View: A Taylor Swift moment is marred by the taxman

The once-in-four-years Cricket World Cup began in India last week, with economists and stock-market pundits showing more enthusiasm for the contest than spectators. Empty seats during the inaugural match in Ahmedabad — played in a stadium named after Prime Minister Narendra Modi — was a bit of a buzz kill. The hope is that attendance will pick up during the course of the two-month-long tournament. Away from the field, however, the World Cup is already producing a different kind of excitement, with analysts predicting the equivalent of a “Taylor Swift effect.”

Just as concerts by the American pop idol and fellow superstar musician Beyoncé are estimated by Bloomberg Economics to have added $5.4 billion to the US gross domestic product in the third quarter, economists at Bank of Baroda are expecting the matches to boost output. An additional $2.6 billion spent on everything from ticket sales and TV rights to tourism and food delivery may lift India’s GDP by as much as $1 billion, they say. Macquarie Group Ltd. has highlighted that room rates at 3-star hotels have doubled.

The stock market has taken notice:

There is, however, a fly in the ointment: A tax bill running into billions of dollars. Betting on the game of glorious uncertainties has traditionally been a preserve of India’s mafia-controlled underground dens. But with fantasy sports, putting real money behind players’ on-field performance has been elevated to a game of skill, at least in the eye of the law. Add the usual suspects — pandemic ennui, the rise of work from home, and an explosive growth in mobile entertainment — and the world’s most-populous nation has emerged as a large online-gaming market.

Since anything that’s legal in India (and even some things like crypto that aren’t) must be taxed vigorously, authorities began their resource-mobilization drive last month by sending a $150 million tax evasion notice to the homegrown Dream11 platform. That’s just for two years, with investigations underway for four more, according to Reuters. The fantasy-sport app was asked to pay a 28% goods and services tax on the entire prize pool, rather than just its own fees. The parent firm of the Tiger Global-backed unicorn has gone to court against the order.

In May, India’s tax authorities lost a similar legal challenge by Bengaluru-based Gameskraft Technologies Pvt, which hosts fantasy card games. Dream11, though, is primarily about cricket. The World Cup would have been a great occasion for the government to stimulate betting demand and earn significant amounts through normal taxes on what the online-gaming venues actually take in.

A 28% tax on a user’s total deposit may damp the excitement.

It’s a worrying development, and not just for the fantasy-sports apps. India’s states will share in the revenue that the federal government raises — and not all state administrations are on board with the tax on online money gaming and casinos that kicked off on Oct. 1. It will wipe out India’s fastest-growing startup sector, Atishi Marlena, the finance minister of the Delhi state, said in a social-media post.

The problem is not the 28% rate per se, though it’s easy to see why an affluent urban center and startup hub like Delhi may not want the highest rate of consumption taxes to apply on gaming apps. A more important question is if the entire wager should be taxed.

To not do so might create other complications. Lotteries are also taxed at face value. The states that depend on them as a crucial source of revenue won’t want to disturb the status quo. But as Tamil Nadu’s former Finance Minister Palanivel Thiaga Rajan explained on CNBC, the tax on lottery doesn’t enter a punter’s calculations. Nobody buys a 10 rupee (12 cent) ticket to win 50 rupees. It’s the 1 million rupee jackpot they’re after. In online gaming, however, the odds are short and payouts limited. The tax matters.

To be sure, Dream11 has found a way out. Suppose a customer brings in 100 rupees. According to the tax rules, the money in the wallet can now only be 100 divided by 1.28, or roughly 78 rupees. That’s a psychological barrier to attracting users. So, Dream11 is making them whole by awarding discount points that are equivalent to the remaining amount. The platform will offset the tax on deposits; the game will go on.

But even if the industry absorbs the shock to the consumers, it might yet buckle under the burden of what it has already been asked to pay — and go underground again. Overall, the government has demanded an estimated $18 billion in back taxes from online-gaming avenues, according to the Times of India.

The country’s biggest legalized gambling avenue is options trading. It’s so buzzing with action and bad advice from “finfluencers” that the National Stock Exchange of India wants to keep the market open until 9 p.m. local time. Since 89% of retail investors ultimately lose money on zero-sum equity derivatives, why impose an exorbitant tax on what they claim to know a lot better: cricket?

With the home team as the bookmakers’ current favorite to win the World Cup, maybe the empty stadiums will fill up, especially as India’s Diwali festival draws closer. But the country’s $1 billion Taylor Swift moment could have done without an $18 billion pouring of cold water.