DGGI Close to Completing Probe in a Dozen Online Gaming Companies For Alleged Tax Evasion

The Directorate-General of GST Intelligence (DGGI) is reportedly wrapping up its investigation into a dozen online gaming companies for alleged tax evasion. Sources suggest that the DGGI will soon issue show-cause notices to these companies. The crux of the investigation lies in the GST rate to be levied on online gaming. The DGGI believes that gaming operators should pay a 28% GST on the entire prize pool, while companies insist that games like rummy and poker require skill and should be subject to an 18% GST.

The DGGI’s investigation comes in the wake of a record ₹21,000 Crores show-cause notice issued to GamesKraft Technology in September 2022, which the gaming operator challenged in the Karnataka High Court. Although the high court granted interim relief to GamesKraft, the case has raised questions about the DGGI’s assessment that rummy and poker are games of chance.

A government official told Moneycontrol, “In other online gaming companies, the department is soon completing their investigation and issuing show cause notice to other companies. Show cause notices are being sent to 11-12 companies soon. Amount of evasion is yet to be finalized.”

The timing of the DGGI investigation is also questionable. Recently, the Union government, recognizing the growth potential of the online gaming industry, separated online games from betting and gambling in the amended Finance Act 2023. Meanwhile, the Union Ministry of Electronics and Information Technology (MeitY) notified the IT Intermediary Amendment Rules, 2023, to regulate the online gaming industry by setting up self-regulatory organizations (SROs) and enforcing stringent KYC norms for gamers.

DGGI’s Contention on GST

The online gaming industry is currently at odds with the DGGI over the correct GST to be levied. While the DGGI believes that operators should pay a 28% GST on the entire prize pool, operators like GamesKraft, which offer games of skill such as rummy and poker, insist that the correct GST rate should be 18% of the platform commission (or rake) charged.

This disagreement led to a whopping ₹21,000 Crores show-cause notice being issued to GamesKraft in September 2022. However, the Bengaluru-based gaming company challenged the notice in the Karnataka High Court, which subsequently permitted interim relief to GamesKraft after hearing the company’s petition in October and November of last year.

Moreover, the High Court even criticized the DGGI’s assessment that rummy is a game of chance. The single-judge bench of Justice SR Krishna Kumar questioned how the DGGI, in its notice, provided the grounds for classifying rummy and poker as games of chance and if DGGI was competent to make this distinction since several past judgments by the Supreme Court and High Courts have adjudicated these games to involve skill.

However, the situation became even more complicated in December 2022 when the CBIC Chairman, Vivek Johri, stated that a 28% GST should be levied on the total bet amount in online games where winning depends on a specific outcome. This statement added to the ambiguity surrounding the issue, leaving many operators needing clarification about how to proceed.

GST on Online Gaming – an Overhanging Issue

The DGGI’s speculated move sticks out as a sore thumb when you look at the fact that the Union government has recently recognized the online gaming industry.

Despite the recent recognition by the Union government of the potential for growth in India’s online gaming industry, there is still ambiguity over the correct GST to be levied on gaming operators. The DGGI’s proposed 28% GST on the entire prize pool for online gaming has been contested by companies like GamesKraft, who argue that games like poker and rummy involve skill and should only be charged an 18% tax on the platform commission.

Moreover, recent developments, such as the amendment of the Finance Act 2023 to separate online games from betting and gambling and MeitY notifying the IT Intermediary Amendment Rules, 2023, to regulate the online gaming industry, have prompted the GoM to reconsider its previous recommendation. It is now expected that the GoM will suggest an 18% tax on Gross Gaming Revenue (GGR) for online games like poker, rummy, and fantasy sports, keeping the current tax regime unchanged for these games.

The final decision on this issue lies with the GST Council, which is expected to convene in May-end or June to discuss the matter and the valuation methodology for computing GST. However, if the DGGI persists with show-cause notices to gaming operators at this time, it could result in further confusion and possible legal challenges.

This is a developing story. Keep following PokerGuru for more updates!