The online gaming sector in India must brace for a flurry of tax claims from goods and services tax (GST) authorities, along the lines of the notice issued to unicorn startup Gameskraft Technology during the weekend.

On 25 September, the Directorate General of GST Intelligence (DGGI) served a show-cause notice asking Gameskraft to pay up ₹21,000 crore following another notice on 8 September when it had said the taxes paid by the startup involved misclassification as a service instead of actionable claims, which are taxable at 28%.

According to a person aware of developments, hundreds of other such notices are in the works and may soon be issued to online gaming companies, casinos and other firms classified as betting and gambling platforms by the department.

The person said DGGI has been working on these notices for over a year now, and the Gameskraft notice was just the first one to be served.

Two lawyers for online gaming firms in India also said their clients had received "exploratory communications" from GST authorities. One of them said the client was able to successfully prove that it was not at fault. A spokesperson for the ministry of finance did not comment on the story.

"Rummy is declared to be a skill game like horse racing, bridge and fantasy games. Therefore, the notice is a departure from the well-established law of the land. As a responsible startup with unicorn status in online skill gaming, we have discharged our GST and income tax liabilities as per standard industry practice, which is now over a decade old," a Gameskraft spokesperson said in a statement on Sunday.

"We are confident that we will be able to respond to this notice to the full satisfaction of the authorities since they sought to apply 28% tax applicable to games of chance and lottery, instead of the 18% applicable to online platforms of games of skill," the spokesperson added. The company on Monday also filed a writ petition before the Karnataka high court challenging the notice, which will be heard on 27 September.

The notice was issued amid an ongoing controversy over the component that GST can be levied on between online gaming firms and GST authorities. Rule 31(A) of the CGST Act, which applies to betting, horse racing, etc.., allows GST to be collected on the gross gaming value (GGV) instead of gross gaming revenue (GGR).

In the online gaming industry, players combine their money to create a prize pool, which is then used to pay out winnings. The difference between these combined deposits and winnings makes the GGR. GGV, on the other hand, is the combined prize pool.

While the sector currently pays 18% tax on GGR, industry stakeholders said they have accepted that taxes will have to be paid at 28%, in line with those levied on other non-essential services. However, they are worried that applying 28% GST to GGV will more than double the taxes for the industry and force some firms to shut down. "The question of classifying the nature of the game as 'game of skill' and 'game of chance' needs to be determined based on the principles and tests laid down by the hon'ble apex court," Asish Philip, partner at law firm Lakshmikumaran and Sridharan, said.