The implementation of a 28 percent Goods and Services Tax (GST) has significantly affected the real-money gaming sector in India’s online gaming industry, according to Ranjana Adhikari, a partner at IndusLaw specializing in technology and gaming law.
“The industry has raised its concerns at various fora regarding higher operational costs, lower margins, and dwindling investments,” Adhikari stated, highlighting that many gaming platforms are absorbing the GST burden by offering cashback to players, leading to considerably lower profit margins.
The GST framework categorizes deposits in online money gaming as taxable under “specified actionable claims,” following amendments made by the GST Council in August of 2023.
Adhikari explained that the valuation mechanism prescribes that the total amount deposited with online gaming operators is subject to taxation.
“However, industry stakeholders contest this, arguing that the tax should apply to gross gaming revenue (GGR) or the platform fee, rather than the total amounts deposited by end-users.” This contention reflects a fundamental disagreement over how the tax should be assessed and who should bear its burden.
The implications of this valuation approach are significant. By taxing the total deposits, online gaming operators face higher tax liabilities, which they often pass on to players, thus affecting overall participation in the gaming ecosystem. This has raised alarms about the sustainability of the industry and its ability to attract investment.
Legal proceedings and Supreme Court hearings
The contentious issue of GST valuation is currently before the Supreme Court of India, with a crucial hearing scheduled for March 2025 that could clarify the valuation and rate of GST for the sector.
Adhikari emphasized the importance of this upcoming hearing, stating: “This could be instrumental in determining how the industry operates moving forward, especially in terms of compliance and profitability.“
Recent GST Council meetings have provided no relief for the industry. In its 53rd and 54th meetings, held on June 22nd and September 9th, 2024, respectively, no significant changes to the 28 percent levy were discussed.
During the 55th meeting on December 21, 2024, officials maintained that the industry was “settling in” to the new tax regime. Moreover, the Council mandated that online gaming operators record the state of unregistered recipients on tax invoices, complicating compliance and increasing administrative burdens.
Adding to the industry’s challenges, the Directorate General of GST Intelligence (DGGI) has flagged the online gaming sector as high-risk for GST evasion, identifying around 658 non-compliant offshore platforms.
“This designation puts additional pressure on compliant operators, who must navigate an increasingly complex regulatory environment,” Adhikari noted.
In response to the rising concerns about compliance, the Union Ministry of Finance has appointed a nodal officer, the Additional/Joint Director of the DGGI, to oversee the blocking of non-compliant entities under the IGST Act.
This move reflects the central government’s commitment to enforcing GST regulations and holding offshore operators accountable for their tax obligations.
Interim relief from the Supreme Court
Amid these pressures, the Supreme Court recently issued an interim order on January 10th, 2025, staying show-cause notices issued by the DGGI to several online gaming companies, which collectively face tax demands exceeding INR1.12 lakh crores ($130 million).
“This interim relief prohibits coercive action by tax authorities while we await a final determination on these issues,” Adhikari explained. The stay ensures that the show-cause notices remain valid until the court resolves the underlying legal questions.
The Supreme Court has consolidated all pending cases and scheduled them for a comprehensive hearing on March 18th, 2025. Adhikari cautioned that “it would be premature to comment on the likely verdict and its potential fallout at this stage.”
The legal proceedings will involve both sides presenting their arguments, and the outcomes could have profound implications for the future of GST valuation in India’s online gaming industry.
As the industry awaits the Supreme Court’s decision, stakeholders are keenly observing the legal landscape. The resolution of these issues is crucial for restoring investor confidence and ensuring the long-term viability of the online gaming sector in India.
“The gaming industry is at a crossroads, and the decisions taken in the coming months will significantly impact its growth trajectory.”
Ranjana Adhikari
