India’s tax department has demanded around $150 million from Tiger Global-backed gaming firm Dream11 for underpaying taxes during 2017-2019, which the company disputes. Legal documents show that officials are also investigating its payments for four more years. The company is one of many online real money gaming (RMG) companies that have been hit with massive goods and services tax (GST) demands since the government announced a 28 percent levy on betting and gaming revenue last week. Executives say that the resulting increase in the cost of operating the platforms will squeeze profits and limit cash flows.
In an industry where the stakes are high, the tax demand from authorities looms over players, with some fearing that they may be forced to pass on the extra costs to customers, while others fear the threat of shutting down because they don’t have enough cash to pay. RMG firms are also facing the prospect of being forced to file retrospective GST returns for all the years they’ve been in operation. According to a report by the Economic Times, they’d have to pay up to seven times their actual revenues in back taxes.
RMG companies generate revenue primarily from the “platform fees” they charge users when creating fantasy teams in cricket, karate, and other games. The platform fee typically accounts for 10-15% of the total prize pool on the game, which is then distributed among winners. Dream11’s total revenues in the past five years have been around Rs 9,500 crore, with a net profit of $18 million. The tax demands imposed by the DGGI are far more than that figure and could put the company out of business if they aren’t paid.
The DGGI has also issued pre-show cause notices to several other online gaming companies, including Play Games 24×7 and its affiliates, Head Digital Works, and Gamekraft, all involved in the real money gaming space. The ET report says that if all the companies were to pay the new GST amounts, their total outstanding dues would be more than Rs 55,000 crore. The companies have moved the Bombay High Court against the DGGI’s notices, with more cases expected in the coming weeks.
Indian gaming companies have been pleading with the government to reconsider the levy, pushed through without consultation. More than 100 companies recently wrote to the finance ministry that imposing the levy will stifle foreign investment and jeopardize $4 billion in prospective investments. Investors such as Tiger Global, Peak XV, DST Global, and Steadview Capital have stakes in the sector. The move is also likely to hurt the country’s burgeoning gaming ecosystem, which is growing at double-digit rates. Hundreds of thousands of people are employed in the industry, which is a significant entertainment source for millions of people. But the levy will push many of them out of business. The new tax will reduce revenue and create a perception that the industry is unfair. That will lead to a backlash against the new law, which could threaten the sector’s growth.