New Government, New GST Council, New Hopes for Gaming

The Lok Sabha elections temporarily suspended significant policy-making in the country, including the pressing issue of providing regulatory clarity for the rapidly growing Indian online money gaming industry.

On the 1st of October last year, the sector was subjected to a multifold hike in the effective GST burden to 28% on the total value of entry deposits for casinos, horse racing, lottery, and any online money games regardless of claimed skill or chance-based nature.

Fearing an irreparable loss of market share, most businesses refused to pass the burden to customers, and survival became dependent on solid cash reserves and creativity in squeezing a margin in the new situation.

While companies engaged in this peculiar war of attrition, GST enforcement authorities went ahead and bombarded the industry with 71 show-cause notices totaling ₹1,12,332 crore ($13.5 billion) plus penalties and interest for the period prior to October 2023.

Now, the Narendra Modi 3.0 cabinet has stepped in, the 53rd GST Council Meeting has been scheduled for Saturday, the 22nd of June, and the 15th of July has been set as a tentative listing date for the mega litigation around the alleged ₹1.12 lakh crore industry-wide tax evasion.

Egregious Retrospective Tax Demand Might Get Written Off

Good news started coming in when a proposal by the Law Committee to amend the Central GST Act (CGST Act) entered the agenda of the upcoming 53rd GST Council Meeting with the potential to soon put the “Retrospective Taxation Crisis in Indian Online Gaming” to an abrupt end.

“The Law Committee recommended that a provision may be incorporated in GST laws empowering the central and state governments to regularize, based on the recommendations of the GST Council, non–levy or short levy of GST or Compensation Cess where it is found that such non-levy or short levy was a result of general practice in the trade or a section of trade,” the Law Committee proposed.

If the GST Council accepts the amendment and Parliament adds a new Section 11A to the CGST Act as proposed, there will be no refunds for eventual overpaid amounts, but the hands of government officials across India will be untied to write off the impossible-to-pay tax demands, which exceed the industry’s market cap several times.

“The retrospective demands for GST have decreased investor confidence, ease of business, and the flow of (foreign direct investment) into the country,” explained John Joseph, former Central Board of Indirect Taxes and Customs (CBIC) Chairman and strategic adviser at risk management consultancy DeepStrat.

A concord between the executive and legislative powers can clear the retrospective aspect of the crisis faced by the industry months before the judiciary is able to deliver a solution, as Parliament’s next session, starting on 24 June, right after the 53rd GST Council, will be focused on budget talks and the Finance Bill.

A Welcome Relief, but Not Nearly Enough

However, the eventual end of the “Retrospective Taxation Crisis,” even though undoubtedly a massive relief for the companies and their CFOs, is hardly going to clear the air of doom hanging over the homegrown online gaming sector caused by the October 2023 hike in GST.

“The gaming industry is facing unprecedented challenges. Companies are struggling to retain gamers, leading to widespread consolidation and pushing startups out of the ecosystem. Many startups have already shut down, laid off hundreds of employees, and are grappling with stagnant revenues,” WinZO Co-Founder Saumya Singh Rathore described.

A freshly released report by Ernst & Young (EY) and the US-India Strategic Partnership Forum (USISPF) on the “Impact of New GST Law on Skill-Based Online Games States” provides more details on the grimness of the current situation.

According to the report, around a third of gaming businesses are now paying between 50% and 100% of their total revenues on GST dues, compared to an average of 15.25% before 1 October 2023. For a number of startups, the new GST burden even exceeds the sum total of their revenues, and they are running at a considerable loss.

“Over half of the sector’s enterprises are now facing stagnant or shrinking revenues, with 25 percent experiencing growth declines of up to 50 percent, a stark contrast to the previous growth rates of 100-200 percent,” the paper points out.

FDI, which totaled $2.6 billion (₹21.730 crore) between 2019 and 2023, with around 90% pouring into the RMG segment, came to a complete halt after the hike in GST.

Out of 12 surveyed Indian gaming businesses, four reported a freeze on hiring new staff, four laid off up to half of their workforce, one company had to part ways with more than 50% of its talent, and one company shut down.

“For a sector which has created 100,000 jobs and was expected to create around three times more jobs in the coming years, such job erosion is an alarming concern that reflects the adverse business impact of the GST amendment,” the EY report states.

Industry Hopes for a Roll Back, not Likely according to Gov’t Sources

After a gap of more than eight months since the 52nd Meeting of the GST Council, held on October 7, 2023, the industry has much awaited the forum between the Central and State Ministers of Finance scheduled for this Saturday.

“(The) upcoming GST council meeting, being the first of the new government, has a full plate of agenda items on its hands. There is a need to address key industry issue like the taxation of online gaming and the promised review of the valuation rules introduced in October 2023,” commented Rajat Bose, Partner at Shardul Amarchand Mangaldas & Co.

Still, the GST Council “is likely to have reservations on any review and it will continue with ongoing policy of 28% GST on actionable claims,” an anonymous source told the media, pointing out the sixfold surge in tax revenues from online gaming.

“The council will not address the comprehensive review of online gaming at the upcoming meeting. A review is not needed. There is no need seen at the moment for the review as industry has adjusted well to the higher tax implemented from October 1, 2023. Thus, the review is not part of the agenda in the upcoming council meeting on June 22,” another governmental source stated.

Nevertheless, the news about the scheduling of the 53rd GST Council brought a 24% uptrend to the shares of Delta Corp Ltd, India’s sole listed operator of casino games, including Roulette and Blackjack, last week from ₹110 to ₹136 due to market expectations of an upcoming tax relief.

“There is a strong market buzz that the Indian Finance Minister Nirmala Sitharaman may announce a reduction in GST in the upcoming interim budget. This speculation has led the market to anticipate additional income in the company’s balance sheet in the upcoming quarterly results. The stock is also available at a significant discount due to prolonged sell-off pressure,” Avinash Gorakshkar, Head of Research at Profitmart Securities, explained.

“If the Union Finance Minister in the Modi 3.0 government indeed announces a GST reduction in her budget speech, we can expect a surge in buying of Delta Corp shares post-budget presentation,” Gorakshkar added.