Headwinds For RMG Industry Grow Stronger: Dream11 Moves Bombay High Court Against Record GST Evasion Notice 

The real-money online gaming industry, long under a cloud of scrutiny, is now facing imminent storms. Today, several reports unveiled that the Directorate General of GST Intelligence (DGGI) has dispatched pre-show cause notices to three prominent real-money gaming firms over outstanding GST dues, pushing the alleged tax evasion figure beyond a staggering ₹50,000 Crores.

According to sources, as many as 40 gaming firms will be served similar pre-show cause notices on outstanding GST payments over total bets wagered for the period 2017 to June 2022.

On September 22, the casino behemoth Delta Corp. formally alerted the stock exchanges of a communication from the Directorate General of GST Intelligence regarding discrepancies in their GST remittances. Delta Corp. was handed a notice citing an outstanding GST amount of ₹11,140 Crores. Simultaneously, three of its subsidiaries – Casino Deltin Denzong, Highstreet Cruises, and Delta Pleasure Cruises – were jointly served a notice amounting to ₹5,682 Crores. Cumulatively, this places the financial obligation for Delta Corp. and its associated entities at a monumental ₹16,822 Crores – over 3.5 times its market cap. The Delta Corp stock has been in freefall after this announcement, with the share price slipping 20% in the Monday session and closing at a 52-week low of ₹139.85 on Tuesday, September 26.

Merely three days after this disclosure, reports emerged that India`s largest gaming firm by valuation, Dream11, co-founded by Harsh Jain, had been served a similar notice by the DGGI. This prompted the firm to pursue legal avenues, mirroring the actions of both Gameskraft and Delta Corp.

As per Moneycontrol, Dream Sports, the parent entity of Dream11, has filed a writ petition in the Bombay High Court to challenge the notice served by tax officials, pointing to their purported GST evasion and an alleged failure to remit the 28% GST on all bets wagered on the platform for the period 2017 to June 2022.

Insiders cited by the report indicate that the tax claims against Dream11 are jaw-dropping, approximating a monumental ₹40,000 Crores. This sum exceeds the ₹21,000 Crores notice served on Gameskraft, making this the most significant indirect tax claim in the country.

Notably, Dream 11 posted a net profit of ₹142 Crores in FY22 and reported total revenues of ₹3,841 Crores. The fantasy sports giant was valued at $8 Billion earlier this year, but these recent developments have significantly impacted the market valuations of all gaming firms.

Given the receipt of GST shortfall notices by three of India’s premier online gaming titans, it’s plausible to infer that numerous other real-money online gaming platforms might be confronting analogous situations. As events unfold, the subsequent days are likely to shed light on the specific companies and their corresponding GST liabilities as they, too, consider legal avenues to challenge the notices.

How It Started

To provide perspective, the DGGI has been scrutinizing the real-money sector for the last two years. According to unconfirmed reports, several prominent gaming firms were visited by tax officials to understand their modus operandi and to get more clarity on their financials.

In the aftermath, Bengaluru-headquartered Gameskraft was served a staggering ₹21,000 Crores by the DGGI on September 8 last year. This was in relation to alleged indirect tax evasion on bets amounting to ₹77,000 Crores, spanning from 2017 to June 2022. Gameskraft contested this by approaching the Karnataka High Court, which ultimately quashed the notice.

However, on September 6, a division bench of the Supreme Court presided by Chief Justice DY Chandrachud stayed the Karnataka High Court’s judgment. This pivotal decision by India’s apex court is perceived as establishing a benchmark, potentially greenlighting the GST department to re-initiate recovery proceedings against Gameskraft and send similar notices to around 40 gaming firms, with Dream11 on that list.

What Lies Ahead

Significantly, a pre-show cause notice acts as a preliminary step before the tax department officially issues a show-cause notice, alerting companies to the magnitude of their outstanding amounts. As reported by the Economic Times, other firms that have been served these notices include Head Digital Works (operates A23 Games, A23 Rummy, A23 Poker and Cricket.com) and Play Games 24*7 (operates Rummy Circle and My11Circle).

Industry insiders anticipate that, with additional notices likely on the horizon, the aggregate GST demand by DGGI from RMG enterprises could touch a staggering ₹1 Lakh Crores. This comes in the wake of a revised GST rate for real-money games, now set at 28% on initial deposits. This revised rate was slated to come into effect from October 1, however, with many states yet to amend their GST rules, there is a possibility of a delay for the new tax regime to come into effect.

In procedural terms, the authorities release a notification of the determined tax payable via the DRC-01 A form. Commonly referred to as a pre-show cause notice in GST jargon, it’s dispatched before the formal issuance of a show-cause notice.

“While Dream11 has been served a pre-show cause of over ₹25,000 Crore on Monday, a similar notice seeking GST dues of ₹20,000 Crore has been issued to Play Games24x7 and its affiliates, including RummyCircle and My 11 Circle. In the case of Head Digital Works, a pre-show cause notice raising a demand of over ₹5,000 Crore has been served,” an insider shared with ET.

The same source revealed that between Friday and Monday, the DGGI’s Mumbai branch alone dispatched approximately seven pre-show cause notices. These notices inquired from the firms about the reasons against a prospective GST demand. “More pre-show cause notices will follow suit, including from Delhi, Hyderabad and Bengaluru units. These companies now have five to seven days to reply to the notices. Once their replies are studied, show cause notices with GST demand will be raised,” the individual elaborated.

Mumbai’s DGGI division has been diligently scrutinizing RMG applications for over a year, dispatching notices during their ongoing investigation. While these companies have proactively engaged with the authorities, challenging the imposed GST, the source pointed out, “However, notices have been served after the recent GST notification, which fixed the GST at 28% on the full face value of bets placed on online games.”

Should formal show cause notices materialize and the companies contest the requisitions, they reserve the right to lodge an appeal before the pertinent adjudicating body.

Central Government Reacts

As GST show-cause notices flood the online real money gaming companies, alarm bells are ringing within the Finance Ministry. The sheer scale of the monetary figures involved has officials wary about the very sustainability of the real money gaming industry.

These ministry insiders argue that a “considerate view” is imperative to prevent the industry from grinding to a halt. However, this runs contrary to the stance of the Central Board of Indirect Taxes and Customs (CBIC), which is gearing up to dispatch show-cause notices to 40 online gaming entities.

Voicing these concerns, an official who spoke with Moneycontrol stated, “Demand should be of a nature that industry will be able to sustain. We do not want to kill any industry. The idea is not to shut down the industry. We do not want to create a situation where the business ceases to function. That call the government may have to take.”

The timing of this GST quandary is notably peculiar, especially as it surfaces just weeks before the 52nd GST Council meeting is slated. Set for October 7 at the Vigyan Bhawan in New Delhi, the council is anticipated to deliberate on the adoption of a 28% GST rate for online gaming, casinos, and horse racing.

The new GST amendments have only been endorsed by a handful of states. Delhi, Sikkim, and Goa had previously expressed dissent against this GST revision. It’s expected that in the forthcoming meeting, these states will seek a re-evaluation of the decision.

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