Online gaming companies in India, including major players like Dream11, Games 24×7, and Head Digital Works, are encountering significant Goods and Services Tax (GST) demands, totaling over Rs 55,000 crore. They have initiated or are considering legal action following pre-show cause notices received recently. This development is seen as a substantial setback to the industry, raising concerns about potential bankruptcies and hampering funding for Indian startups.
Dream11, a leading gaming startup valued at $8 billion, has already taken legal action by filing a petition with the Bombay High Court against the central government and its authorities. The company argues that the retrospective application of the amendment, effective from October 1, 2023, is unwarranted and could have severe financial implications.
The demands imposed by tax authorities are viewed as insurmountable, potentially pushing these companies into financial distress. Industry experts emphasize the necessity of legal recourse, considering the enormity of tax demands in comparison to the companies’ revenues. They stress that while the companies can adapt their business models to comply with the new tax regime, paying taxes based on previous year’s revenues is overwhelming.
Recently, the Directorate General of GST Intelligence (DGGI) issued pre-show cause notices to several online real money gaming (RMG) companies, including Dream11, Games 24×7, and Head Digital Works, for GST dues totaling approximately Rs 55,000 crore. Dream11, specifically, received a substantial GST notice of over Rs 25,000 crore, representing a significant challenge for the company.
Investors express concerns regarding the retrospective nature of taxation, drawing parallels to past cases like Vodafone. This development alters the unit economics for future investments, impacting cash flows and investment underwriting. It has resulted in a significant slowdown in deal flow within the RMG space, with gaming-focused funds shifting their focus towards casual and non-RMG games.
Legal and tax experts believe that online gaming companies have valid grounds to contest the notices in legal forums, emphasizing that the amendments to the law are substantive, rather than merely clarificatory.
Despite the government’s stance on recovering tax dues from previous years’ revenues, industry players argue that the tax demands far exceed the revenues collected by these companies since the implementation of GST in July 2017. Dream11, for instance, made Rs 9,467 crore in aggregate revenues from FY18 to FY22. This situation raises concerns about the potential closure of several companies within the industry due to the exorbitant tax demands.
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