One97 Communications Ltd (OCL), the parent company of digital payments platform Paytm, has disclosed that its gaming subsidiary, First Games Technology Pvt Ltd, has received a significant show-cause notice (SCN) from the Directorate General of GST Intelligence (DGGI) on 28 April 2025. The notice is part of a larger, ongoing investigation into Goods and Services Tax (GST) practices within the online gaming sector, a matter that has been under regulatory examination for over 18 months.
Background: Ongoing GST Investigation in Online Gaming Sector
At the core of the issue is a dispute over the applicable GST rate and its calculation base. The DGGI has asserted that GST should be levied at 28% on the entire entry amount collected from users participating in online games. This is in contrast to the 18% GST currently paid by most gaming platforms, which is applied only on the platform fee or operator’s margin. This reclassification, if enforced retrospectively, could lead to massive tax liabilities across the sector.
Industry-Wide Impact and Legal Pushback
In its regulatory filing, Paytm emphasized that the SCN issued to First Games is not an isolated case, as numerous other gaming operators have received similar tax demands. The industry-wide nature of the dispute has prompted several companies to approach the Supreme Court, which has since stayed ongoing proceedings in related cases while hearing writ petitions challenging both the retrospective application of the revised GST rule (effective from 1 October 2023) and its interpretation under prior laws.
Paytm’s Legal Strategy to Handle GST Notice
Paytm confirmed that First Games will file a writ petition contesting the SCN on legal grounds, aligning its defense with arguments already raised by peers in the gaming industry. The petition will also seek interim relief from the court, similar to relief already granted to other firms, to temporarily halt further proceedings while the matter remains sub judice.
PAYTM’s GST Notice: Financial Exposure and Impact
The notice imposes a massive GST liability of ₹5,712 crore, which includes interest and penalties, for the period between January 2018 and March 2023. Despite the high value involved, Paytm assured stakeholders that this matter has no material impact on its overall operations or financials. The company explained that First Games is treated as a joint venture, and its revenues are not consolidated into OCL’s books as per accounting standards.
For the financial year ending 31 March 2024, First Games contributed less than 1% to Paytm’s consolidated profit or loss, and its carrying investment value stood at nil. Furthermore, OCL’s total financial exposure to First Games, as of 31 December 2024, was approximately ₹225 crore, largely in the form of a shareholder loan, including accrued interest.
This development underscores the broader challenges faced by the online gaming industry in India, as it navigates evolving tax policies and awaits judicial clarity on the treatment of GST for gaming transactions.
Paytm’s response to the ₹5,712 crore GST notice underscores the growing legal complexity in India’s online gaming sector. As First Games prepares to challenge the demand, the outcome may have far-reaching consequences for the entire industry, which awaits clarity on GST treatment under evolving regulations. Consult Vakilsearch for expert assistance on GST notices.
