax sleuths knock on the doors of more online gaming firms

Directorate General of GST Intelligence (DGGI) has questioned 65-70 online gaming companies since October and the frequency has increased till December , according to four sources close to the development.

These visits included officials checking for evidence that no money laundering activities were carried out, ensuring that standards of invoicing are being met and seeking customer database, among others. Two of the sources quoted said that all the top online gaming companies have had these visits from DGGI in the last few months. 

Sources believe that GST Intelligence has started the process of issuing tax evasion show-cause notices, similar to the one issued to Gameskraft Technologies. However, the officials are not expected to take any action before the Karnataka high court judgement in the Gameskraft case, where the company has appealed against the ₹21,000 crore DGGI tax notice. The judgement in expected in January 2023.

Talking about the impact of such tax notices on the industry, the founder of an online gaming company who spoke to businessline on the condition of anonymity, said, “When the government issues a show-cause notice equivalent to a company’s valuation, it deters international investors from looking at the Indian market. More importantly, companies who already have international investors are now seeing their valuations being slashed as investors see massive investment risk.”

The entrepreneur added such moves take away exit opportunities for highly valued companies who could have gone for an IPO along with smaller companies as existing investors becoming wary of supporting them.

On the other hand, the third person said that it is good for the industry to be transparent and share all the information about their processes with the GST officials He highlighted that there is a need for the government to differentiate Skilled Online Games ( SOG) from Games of Chance (State subject under the Constitution) or else states will continue to ban and tax authorities will have no clarity on how to tax them.

GST council is due to take a decision on the revised GST rate on the online gaming companies. The council mulls charging 28 per cent GST on the total prize pool collected by them instead of the platform fee earned. Currently, gaming companies are charged 18 per cent GST on the platform fee. 

An industry source belives that applying GST on the company’s total prize pool will completely wipe off the online gaming industry. According to a report by gaming-focused VC fund Lumikai, India’s gaming market size hit $2.6 billion in FY22 and is projected to cross $8.6 billion by FY27. The country has 507 million gamers, out of which 120 million, almost one-fourth, are paid users.

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