Gaming startups likely to face huge changes in tax liabilities

Changes in tax liabilities have become a new headache for startups in India. After the menace of the Angel Tax was brought under control by united efforts of the ecosystem, a new arrow is approaching the gaming startup industry.

The Tax Department in India has started to scrutinise the tax paid by gaming startups like Dream11, Fantasy Sports etc.

To give context, these startups collect from users a minimum contribution to the prize pool as a fee to play a certain game. Whoever wins, gets the prize from this pool. Till now, taxes are charged on the commission that the company gets from this user contribution.

For instance, if the company earns a 15% commission on the user contribution, it pays 18% GST on that 15% amount.

However, now, the Tax Departments are likely to change this metric of tax liability calculation. Instead of charging the tax on commission, the tax authorities are questioning whether the tax should be implied on entire contest entry amount (the whole amount of users contribution).

This is after keeping in mind the fact that, several experts believe that tax should be applied to the gross deposits. Further, Dream11 that recently turned a unicorn in that last funding round and is considered to be leading this industry, is already paying GST on the total consideration instead of their margins.

The logic is simple, unlike regular deposits where the GST is charged on margins, the money contributed by users here is never returned to them, unless they win. And as Dream11 co-founder Harsh Jain pointed out, instead of paying GST every time the user plays a game on basis of one contribution, paying this tax once on the entire pool seems to be a better option.

On the other hand, the difference between payment of GST on margins and on entire pool is vast. If we take one person’s contribution to be Rs 100 and there are 1 lakh people paying the same amount, total GST to be paid on margins would be Rs 2.7 lakhs. But the total GST to be paid on entire consideration would be Rs 18 lakhs.

Hence, the tax department is still asking all the major startups about how to deal with this tax dilemma, by questioning them about why the tax shouldn’t be on the entire consideration. Companies themselves are asking the authorities for clarification on the matter.

While the matter seems to be dipping in the favour of tax imposition on the entire consideration, even with entrepreneurs arguing that tax should only be payable on the service fee they charge from the customers. If there is no clarification, the matter may proceed to litigation.

If the decision is made against GST on margins motion, then the impact on startups in the gaming league will be humongous and a sincere effort from these startups to stop this while preparing for the potential change can be expected next.

This development was first reported by ET.