Let us briefly look at the background of the matter. In a post-Budget talk in 2022, the Prime Minister had emphasized the importance of online gaming, acknowledged its international market and said that India is exploring avenues to increase its footprint in the sector. Realizing the potential of gaming, the government has been forming regulatory mechanisms to facilitate its responsible and sustainable growth, commensurate with our socio-economic and cultural ethos, so as to take care of the problem of addiction, serve consumer interests and curb the proliferation of illegal offshore gambling sites. Union minister Rajeev Chandrasekhar has also asserted the importance of this burgeoning sector and the need of regulation for its sustainability and growth.

Since the implementation of GST in 2017, a landmark move designed to integrate and streamline indirect taxation in India, corporations have enhanced their compliance efforts and budgets to ensure strict adherence with it. This is reflected in impressive growth in GST collections month after month, for which the tax department must be unreservedly complimented, as also Indian businesses for compliance. GST processes, however, also involved the submission of numerous forms and reports through various online portals.

The gaming industry contends that ever since the advent of the GST regime, tax authorities didn't raise any objections or concerns when it filed returns with GST at a rate of 18%. On the other hand, the taxation authorities hold that they have an 'actionable claim' as the activity is covered under gambling, which would legally attract GST at 28% and not 18%, and so their demand for arrears is legitimate.

Therein, however, lies a fallacy. Prize winnings have already been disbursed to game players, leaving companies with only their already-taxed revenue. So the demands not only place an unjust burden on these operators, but also establishes a troubling precedent for other sectors. It introduces ambiguity into the business environment, which would ultimately hurt entrepreneurial spirits.

From a pragmatic perspective, the retrospective application of tax rules, even if it is based on a clarificatory interpretation, appears enmeshed in a legal and financial tangle. It has been argued that since the matter necessitated an amendment to our GST law by Parliament, it was more of a rule change than a clarification. Whatever it is, it can impact investor sentiment, and even revive memories of a retrospective amendment brought in to overturn the Vodafone judgement of the Supreme Court.

To recap, in the Vodafone-Hutchison case of retrospective taxation, in 2007 Vodafone had acquired Hutchison for $11 billion in a deal through an overseas holding company. India sent a tax notice to the UK telecom company. Vodafone challenged the notice in the Supreme Court, whose ruling favoured the company. The Union government amended the Finance Act and introduced retrospective taxation. In September 2020, a tribunal in The Hague ruled that India's retrospective tax bill on Vodafone breached an investment treaty between India and the Netherlands. It was subsequently reversed by the government to settle the matter.

The recent notices by Indian tax authorities raising humongous demands on online gaming industry based on a current interpretation of GST applicability pose a significant challenge to one of the country's fast-emerging sectors. While the industry can still strategize and develop survival business plans to contend with the prospective application of GST on the full face value of deposits, a significantly increased burden, the barrage of notices sent to firms that aver they have been operating by the book could cause this revenue source to lose its promise.

The potential economic impact, legal uncertainties and business closures which may result from these demands of arrears could have several unintended implications. As the industry may not be in a position to pay such astronomical amounts, it may result in shutdowns or shift-outs, with offshore sites creeping in to fill a market vacuum, some of them illegal and posing security concerns. The government could consider taking a bold and pragmatic stance, as the Atal Behari Vajpayee regime once did with the telecom sector to grant it renewed capacity for expansion. Striking a balance between what is legally sound and economically doable would be crucial to ensure the continued growth and success of this burgeoning industry in India.