Gaming sector on tenterhooks following raids & notices

The gaming sector recently faced another round of crackdowns as a police raid was conducted on the premises of a Kolkata-based gaming app accused of fraud earlier in September.

This comes a week after the Directorate General of GST Intelligence (DGGI) had issued a show cause notice to Bengaluru-based Gameskraft Technology for not paying goods and services tax (GST) calculated at an eye-watering Rs 21,000 crore, as reported by CNN-News18.

The show cause notice, which according to reports is the biggest in the history of indirect taxation in India, is for the period between 2017 to June 30, 2022. 2022 has seen a number of raids and notices issued to gaming entities over the months.

Economic Times reported later in the week that the Income Tax department has issued show cause notices to seven online gaming firms, and close to 36 established professional players active on those gaming platforms. According to ET, the tax evasion amount is estimated to be as much as Rs 28,000 crore (USD 2.58 billion).

For Rohit Agarwal, Founder and Director, Alpha Zegus, a marketing agency specializing in the domains of gaming and lifestyle, this news was quite shocking, and the massive figures being mentioned are even more surprising. “I'm not sure what the outcome of this investigation will be, but I hope the repercussions do not resonate within the esports gaming industry.”

Gameskraft Technology being also accused of promoting an online betting culture, through mostly Rummy games, follows on the heels of a recently launched pilot project by Google Play Store that finally allowed Real Money Gaming apps for skilled-based games like Rummy onto its app store for a one-year trial period.

Perhaps more pertinently, apart from a few state rulings, most of the country recognizes certain card games and fantasy sports as ‘games of skill’ rather than ‘games of chance’, rendering them legal to play and earn.

As enumerated by several industry reports, the online gaming sector in India is estimated to cross USD 2 billion (Rs 16,357 crore approximately) by 2023 (an amount less than the recently purported tax evasion interestingly) and can reach up to as much as USD 5 billion by 2025, with different gaming platforms, tournaments and apps, becoming an increasingly attractive venue for advertisers to reach out to an ever-growing and ever-diversifying audience pool, given that India recorded 391 gamers in 2021, a number expected to rocket past 650 million gamers by 2025.

According to an advertising industry source, who wishes to remain anonymous, says with no centralized framework and clear indicators of dos and don’ts, the industry is growing faster every day, leading to interference by states and regulatory authorities.

Echoing this sentiment, Jay Sayta, a technology and gaming lawyer, believes the tax department is taking an aggressive and unjustified interpretation in asking for absurd claims from online gaming companies and players.

“This kind of demand which is much higher than the revenues generated by the industry is bound to be challenged in courts and may lead to a long cycle of litigation. It is better if the government drops its irrational demands while allowing the industry to grow and contribute to the goal of creating a $1 trillion digital economy,” he says.

As Agarwal concludes, “Esports is still in its early growth stages, and it is critical that the government and other stakeholders treat this situation independently. Most importantly, it's high time the two distinct industries (esports and fantasy gaming) have a clear demarcation in terms of taxation, regulation, and laws, such that such actions do not have implications on their counterpart.”