Why Dream11 filed a suit challenging India’s tax demands? | Explained

‌Indian tax authorities have demanded approximately $150 million from Dream11 for alleged underpayment of taxes during the years 2017-2019.
| Photo Credit: Varun Krishan

The Story So Far: On September 12, tax authorities issued notices giving Dream11 30 days to explain why it should not be required to pay a shortfall of 2.1 billion rupees ($26.07 million) for 2017-18 and 10 billion rupees ($120.85 million) for 2018-19, along with interest and penalties. In response to these notices, Dream11 has taken a legal stance and filed a lawsuit in the High Court in Mumbai, challenging the tax demands.

‌What is the Crux of the Dispute?

‌The central issue in this dispute revolves around whether Dream11’s gaming platform should be classified as a “game of skill” or a game involving ‘”betting/gambling/wagering.”

‌Dream11 argues that it falls within the “games of skill” category, which merits a lower tax rate applied specifically to its earnings, particularly platform fees, as opposed to the entire prize pool. In contrast, Indian tax authorities insist on a higher 28% tax on the total gaming revenue generated from players.

What are the demands of the Indian Tax Authorities?

‌Indian tax authorities have demanded approximately $150 million from Dream11 for alleged underpayment of taxes during the years 2017-2019. Furthermore, they are conducting an investigation into Dream11’s tax payments for an additional four years, extending until March 2023, as indicated in the company’s court filing.

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What is the new law?

‌At the recently concluded 50th GST Council meeting, a significant decision was reached regarding the taxation of online gaming. It was decided that online gaming platforms, including Dream11, would now be subject to a 28% tax rate based on the full-face value of the placed bets.

‌Up until recently, skill games attracted GST at 18%, and chance games were taxed at 28% GST on the commission. The GST Council’s new laws do not differentiate between skill and chance and levy 28% GST on both!

‌Finance Minister Nirmala Sitharaman clarified that the intention behind this decision was not to harm the industry. However, she posed a moral question about whether the gaming industry, which includes casinos and horse racing, should receive greater encouragement than essential goods. The Minister also emphasized the aim of simplifying the taxation mechanism, eliminating complexity, and promoting transparency.

What are the implications for Online Gaming Platforms

‌Online gaming platforms like Dream11 typically charge an entry fee from users to enable them to participate in various games. For instance, let’s consider an entry fee of ₹100.

‌The platform operator deducts a certain portion of this entry fee to cover the costs of running the game and the overall platform, known as the gross gaming revenue (GGR). The remaining funds are directed towards the prize pool. In our example, let’s assume the GGR to be ₹20. Previously, GGR was subject to an 18% tax rate, which meant the operator had to pay ₹3.6 in taxes.

‌However, the new provision dictates that tax should be imposed on the entry bet itself, which is ₹100 in our example, at a rate of 28%, resulting in a taxation amount of ₹28. In essence, this translates to reduced resources available for essential platform fees and a diminished prize pool.