Just as concerts by American pop icon and fellow superstar musician Beyoncé were estimated by Bloomberg Economics to have added $5.4 billion to US gross domestic product in the third quarter, Bank of Baroda economists expect these matches to boost output . An extra $2.6 billion spent on everything from ticket sales and TV rights to tourism and food delivery could boost India’s GDP by as much as $1 billion, they say. Macquarie Group Ltd. noted that the cost of rooms in three-star hotels has doubled.
The stock market took notice:
However, there is a fly in the ointment: tax bills run into billions of dollars. Betting on the game of glorious uncertainty has traditionally been the preserve of the underground dens of the Indian mafia. But in fantasy sports, investing real money to support players’ on-field performance has become a game of skill, at least from a legal standpoint. Add in the usual suspects – pandemic boredom, the rise of working from home and the explosion of mobile entertainment – and the world’s most populous country has emerged as a major online gaming market.
Since everything that is legal in India (and even some things like cryptocurrency that are not) must be taxed, authorities began their resource mobilization campaign last month by issuing a tax evasion notice of 150 million dollars for the domestic platform Dream11. That’s just two years, and the investigation continues for another four years, according to Reuters. The fantasy sports app has been asked to pay GST of 28% on its entire prize fund, not just its own fees. The parent firm of the Tiger Global-backed unicorn sued over the order.
In May, Indian tax authorities lost a similar lawsuit by Bengaluru-based Fantasy Card Games company Gameskraft Technologies Pvt. However, Dream11 is primarily about cricket. The World Cup would be a great opportunity for the government to stimulate demand for betting and make significant money through regular taxes on what online gaming establishments actually earn.
A 28% tax on a user’s total deposit may dampen the excitement.
This is a worrying development, and not just for fantasy sports apps. Indian states will receive a share of the revenue collected by the federal government, and not all state administrations agree with the tax on online gambling and casinos introduced on October 1. It will destroy India’s fastest growing startup sector, Atishi. Marlena, the Delhi state finance minister, announced this on social media.
The problem is not the 28% rate per se, although it is easy to understand why a wealthy urban and startup hub like Delhi might not want the highest consumption tax rate to apply to gaming apps. The more important question is whether the entire rate should be taxed.
Failure to do this may lead to other complications. Lotteries are also taxed at face value. States that depend on them as a critical source of revenue will be reluctant to disrupt the status quo. But as former Tamil Nadu finance minister Palanivel Thiaga Rajan explained on CNBC, lottery tax is not included in players’ calculations. No one buys a 10 rupees (12 cents) ticket to win 50 rupees. They want a jackpot of 1 million rupees. However, in online games, the odds are slim and the payouts are limited. Tax matters.
Of course, Dream11 found a way. Suppose a customer brings 100 rupees. According to tax rules, the money in the wallet can now only be 100 divided by 1.28, or approximately 78 rupees. This is a psychological barrier to attracting users. Thus, Dream11 combines them by awarding discount points equivalent to the remaining amount. The platform will compensate the tax on deposits; the game will continue.
But even if the industry copes with the shock to consumers, it could still buckle under the burden of what it has already been asked to pay and go underground again. Overall, the government has claimed about $18 billion in back taxes from online gaming, according to the Times of India.
The largest legalized form of gambling in the country is options trading. The situation is so saturated with actions and bad advice from “financiers” that the National Stock Exchange of India wants to keep the market open until 21:00 local time. Since 89% of retail investors end up losing money on zero-sum equity derivatives, why impose an exorbitant tax on something they claim to know much better: cricket?
With bookmakers currently tipping the home team as favorites to win the World Cup, it is possible that empty stadiums will fill up, especially as the Indian festival of Diwali approaches. But Taylor Swift’s $1 billion moment could have been done without the $18 billion cold water thrown on it.
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This column does not necessarily reflect the views of the editors or Bloomberg LP and its owners.
Andy Mukherjee is a Bloomberg Opinion columnist covering industrials and financial services in Asia. He previously worked for Reuters, Straits Times and Bloomberg News.
For more stories like this, visit bloomberg.com/opinion.