Update on 7/6/23 at 11:55 am: The Indian government may launch a Supreme Court challenge against the Karnataka High Court’s recent verdict in favour of skill-based gaming company Gameskraft, reported CNBC. The decision may follow the GST Council and Group of Ministers’ forthcoming and finalised stands on GST taxation regimes for the online gaming industry, the reporter added.
Original article published on 16/5/2023 at 4:24 pm: “The impugned Show Cause Notice … issued by the respondents to the petitioners is illegal, arbitrary and without jurisdiction or authority of law and deserves to be quashed,” ruled the Karnataka High Court in its recent verdict on gaming platform Gameskfraft’s challenge to a Rs. 21,000 crore tax evasion notice it received from India’s Goods and Service Tax (GST) authorities last year.
The authorities had issued an ‘intimation notice’ on the Rs. 21,000 crore figure to Gameskraft on September 8th last year—the Court stayed the notice on September 29th. Almost immediately after, the authorities went on to issue the show-cause notice, which once again alleged that Gameskraft was evading tax by indulging in betting and gambling activities by hosting its online real money rummy game. Because of this, the full entry fee paid by players on the platform should be taxed at 28% GST.
Why it matters: Gameskraft argued that online rummy had long been held by Indian courts to be a game of skill—distinct from gambling games, or games of chance. It remained a game of skill regardless of whether it was played online or for stakes. The intervening skill-based gaming industry associations had further argued in court that the controversial show-cause notice could up-end the sector’s economics. “As on date, the revenue of the entire industry itself is not INR 21,000 crores,” the All India Gaming Federation drily submitted during the proceedings. “Therefore, to tax just one entity over INR 21,000 crores by way of the Impugned SCN [show-cause notice] is absurd.”
The Court ultimately went on to rule in favour of Gameskraft and the intervening industry associations last week, noting how the GST authority’s arguments “are an outcome of a vain and futile attempt … to cherry pick stray sentences from the judgments of various Courts … and try to build up a non-existent case out of nothing which clearly amounts to splitting hairs and clutching at straws which cannot be countenanced and is impermissible in law”.
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The verdict could complicate the Indian government’s online gaming rules: The IT Ministry has been clear that it only prohibits any games involving wagering or betting on an outcome under its recently notified online gaming rules, dismissing the regulatory option of distinguishing between games of skill and chance. The Court, however, reinforced the value of this distinction, while dismissing playing for stakes as an identifying characteristic of gambling. In the unlikely event that the rules are challenged in court, this verdict may complicate the IT Ministry’s seemingly concrete reasoning.
“Rummy is substantially and preponderantly a game of skill and not of chance” — Karnataka High Court
What did the authorities say?: Rummy offered on Gameskraft is “nothing but a pure game of chance”. This is because players have no choice in deciding whom they compete against—anyone can sign up for Gameskraft and start playing rummy. “When skill is not the qualifying criteria and placing stakes by a player is the only criteria to enter a table on Petitioner’s platform, the success of the game principally depends on chance and not skill,” the GST authorities concluded.
Also, a game of skill played for stakes would amount to betting, the authorities added. “When the element of staking on the outcome of the games of rummy is introduced, it is nothing but an independent transaction which is in the nature of betting and gambling on the outcome of a game which is an uncertain event,” it submitted.
What did Gameskraft say?: Rummy is “undisputedly” a game of skill, Gameskraft argued, adding that this position is supported by Supreme Court and High Court judgments. This doesn’t change just because rummy is being played online—so the allegation that Gameskraft is involved in betting or gambling should be rejected. What’s more, skill games played for stakes do not become gambling games—they remain games of skill, and can’t be taxed at the 28% GST rate for gambling. Trying to argue otherwise “obliterates” the distinction between games of skill and betting and gambling, Gameskraft argued.
In its intervening submissions, the E-Gaming Federation further explained why rummy is a game of skill:
“The key skills involved in rummy are memorizing the fall of the cards, building up the right sequences by discarding cards and drawing cards from the open pile. The game of rummy requires a player to strategize his/ her moves, exercise experience, adroitness, alertness on the table and skills in permutations and combinations. A player with greater skills is always more likely to win against players with inferior skills, purely based on the skill that the players possess.”
The All India Gaming Federation concluded by arguing that “to say that placing of stakes on games of skill will make it gambling, does complete violence to the legislative intent that has consistently been in vogue for over 150 years … The only test to ascertain the nature of the game is the preponderance test [of skill over chance or vice versa] and not on the basis of the skill level of the player involved.“
What the Court ruled: Ruling in favour of the petitioners, the Court flatly stated that rummy is a skill game—and that it’s not gambling, regardless of whether it’s played online or offline, and for stakes or not. Simply put: games, where success depends on substantial skill, cannot be of a gambling nature:
“The game of rummy … is one, where [the] exercise of substantial skill is the activity of the player and such skill controls the outcome of the game and not chance. When the outcome of a game is dependent substantially or preponderantly on skill, staking on such game does not amount to betting or gambling … It is also relevant to state that in the definition of wagering, the persons so doing should not have any interest in the outcome, which is completely contrary to the concept of game of skill, where the person playing the rummy is clearly interested in winning, which is also a circumstance to rule out the possibility of it being called a wagering contract. The contention that it matters not whether the player or some third person is staking money is not apposite considering the fact that the person who stakes does so based on the confidence that he has on his skills and not his luck.“
“Taxation of games of skill is outside the scope of the term “supply” in view of Section 7(2) of the CGST Act, 2017 read with Schedule III of the Act” — Karnataka High Court
What is Schedule III under Section 7(2) of the CGST Act?: Among other things, it lays out activities that are not considered as a supply of goods or services under the Act. This includes “actionable claims, other than lottery, betting and gambling”. An actionable claim is “a legal right to receive payment for goods or services provided or any other legal obligation”.
What did the GST Authorities say?: The show-cause notice alleged that Gameskraft was involved in hosting ‘betting and gambling’, and evaded GST by misclassifying these games (or supplies) as ‘services’, instead of ‘actionable claims’, Gameskraft recounted.
GST taxation for games is still an open issue that hasn’t “attained finality”, the authorities argued. Past court decisions on whether fantasy games constitute betting and gambling under GST law were decided without examining the underlying facts. The GST authorities “are at liberty to revisit and examine the facts as it has never been done before”.
What Gameskraft argued: It’s “erroneous” to argue that Gameskraft is involved in supplying actionable claims. Gameskraft only charges a platform fee for players to use the platform—the actionable claims, if any, only arise between the players who have deposited stakes while playing. Even then, these claims are excluded from taxation under the CGST Act—only lottery and gambling claims are included, which is irrelevant here as Gameskraft only offers online rummy, which is a game of skill. The E-Gaming Federation additionally noted in its intervening submissions that:
“The players contract with each other to make contributions to the prize pool and contract with each other to abide by the rules of the game … The amounts comprising the prize pool are not a “consideration” for any services provided by the Operators. Since these amounts contributed towards the prize pool are (i) not supplies made by the Operators; and alternatively (ii) consideration for [the] supply of actionable claims, no goods and services tax (GST) is required to be discharged on the contribution made by the players to the prize pool.”
What the Court ruled: Betting and gambling under the CGST Act should be understood in terms of the judicial interpretations of gambling and betting—whether under the Public Gambling Act, 1867, or entry 34 of the Constitution’s state list. Ergo, betting and gambling under the CGST Act does not include skill-based games within its definition. Further, the Court ruled that “taking actionable claims out of the purview of supply of goods or services would clearly apply to games of skill and only games of chance such as lottery, betting and gambling would be taxable”.
To sum it up: betting and gambling, described under Schedule III of the CGST Act, aren’t applicable to online, electronic, or digital rummy, whether played for stakes or not. The Court added that these maxims apply to other online, electronic, and digital skill-based games too. So, online, electronic, or digital rummy (as well as other skill-based games) aren’t taxable as betting and gambling games under the CGST Act, or under the GST authorities’ contentious show cause notice.
What else did Gameskraft argue?
Can’t charge GST on total transaction volume instead of revenue: The show-cause notice “grossly” misunderstood Gameskarft’s business practice—as an intermediary, it simply hosts games, offering a platform that users can play on. If the show-cause notice’s logic is accepted, then every intermediary service will have to deposit GST on the gross transactions taking place on the platform, not on the revenue they’ve actually earned. For example, the notice describes the entire ‘buy-in’ amount pledged on the platform to play as Gameskraft’s revenue, a whopping Rs. 70,000 crore. This is misleading because Gameskraft has no rights over the buy-ins—the decision of which game to play, and how much to stake, lies entirely with the players themselves. The only money the platform retains (and pays GST on) is the fee to use the gaming platform, as Gameskraft illustrated:
“Assuming that ‘A’ and ‘B’ have downloaded the mobile application of the Petitioner and intend to play a game of rummy against each other by using the Petitioner’s online platform/mobile application. As per the construct of the game, ‘A’ and ‘B’ has to deposit INR 200 each for participation in the game. The winner at the end of the game gets INR 360 as winnings. Further, for allowing ‘A’ and ‘B’ to use its platform for participating in the game of rummy hosted by the Petitioner, it would charge INR 20 each from ‘A’ and ‘B’. Therefore while ‘A’ and ‘B’ deposit INR 200 each, the winner gets INR 360 and INR 40 is retained by the Petitioner as its ‘platform fee’. During the course of the game, INR 360 is held by the Petitioner in a designated account and on this amount, the Petitioner has no lien or right. The money is transferred back to the winner at the end of the game. Therefore, what the Petitioner retains is INR 40 which is its consideration for facilitation of the game play and on which the Petitioner has been depositing GST.”
Gameskraft doesn’t induce players to play more: The show-cause notice also alleged that Gameskraft’s offering of bonuses and discounts induces players to play more on the platform. Gameskraft argued that players alone decide whether to withdraw their winnings from the platform, or use them to play further.
Gameskraft has complied with the CGST Act: As per Section 31(3)(b), tax assessees (like Gameskraft) don’t have to issue invoices if the value of the supply is less than Rs. 200. 99.5% of the supplies, or transactions, on the platform are for amounts less than Rs. 200. So, there was no need to issue an invoice in the first place—the GST authorities have not depicted how this non-issuance amounts to tax evasion, Gameskraft argued.
The show-cause notice is “utterly bad in law”: For example, the GST authorities argued that the petitioner hadn’t responded to their intimation notice, which was why the eventual show-cause notice was served. This “perverse statement” attempted to hide the fact that the intimation notice had already been stayed by the Karnataka High Court on September 29th, 2022, Gameskraft argued. Also: the show-cause notice was “bereft of any reasoning” and violated Gameskraft’s fundamental rights guaranteed by Articles 14 and 19(1)(g) of the Constitution.
The GST authorities’ arguments flip-flopped: Earlier, the authorities alleged that Gameskraft had evaded taxes by “claiming ineligible discounts from its ‘platform fee'”. The narrative “suddenly” changed afterwards, which is when Gameskraft was accused of indulging in gambling and betting. As Gameskraft (memorably) alleged:
It is fairly evident that the prime objective of the Respondents is to harass and intimidate the Petitioner and its employees. Further, as per the Impugned SCN [show-cause notice], the Respondents supposedly had the intelligence from the beginning that the Petitioner is involved in ‘betting’, however, never disclosed the same in the provisional attachment orders. The entire approach of the Respondents is motivated in nature.
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