1. INTRODUCTION
Online gaming has garnered a lot of media attention in the recent past, owing to high-pegged demands of approximately INR 1.12 Lakh Crores (Indian Rupees One Point Twelve Lakh Crores) that has been raised under 71 (seventy-one) show cause notices issued by the Indian tax authorities (“Tax Authorities”), under the Goods and Services Tax Laws1 (“GST Laws”), for the period July 2017 - September 2023.
The said demands have been raised in the backdrop of two major events namely, (a) the GST Council's recommendation and subsequent amendments to the GST Laws2 to levy Goods and Services Tax (“GST”), at the rate of 28% (twenty-eight per cent), on the deposit amount paid by the users in online games, and (b) the Supreme Court (“SC”) order3 staying the operation of the judgment passed by the Karnataka High Court4 (“Karnataka HC”) in the case of Gameskraft Technologies (“Gameskraft”). The main allegations raised on behalf of the Tax Authorities, before the SC as well as the Karnataka HC, is that online gaming operators are engaged in providing betting activities, and therefore are required to pay taxes at the rate of 28% (twenty-eight per cent), on the face value of contest entry amounts paid on such platforms.
As per information available in the public domain, the online gaming industry has complied with the new tax regime introduced in October 2023. However, many gaming operators have challenged show cause notices (SCNs) issued to them for the period up to September 2023, either before the High Courts or directly before the SC, as detailed in the below paragraphs.
With the above background, this article seeks to analyze the controversy between the online gaming operators and the Tax Authorities. The article also provides the authors' analysis of the legal issues likely to be debated before the SC on the subject matter.
2. LEGAL POSITION AND TAX POSITION ADOPTED BY ONLINE GAMING OPERATORS
For period up to September 2023:
It is undisputed that contest entry amounts in online games qualifies as ‘actionable claims', which is classified under the definition of ‘goods' under the GST Laws. In terms of statutory exclusions carved out under the GST Laws, for the period up to September 2023, only actionable claims in the nature of lottery, betting and gambling could be subjected to levy of GST5 . For such actionable claims, rules prescribed under the GST Laws prescribed for special valuation mechanism, and the notifications provided for a tax rate of 28% (twenty-eight per cent6 ). Particularly, for betting and gambling, GST was payable at the rate of 28%, on the face value of bets7.
Given the historical judicial distinction between games of skill and games of chance, a segment of online gaming operators had taken a position that since their offering qualifies to be a game of skill, they do not fall within the ambit of ‘actionable claims' which are taxable under the GST Laws. Consequently, the practice adopted by this segment of the sector was to discharge GST, at the rate of 18% (eighteen per cent), on the Gross Gaming Revenue (“GGR”) which is earned by the operators, colloquially known as the ‘Platform Fee'.
For period effective from October 2023:
Pursuant to the recommendations made by GST Council in July 20238 , several amendments were made in the Acts, Rules and the Notifications under the GST Laws. Similar amendments were also made to the State level GST Laws as well. Importantly, a new category called ‘Specified Actionable Claims' was introduced under the GST Laws, which now includes ‘Online Gaming' as one of the specified categories therein9 . Considering the definition of ‘Online Gaming'10, which includes games where monetary deposits are made with expectation of winning back monetary prize, it could be stated that the historical distinction between games of chance and games of skill stands removed, and all games are to be equally taxed henceforth.
These substantive amendments were expressly made effective from October 1, 2023, and also clarified by the Hon'ble Finance Minister, in the Parliament, to be prospective11.
Dehors the legal issues with the above amendments under the GST Laws, it cannot be emphasized enough that such amendments have had drastic consequences on the sector leading to large scale lay-offs, business restructuring and raising sustainability issues in the long run.
3. ADVERSE CLAIMS BY TAX AUTHORITIES
Given that the tax compliance is effective as per the mandate of the law from October 2023, the tax disputes largely pertain to periods up to September 2023. For the period from July 2017 till September 2023, the Tax Authorities have claimed that the GST ought to be levied on the face value of contest entry amounts paid on online gaming platforms, at the rate of 28% (twenty-eight per cent), as against the tax position of the skill-based gaming operators. Considering the high-pitched demands, which in most cases extend beyond the actual revenues earned by gaming operators, and the position of law as explained in the above paragraphs, the online gaming operators have challenged the show cause notices.
Dispute before the High Courts:
As per media reports12, first of such challenge was made by Gameskraft before the Karnataka HC, wherein the total demand raised against Gameskraft is stated to be amounting to more than INR 21,000 Crores (Indian Rupees Twenty-One Thousand Crores). In the said case, the main thrust of the arguments raised on behalf of Tax Authorities was that games of skill when played with monetary stakes, partake in the character of betting. As against the said claim, it was argued by Gameskraft that their predominant game offering, rummy, has been held to be a game of skill in the past, particularly by the Karnataka HC itself in the case of All India Gaming Federation13 . Further, it was also argued that the GST Laws only provide for taxing of actionable claims in the nature of lottery, betting and gambling, which is not relevant to the business of Gameskraft.
In a huge relief, albeit short lived, the Karnataka HC dislodged the claims of the Tax Authorities and principally noted that playing with or without stakes cannot be a criterion to determine whether a game qualifies as a game of skill.14 Based on this, it also observed that when the outcome of a game is dependent substantially or preponderantly on skill, staking on such game does not amount to betting or gambling. Importantly, it was held that the terms ‘betting' and ‘gambling' under Entry 6 of Schedule III of the Central Goods and Services Tax Act, 2017 (“CGST Act”) must be given the same interpretation given to them by the courts in the context of Entry 34 of List II of Seventh Schedule of the Constitution of India. Consequently, it falls out that, games of skill are not covered within the scope of Entry 6 of Schedule III of the CGST Act, and therefore not taxable in terms of valuation rules and the tax rate of 28% (twenty-eight per cent), as applicable to lottery, betting and gambling.
It must be noted that similar challenges were pending before other High Courts, including before the Punjab and Haryana High Court15, Bombay High Court, at Goa16 , and Rajasthan High Court17.
Dispute before the SC:
The above Karnataka HC judgment in the case of Gameskraft was challenged before the SC, wherein the SC stayed the operation of the said judgment during the pendency of the petition, in September 2023. It is important to note that the said timeline coincided with the amendments that were made effective from October 2023.
Owing to the above, the Tax Authorities issued show cause notices to several gaming operators. Most of such notices were challenged either before the High Courts or directly before the SC. On account of commonality of the issues involved, the Revenue Department preferred a transfer petition before the SC seeking to consolidate all litigations on the subject matter before the SC, which came to be allowed in April 2024. Consequent to the order in the transfer petition, the SC now has a batch of 45 (forty-five) petitions to adjudicate upon a common issue with regard to the levy of GST on online gaming, for the periods up to September 2023.
At this juncture, it is important to analyze the legal issues which are likely to be debated before the SC:
- Whether format of games which are mainly /
preponderantly / substantially based on skill, and not on chance,
could be classified under the category of ‘betting' or
‘gambling' for the purposes of levy of
GST?
It is important to note that the provisions as they stood, up to September 2023, only provided for tax on actionable claims which are in the nature of lottery, betting or gambling. As such, it is important that the game offering has to be classifiable within the ambit of either of these activities, for them to be taxable under the GST Laws.
Historically, several judicial precedents have created an identifiable distinction between games of skill and games of chance. In that regard, the Courts have held that only games of chance would qualify as ‘betting' or ‘gambling'. These judicial precedents are based on constructive analysis of Entry 34 under List II of the Constitution of India, which empowers States to legislate and regulate the activities qualifying as ‘betting and gambling'.
On account of the above, it could be argued that such distinction could not be diluted merely on the basis that ‘monetary stakes' would change the nature of a game from game of skill to game of chance. In fact, the SC, in the past, has held that games of skill, when played with stakes, would still qualify as a game of skill. 18
- Whether the valuation mechanism, as prescribed
under Rule 31A, be made applicable to games of skill?
Rule 31A of the Central Goods and Services Tax Rules (“CGST Rules”) provides for specific provisions for valuation of supplies in the nature of lottery, betting, gambling and horse racing. Considering the judicial distinction between games of skill and games of chance, as highlighted above, the said valuation mechanism cannot be made applicable to games classifiable as games of skill. Any other interpretation of the said provision would render the said valuation provision to be ultra vires of Section 2(31), Section 7, Section 9, and Section 15 of the CGST Act
- Whether the online gaming operators be said to be
the supplier of ‘actionable claims'?
It must be noted that the transactions on online gaming platforms typically involve multiple users as per game formats. In such cases, the online gaming platform only acts as an intermediary, for a commission or a platform fee. Accordingly, supply of ‘actionable claim', if any, is to be considered as amongst the said users, to the exclusion of the operator.
In fact, it is noticed that the terms of use of the gaming platforms clearly indicate that the amounts pooled from the users, excluding the platform's commission, is held by the platform in ‘trust', and will be distributed to the winners, as per game format. Therefore, a deeming fiction ought not to be applied, when there exists none under the law, to treat the operator as the supplier of ‘actionable claims' pooled on the platform.
4. CONCLUSION
On the basis of the above analysis, it cannot be doubted that the case of the online gaming industry stands on a strong footing. Given that the judicial precedents recognize the distinction between games of skill and games of chance, and that the GST Laws itself carve out the taxability in respect of games of skill, it is likely that the SC will rule in favour of the industry and the claims of the Revenue Department will be rejected.
At this stage, all eyes are on the SC, which is likely to adjudicate these issues in the coming months. It is expected that the decision of the SC will end the tax saga, at least for the period up to September 2023.
Footnotes
1. GST Laws inter alia comprise of Central Goods and Services Tax Act, 2017, Integrated Goods and Services Tax Act, 2017 and corresponding State / Union Territory Goods and Services Tax Act, 2017.
2. The Central Goods and Services Tax (Amendment) Act, 2023, The Integrated Goods and Services Tax (Amendment) Act, 2023 and corresponding amendments in the rules and the notifications.
3. Order, dated April 5, 2024, Transfer Petitioner (Civil) Nos 755-781 of 2024, SC.
4. Gameskraft Technologies Private Limited v. DGGSTI, TS-181-HC(KAR)-2023-GST.
5. Section 7(2) read with Entry 6, Schedule I of the Central Goods and Services Tax Act, 2017, as it existed during the relevant period.
6. Sl. No. 229, Schedule IV, Notification No. 1/2017 – Central Tax (Rate), dated June 30, 2017, prior to its omission vide Notification No. 11/2023 – Central Tax (Rate), dated September 29, 2023, with effect from October 1, 2023.
7. Rule 31A of the Central Goods and Services Tax Rules, 2017.
8. Refer Press Release, dated July 11,2023, pertaining to 50th Meeting of the GST Council.
9. Section 2(102A) of the Central Goods and Services Tax Act, 2017.
10. Section 2(80B) of the Central Goods and Services Tax Act, 2017.
11. Refer media article here.
12. Similar tax issues have albeit been pending in a revision petition before the Bombay High Court in the case of Union of India v. Gurdeep Singh Sachar, Cr. IA No. 125 of 2020 in PIL No. 16 of 2019. In terms of last order in the said petition, the said matter shall await the judgment of the SC in the case of Gameskraft Technologies Private Limited, SLP (C) No. 19366-19369 of 2023.
13. All India Gaming Federation v. State of Karnataka, 2022 SCC Online Kar 435 (DB).
14. Head Digital Works Private Limited v. State of Kerala, (2021) SCC Online Ker 3592.
15. Joy Plus Technology Private Limited v. Union of India, CWP 28011 of 2023; Rubik Cube Technology India Private Limited v. Union of India, CWP 29071 of 2023; Jugador Technology Private Limited v. Union of India, CWP 28242 of 2023; Witzeal Technologies Private Limited v. Union of India, CWP 1232 of 2024; Gridlogic Games Private Limited v. Union of India, CWP 651 of 2024.
16. Delta Corp Limited v. Union of India, WP 715 of 2023; Delta Pleasure Cruise Company Private Limited v. Union of India, WP 717 of 2023; Highstreet Cruises and Entertainment Private Limited v. Union of India, WP 716 of 2023.
17. Myteam11 Fantasy Sports Private Limited v. Union of India, CW 1100 of 2023; Blue Horizone Infotech LLP v. Union of India, CW 19667 of 2023; Khud Ka Karobar Infotech Private Limited v. Union of India, CW 19668 of 2023.
18. State of Andhra Pradesh v. K. Satyanarayana, AIR 1968 SC 825.
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