Online gaming companies received a big blow last year, when the government issued notices to them for over one trillion rupees in goods and services tax (GST). While the matter has ended up in the Supreme Court, the federal indirect taxes body GST Council now plans to consider the impact of the tax demand on the industry's viability, two people aware of the matter said.

Central and state GST officials are examining the grievances of online gaming companies and their request for relief from the tax notices issued for the period till October 2023, totalling over  ₹1.12 trillion, across 71 cases, the people cited above said on condition of anonymity. Under GST laws, penalty can match the tax specified in the notice, which could increase the tax claim further.

“Officials are examining the plea made by online gaming companies about the tax notices. It will be considered by the GST Council at its next meeting, which could either be at the end of June or early July," said one of the two persons cited above. The person said “some discussions" are going on, but declined to describe it as a “relief to the industry" yet.

Change of regime

Until last year, the law did not specify tax rates on online gaming, and companies used to pay 18% GST on the platform fee or commission (which ranges from 5-20% of the deposits). On 1 October 2023, the GST Council set 28% tax on the full face value of deposits, which was followed by tax demands on previous earnings by the gaming companies. While the companies have challenged it in court, finance ministry officials have earlier said that the government's claim to money -- actionable claim in tax parlance -- was always 28% tax on the full deposit amount. Since the government holds this view, giving relief on the tax demand would require a strong rationale.

Queries emailed to a spokesperson for the finance ministry and the GST Secretariat on Thursday seeking comments remained unanswered till publishing.

An executive from a leading online gaming firm said the industry’s complaint was about the tax notices for the pre-October 2023 period and not about the new regime, which they are complying with. The executive cited an industry plea before tax officials stating online gaming companies are a platform, and there is no actionable claim, and that ⁠actionable claim can be at most between the players. The executive also said that ⁠GST has been “duly paid and returns were filed" and that the tax authority decided to take action after five years of GST implementation. “This will shut down the industry as the demands are higher than the revenues for the last five years," the executive said, requesting not to be named as the matter was sub-judice.

'Need for a win-win solution'

According to experts, online gaming platforms always believed that until 1 October, GST was neither payable on the entire bet value for games offered by them nor was the GST rate at 28%. “The tax demand in some of the cases for the period prior to October 2023 is significantly higher than the revenues of these gaming companies. Besides, the government’s revenue from this sector has gone up after the regime change in October 2023. In view of these circumstances, it may make sense to evolve a solution on the tax demands for the prior period that is a win-win for the industry and the government," said Abhishek Jain, partner and national head of indirect tax at KPMG in India.

To be sure, Central Board of Indirect Taxes and Customs (CBIC) chairman Sanjay Kumar Agarwal had in an interview to Mint published on 3 February and his predecessor Vivek Johri in an interview to Mint published on 14 July 2023 have clarified that recovery of the tax dues from online gaming companies can take place only after the decision of the Supreme Court, where the matter is pending. GST authorities’ argument that online gaming attracts 28% GST, like betting, was not upheld last May by the Karnataka High Court which favoured the industry, prompting the Centre to move the apex court.