Nazara Technologies, a leading gaming and sports media platform in India and abroad, has landed in a GST controversy over its export of services. The company has been slapped with a show-cause notice and a tax demand of Rs 2.83 crore from the Director General of GST Intelligence (DGGI), Mumbai.
Why did Nazara Technologies received Tax notice ?
The DGGI has alleged that Nazara Technologies has violated the provisions of the Central Goods and Services Tax (CGST) Act, 2017 by exporting services under Letter of Undertaking (LUT) without realising the export proceeds within the stipulated time period. According to the CGST Act, exporters are required to receive the payment for their exported services within one year from the date of issue of invoice, failing which they are liable to pay GST along with interest and penalty.
Nazara Technologies is not the only gaming company to face such action from the DGGI. Several other gaming companies in India have also received huge GST notices this month, with some of them exceeding their market capitalization.
“Nazara exported services under a letter of undertaking without payment of GST as per rule 96A of CGST Rules, 2017. As export proceeds have still not been received (on account of a force majeure event) section 2(6)(iv) does not comply, the sale of services can’t be treated as the export of services and hence company is responsible for paying IGST at 18% on the value of such services” the show cause notice states, as per the filing.
How is Nazara Technologies responding?
Nazara Technologies, which is backed by ace investor Rekha Jhunjhunwala, has said in a regulatory filing that it has received a tax demand of Rs 2.83 crore along with interest under section 50 of CGST Act along with a penalty from the DGGI, Mumbai. The company has also said that it will respond to the show-cause notice within the given timelines.
The company has attributed the delay in receiving the export proceeds to unforeseen events beyond its control. However, it has also assured that there is no indication to suggest that it will not eventually receive the entire export proceeds.
What does Nazara Technologies do?
Nazara Technologies is a diversified gaming and sports media platform with presence in India as well as emerging and global markets like Africa and North America. The company offers various products and services across interactive gaming, eSports, ad-tech and gamified early-learning ecosystems.
The company has been on a fundraising spree in the past few months, raising Rs 410 crore from SBI Mutual Fund through equity share issuance and allocating shares worth Rs 100 crore to Zerodha co-founder Nikhil Kamath. The company also got listed on the stock exchanges earlier this year, becoming the first Indian gaming company to do so.
Rekha Jhunjhunwala, wife of ace investor Rakesh Jhunjhunwala, holds a 9.96 percent stake in Nazara Technologies as of June 30, 2021.
“It’s not that we are raising capital out of desperation or urgency. It’s something we want to do because we think the timing is good and therefore, what is equally important is the quality of the investor,” founder Nitish Mittersain said.
What is the outlook for the gaming industry in India?
The GST trouble for Nazara Technologies comes at a time when the gaming industry in India is witnessing a boom due to increased internet penetration, smartphone adoption and digital payments. According to a report by KPMG, the online gaming industry in India is expected to grow at a compound annual growth rate (CAGR) of 21 percent over FY21-FY25 to reach Rs 29,000 crore.
However, the industry also faces several challenges such as regulatory uncertainty, taxation issues, data privacy concerns and cyber security threats. The GST notices issued by the DGGI to various gaming companies have raised questions over the clarity and consistency of the tax regime for the sector.
The investors and traders of Nazara Technologies will be keenly watching how the company deals with the GST issue and whether it affects its financial performance and growth prospects in the future
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