A breakdown of the fantasy sports industry in India
The craze for fantastic games exploded after the arrival of apps like Dream11 and My11circle. According to an Ficci-EY report, the Indian fantasy sports industry is expected to reach $ 2.5 billion by 2022. The industry is growing at a CAGR of 32% and is expected to be worth $ 3.7 billion by 2024. With a user base of around 90 million in 2019, according to a study by the Indian Fantasy Sports Federation in collaboration with KPMG, the fantasy sports industry is now generating revenues that no one would have imagined in the age of Super Selector. With so much money coming in, it becomes very interesting to understand the gain and income taxation of all stakeholders.
The revenue model for these fantastic apps is pretty straightforward. The app / website acts as the organizer of various contests categorized by amount and participants. To match players, secure and run these competitions, the app / website charges an entry fee, which is typically 20% of the total amount collected in a particular competition. So, unless enough players haven’t entered a competition, fantastic apps will always make money. Dream11 recorded a 2.6-fold increase in operating revenue at ??2,070.4 crore in FY20 from ??775.5 crore in FY19. He recorded a first profit of ??180.80 crore in FY20, according to Entrackr. Almost all of these great apps are at a loss right now, as usually happens in the first few years, due to huge marketing, advertising, and customer acquisition costs.
For tax purposes, winnings from such competitions will in most cases be treated as winnings in accordance with Section 115BB of the Income Tax Act. The provisions of the law are strict with regard to earnings from earnings. This income will be taxable at the flat rate of 30%, plus a surcharge (if applicable) and 4% cess. Users cannot offset or carry forward any loss of earnings and no loss of earnings can be deducted from any other income. The benefit of the basic exemption limit of ??2.5 lakh, which is available in normal cases, will also not be available. And finally, you can’t even claim entry fees as an expense to deduct them from earnings income.
Taxes in all their forms are important to government. In case of direct taxes, the government will get the full amount of income tax paid by users and these platforms. If a user’s income is greater than ??10,000, the fantastic platform should deduct the tax and file it directly with the central government. Users can claim these TDS (Withholding Tax) credit for their tax payable. The government received TDS on earnings in fiscal 2019 up to ??93 crore, which had risen to ??250 crore by FY20. The amount could have been higher if users who earned less ??10,000 in one fiscal year also filed taxes with the government. In case of indirect taxes, GST payments on the services offered by the platforms will be shared by the central government and the state in most cases. GST collections on these platforms also increased 2.6 times in FY20 to approximately ??445 crores ??166 crore in FY19 according to Indiatech. Aside from taxes, these fancy platforms have indirectly generated ??2,600 crore in revenue also for ancillary industries including payment gateways, technology providers, etc.
The craze for fantastic games is not going to slow down. Fantastic platforms have a bright future ahead of them as games other than cricket are also gaining user support and the growth opportunities are excellent. But these are issues of consumer dependence, financial risks and prohibitions by certain states. States like Assam, Andhra Pradesh, Odisha, Telangana, Nagaland, Sikkim and Karnataka have passed laws banning paid contests. Users should perform a cost benefit analysis of playing such fantastic games and consider the legal status of the game in their state. So far, the government collects taxes only from users, as most of these platforms are making losses. It should seek to frame guidelines and rules for the industry so that in the future platforms cannot shift profits or avoid taxes when they ultimately become profitable.
Kashif Ansari is Assistant Professor, Hans Raj College, University of Delhi.
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