Indian Tax Body sends a $2.6 Billion Show Cause Notice to Skill Gaming Company. Is Crypto Next?
Gameskraft has been accused of not paying Goods and Services Tax to the tune of INR 21,000 crore. The show cause notice is for the period between 2017 to June 30, 2022.
Dear future and current Web3 leaders,
Since a lot of our readers are Indian, this story about indirect taxes on online betting games, holds significant importance. Last week, another story did rounds about how the government is mulling an indirect taxes on Crypto transactions, and that is important too. We will cover them both today.
The first story is about Gameskraft Technology Private Ltd (GTPL), which is the company behind skill-based games in India like Rummy.
Rummy is a card based game of skill which largely played in most households as a family game, but now is open to betting and wagering money to win against other people online.
The Directorate General of GST Intelligence (DGGI) has issued the biggest show cause notice in the history of indirect taxation to a Bengaluru-based online gaming company, GTPL as reported by CNN News 18.
The company has been accused of not paying GST - India-based Goods and Services Tax to the tune of INR 21,000 crore ($2.6 Billion). The show cause notice is for the period between 2017 to June 30, 2022. DGGI has slapped a 28% tax on betting amounts of nearly Rs 77,000 crore ($9.5 Billion), accusing the company of promoting online betting through games like Rummy.
According to the DGGI report, GTPL was engaged in betting by allowing its players to place bets in form of money stakes and it allowed bets on the outcome of card games played online.
The report says that DGGI found out that Gameskraft was not issuing any invoices to its customers and submitted fake/back dates invoices, which were caught by forensic examination.
Gameskraft spokesperson said,
"Games of skill are a constitutionally protected activity per the Supreme Court and various High Courts across the country. Rummy is one such game declared to be a skill game like horse racing, bridge and fantasy games. Therefore, the notice is a departure from the well-established law of the land."
The spokesperson said that only 18% GST is applicable to online platforms of games of skill.
How far is too far with taxes?
Let us forget for a moment that these games are online betting games and are perhaps very addictive. It is important to understand how taxes are expected according to the notice, vs how they may actually work, in ideal conditions.
At 28% GST on bets, if a customer is betting 100 INR on one game, the company is expected to take a cut of 28 INR and pay it to the government. That is essentially what the DGGI is expecting. What the company is saying is that they already pay 18% GST, but that is on the platform fees and not the wager amount.
The usual edge for any gambling platform is roughly between 0.5% to 3.5%, depending on the games. In skill-based games, it remains on the lower side. This means that for every 100 bucks bet by the customer, the client may earn 0.5-1% only.
So where is this tax coming from and how can anyone ever afford it?
I did a little digging. Online Rummy websites like RummyCircle do not charge GST to customers, they do however deduct 10% TDS (Tax Deduction at Source) on all winnings over 10000 INR. These winnings are subject to 30% income tax for the user.
Other skill game websites for fantasy sports charge 18% GST on the withdrawal amount, if the user has provided GST details. Which means that despite several game plays, only the withdrawal amount is subjected to GST.
These games charge a platform fee for each game, which may range from 1% to 20%. For instance, a video on youtube shows that two players chipped in 3000 INR each and the winner took home 5400 INR, while 600 INR went to the platform.
If 10% is taken as a median fee for each bet, users must have wagered over 7,70,000 Crore ($95 Billion) on the platform for DGGI to come up with the estimates that it claims. That number is highly improbable. The volume of Rummy games is expected to be around $1.4 billion in 2024, and it was just over $300 million in 2019.
The platforms currently charge 18% GST on the platform fee they earn from each player’s bet. A committee set up by the government is mulling 28% on online gambling and casino platforms.
The absurdity of this number is something no one is talking about. All headlines are focusing on what seems to be the biggest ever size of a show cause notice, the number being highly improbable to be accurate. So the question arises, what is the norm now and what will it be in the future? Will the government ask these companies to charge GST on each bet? Or will it for platform fees only?
Of course the gaming company Gamekraft will fight against the current notice, and possibly win, it remains to see how the news comes across then. Another major argument here is whether or not games like Rummy and Fantasy sports be clubbed with other chance-based games in the casino.
What if, similar taxes get applied to Crypto?
You must be aware that in India, one has to pay a 30% flat tax on all profits generated from cryptocurrencies and a buyer or an exchange must deduct a 1% tax from each seller and deposit it to the government.
This has drastically reduced the volumes on exchanges. By some estimates, up to 90% volume of exchanges has vanished compared to before the TDS (Tax deducted at source) era that began on July 01, 2022.
Now, there is news in circulation that the government is planning on introducing GST or indirect tax on crypto transactions. A few sources that news platforms could confirm the information with have said that there is a legal framework for crypto in the works and once that is defined, it will be decided whether there should be an 18% or 28% Goods and services tax levied on crypto transactions.
News around the applicability of GST on crypto is not new, and for a very long time, all crypto exchanges have been applying 18% GST on the fees they charge their customers.
What worries me is if the government comes up with a GST mandate on the whole amount of transactions instead of just the platform fees. Even if it can be fought back and removed legally, the dent it will create even if temporary, in an already bleeding market is unprecedented.
I wouldn’t trust any news unless it comes from official sources, so for now I am going to be relaxed about this. However, it will remain in the back of my mind as we await clarification.
What do you think the future scenario will be with crypto and tax? Let us know in the comments below.
Hope you enjoyed learning about the latest in taxation. Subscribe to receive these stories straight to your inbox.
Please share if you think a friend or family member will benefit from this letter.
And, if you want to, you can consider becoming a paid subscriber.
In addition to supporting independent journalism, here are the benefits of becoming a paid subscriber:
An exclusive Story of the week, just for paid subscribers
Access to Exclusive Videos one week before free subscribers
Exclusive QnA Sessions and Meet-ups
More benefits coming soon