Gaming Firms Seek Swift Legal Relief from Tax Authorities

Burdened with tax requests significantly exceeding their revenues, gaming firms are seeking intervention from the Supreme Court (SC) to prevent the tax authorities from igniting a crisis.At least two companies have submitted ‘interlocutory applications’ in December asking for a pause on the tax office’s actions until the highest court delivers its ultimate decision in a dispute that could influence the prospects of India’s online gambling market. As the goods and services tax (GST) department begins issuing adjudication notices related to their 28% tax claim on the total betting sums from prior years, gaming companies are seeking ‘interim relief’ from the SC.

Last week, the primary industry association, which is also readying to approach the court imminently, distributed a draft interim application among its members for feedback, according to reports from two sources to ET. Legal experts anticipate that the SC will review the case this week.

The gaming sector’s urgency to approach the SC arises from the February 5, 2024 deadline set by GST officials to transform their past show cause notices into tax demands through the issuance of adjudication orders.

What’s currently unfolding is a psychological struggle between the industry and the tax authority. On one side, unless the tax office issues the adjudication orders by early February, the tax notices may become invalid as per regulatory guidelines. Conversely, the gaming organizations realize that pushing through a substantial tax demand could spell disaster for numerous companies.

The GST regulations were modified in January 2018, and subsequently, the GST Act was revised in late 2023 to include online money gaming within its scope. This facilitated the tax office to impose retroactive taxation of 28% GST on the complete betting pool (or deposits) held by firms from January 2018 to September 2023. Companies have been paying 28% GST on the pool since October 1, 2023, when the revised legislation took effect. Thus, the adjudication notifications pertain to finalizing tax claims for the interval prior to October 2023. The pivotal case before the SC involves several questions: firstly, can GST be charged on the total deposit made by players; secondly, can GST be applied to the duration before October 2023; and thirdly, are online money games like Poker, Rummy, and Fantasy Sports classified as games of ‘chance’ or ‘skill’? If the court categorizes them as games of chance, it could spell the end for the industry as gambling (or pure betting) is prohibited under Indian law.

Gaming firms have contested the constitutional legitimacy of ‘Rule 31 A’ — the particular rule under the GST Act — asserting that while indirect tax should only be applied to the ‘supply’ of goods and services, the deposits made by players (or the full value of the betting amounts received by gaming firms) should not be considered as payment for any ‘supply’. Instead, GST should only apply to the ‘fees’ — ranging from 5-20% of the deposits — retained by gaming firms for their services.

Notably, several turf clubs have paid the GST for previous years under protest after the revised legislation encompassed horse racing. However, while some of the established racing clubs had the financial means to meet the tax claims, most gaming firms likely lack the resources to pay hefty tax demands, leading to some starting to close down operations.

After some firms had previously succeeded in the High Courts, the revenue department appealed to the SC to overturn those rulings. The ultimate SC decision is awaited on these various cases that have been consolidated. The interim or interlocutory applications aim to prevent the tax office from proceeding until the SC issues its final ruling.

“In light of these circumstances, the primary request made before the SC is to instruct the GST office to abstain from any further actions pending the resolution of the current group of matters, as it could jeopardize the very existence of online money gaming companies since the additional tax demands significantly surpass the total revenue generated by these entities,” commented a source.

HIGHLIGHTS:

• GST department enforces retroactive claims from Jan’18-Oct‘23
• Some tax demands surpass earnings of gaming companies
• Tax department pursuing deadline of Feb 5 to sustain claims
• This is propelling gaming companies to SC for interim relief