In today’s Finshots, we explain a bizarre decision of the GST Council to increase taxes on real-money online gaming companies like Dream11, Gameskraft, and Games24x7.

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The Story

Dream11 would’ve been celebrating on Tuesday.

It had splashed about ₹350 crores and snagged the rights to stamp its red logo on the jersey of the Indian cricket team. The photos of Rohit Sharma and Virat Kohli posing in this kit were doing the rounds. It was a big deal and Dream11 should’ve been riding high on its victory.

But soon, the joyous Tuesday would've turned into a nightmare.

Because the GST Council bowled a googly. They said they’re going to raise the GST rates. From 18% to 28%!

But that wasn’t the body blow.

This time, the tax won’t be just on the Gross Gaming Revenue (GGR) or the commissions that Dream11 earns. The GST will be charged on the Contest Entry Amount (CEA). Or simply put, on the entire sum of money the customers deposit to play on the platform!!!

That’s crazy.

If you’re scratching your head wondering what’s going on, don’t worry, we’ll explain it all. So strap in.

Firstly, companies like Dream11 create what’s called ‘Real Money Games’. For instance, Dream11 allows folks like you and me to live the ultimate fantasy. You can make a virtual cricket team with top players from across the world. Now if your team does well by scoring runs or picking up wickets, you rack up points. And if you’ve bet money on your team, you might end up with a nice payout. That’s the real money bit.

Now you could pick your team in one of two ways.

  1. You could just pick your favourites. And then keep your fingers crossed and pray to the cricket gods. If you’re lucky, you’ll win.
  2. Or…if you’re serious about the money you’ve bet, you might consider things like who’s in form, who’s likely to be dropped, maybe the player’s stats against the opposition team, and the weather conditions and the kind of pitch that’s in play. There’s a fair bit of skill involved.

And because of this skill factor, the folks in power haven’t classified it as a gambling app.

It’s the same principle for rummy and poker apps too. The outcome isn’t determined by luck alone. And India’s gambling laws are a bit hazy. There isn’t a blanket law by the central government. States decide how to regulate these apps. Some of them have banned it. But most of the states have given these apps a free pass. And the industry has flourished.

This real-money gaming segment generated over ₹10,000 crores in revenue in 2022. And everyone knows that it’s only set to balloon from here.

Maybe the GST council wanted a bigger slice of this lucrative pie.

So this is how things stand currently. Let’s assume that 2 people join a game. Both of them make a deposit of ₹100 each. Dream11 pools this money together. And the pot becomes ₹200. But Dream11 also takes a commission for facilitating this deal. So if we assume a 15% commission, it means the pot is now ₹170 (for simplicity, we’re not assuming Google’s cut when the app is downloaded from the Play Store). So Dream11 earns ₹30. And then it pays the government a GST of 18% on these earnings. Which amounts to around ₹5.4 in this case.

Seems like quite a fair deal, right?

But now, the GST Council wants a bigger cut. It wants 28%.

And sure, that seems fine. You can argue that it’s the cost of tax laws and regulations and all that.

But that’s not the problem here. The problem is that the GST Council is really pushing it. It wants to levy the 28% tax not just on the commissions, but, on the entire pot of money. That means, on a ₹200 pot of money, Dream11 will probably first have to deduct a GST of ₹56.

And the pot of potential winnings for a customer will now drop drastically too. And after Dream11 takes its commission, the winnings will be taxed as well. Dream11 will deduct 30% of the net earnings at source and pass on this to the government.

So you can see why people are calling it the “1000% tax”!

And it won’t just affect Dream11, of course. We just used the company as an example. Anyone operating in the online gaming industry is under threat now — fantasy cricket, rummy, poker…the list is long.

Also, there are the second-order effects of all this.

You might find illegal apps mushrooming in the market. The ones that will set themselves up offshore and worm their way into the phones of Indians. Many of them will be dubious.

Then there’s the worry that thousands of people employed in the sector might soon find out that they’ve lost their jobs. Because companies in the space might shut down or reduce operations.

Then there’s $2.5 billion worth of foreign investments in these companies. Investors will panic. They won’t touch this industry again with a barge pole. They might even think twice before investing in India. If they can’t bet on a stable tax regime, it could create room for doubt.

So the real question is — why on earth has the government taken this decision?

Well, the simple answer would be that activities like gambling or goods such as cigarettes that are considered a ‘sin’ are typically slapped with the highest tax rate. So it’s about levelling the playing field. Sure, you could again argue that it’s a game of skill so it’s not problematic as a lucky draw. But even the apps know that these games are addictive. That’s why they have disclaimers announcing that. And maybe that’s why the government wants to club it with other ‘sinful’ stuff too.

Or wait…maybe there’s another reason. Maybe “the government does not like to lose.”

What do we mean?

Okay, so in September 2022, a Bengaluru-based real-money gaming company called Gameskraft got a shocker in their mail. It was from the GST department. And they claimed that Gameskraft owed them taxes — a mammoth sum of ₹21,000 crores. Apparently, the folks in the GST offices, hunched over their spreadsheets and documents, had decided that Gameskraft needed to pay 28% on the deposits it received from players.

Yup! Till then Gameskraft was coolly paying 18% GST on just the commissions. Just like everyone else in the industry. It facilitated ‘games of skill’ and was not a gambling company after all. It felt like it was following the law to the T. The industry banded together behind Gameskraft too.

So with that confidence, Gameskraft took the GST department to court.

And finally, in May, a judge at the Karnataka High Court ruled in favour of Gameskraft. The judge called the GST department’s attempt to squeeze more money “illegal”, “vain” and “arbitrary”. The gaming industry breathed a sigh of relief.

But maybe that slight was enough to spur the GST Council to act. Maybe they believed that if the court didn’t agree, the council would just take matters into their own hands. They’d change the rules of the game. They’d force the gaming companies to cough up.

We don’t know if that’s exactly what forced its hand. But either way, the end result is this nightmarish turn of events for the companies.

Will the government backtrack on this?

We don’t know. The proposal still needs to be passed as a law. But you can bet that the industry will be certainly batting for a U-turn. Otherwise, they might as well be dead and buried.

Until then…

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