New Delhi: India’s $3 billion digital gaming industry involving half a billion players is off the ventilator amidst hope there will be no character assassinations and niggling tax issues.
The much-awaited judgement of the Karnataka High Court has turned everything in the industry black and white, leaving no shades of grey.
The judgement has made a distinct difference between gambling and gaming, always a contentious issue in conservative India, home to the world’s largest mobile gaming market in terms of App downloads.
Yet, there are chances that this very judgement could be challenged by the Directorate General of Goods and Services Tax Intelligence which has a contrarian viewpoint to the one upheld by the court.
The Directorate General of Goods and Services Tax Intelligence is likely to go to court against the order. It was not immediately known when it would happen.
But as of now, the judgement had a rippling effect across the nation. In the Indian Capital, officials of the Ministry of Finance said the GST Council is likely to fix 18 percent Gross Gaming Revenue (GGR) for skill and gaming industry and, thereby, boost investor confidence.
Mandarins of the finance ministry also said that the Finance Minister, Nirmala Sitharaman, herself had said last fortnight that the Directorate General of GST Intelligence should stop harassing legitimate operators with their show cause notices. That was seen as the strongest signal from the topmost official of the Finance Ministry to the GST Intelligence which failed to distinguish between gaming and gambling.
But doubts remain if the judgement will be the biggest reprieve to India’s gaming industry.
India’s gaming market is expected to grow from $2.6 billion in 2022-23 to a whopping $8.6 billion by 2027, growing at a compounded annual growth rate (CAGR) of 28-30 percent. The number of gamers in India stands at 507 million. CNBC said between 2017 and 2020, India’s gaming industry expanded at a CAGR of 38 percent, compared to 8 percent in China, 10 percent in the United States.
So let’s get back to the judgement.
The High Court made two definitive pronouncements that has helped the industry that was – till date – lying till date like a prostrate, disembowelled Gulliver, clear out its character and tax liabilities. The court made it clear that a game of chance whether played with stakes is gambling and a game of skill whether played with stakes or without stakes is not gambling.
This has put a lid on all unnecessary controversies revolving around the character of the gaming companies.
The High Court ruled that online/electronic/digital game of rummy and other online/electronic/digital game of skills are not taxable as ‘betting’ and ‘gambling’ under the Central Goods and Services (GST) Act.
In one shot, the High Court overturned the imposition of Goods and Services Tax (GST) worth Rs 21,000 crore on Gameskraft Technologies (GTPL), an online gaming platform company.
In November 2021, officials from the Directorate General of Goods and Services Tax Intelligence had conducted a search and seizure operation at GTPL’s premises. The raid was widely criticised across India, even in some government circles.
But GST authorities refused to budge and froze GTPL’s bank accounts, alleging that the gaming company had suppressed taxable value by claiming discounts. The authorities had also argued that the amounts staked by participating players on the GTPL platforms constituted taxable “betting and gambling”.
Gameskraft Technologies challenged the order before the Karnataka High Court, which allowed the company to operate its bank accounts for specific purposes. The GST authorities issued an Intimation Notice demanding a staggering Rs 21,000 crore, equivalent to LIC’s IPO.
The High Court’s ruling is expected to establish a precedent that could influence similar cases in the future. In his judgement, Justice SR Krishna Kumar established a distinction between ‘games of skill’ and ‘games of chance’, adding that the former was outside the purview of ‘betting and gambling’, and therefore exempt from GST.
“The expressions, ‘betting’ and ‘gambling’ having become nomen juris, the same are applicable for the purpose of GST also and consequently, the said words, ‘betting’ and ‘gambling’ contained in Entry 6 of Schedule III to the CGST Act are not applicable to online/electronic/digital Rummy, whether played with stakes or without stakes as well as to any other online/electronic/digital games which are also substantially and preponderantly games of skill,” the Court said.
Justice S.R. Krishna Kumar made these observations in his judgement on a petition filed by Gameskart
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, the Court said while upholding the company’s contentions.
The Court said that claims and arguments, put forth on behalf of GST authorities, are “an outcome of a vain and futile attempt on the part of the respondents to cherry pick stray sentences from the judgments of various Courts including the apex court, this Court and other High 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.”
As the Courts have already held that Rummy and other games of skills, be it played in physical form or in digital mode, and whether played with stakes or without stakes, are not gambling, Justice Kumar said that “the terms ‘betting’ and ‘gambling’ under in Entry 6 of Schedule III of the CGST Act must be given the same interpretation given to them by the courts, and therefore the terms ‘betting’ and ‘gambling’ appearing in Entry 6 of Schedule III of the CGST Act does not and cannot include games of skill within its ambit.”
“Though Section 2(17) of the CGST Act recognises even wagering contracts as included in the term business, but that in itself would not mean that lottery, betting and gambling are the same as games of skill,” the Court said.
Hence, it is important to look specifically at some of the crucial issues raised by the court.
• There is a distinct difference between games of skill and games of chance; games such as rummy, etc. as was discussed in several decisions above and particularised in the Division Bench decision of this Court in All India Gaming Federation’s case supra, whether played online or physical, with or without stakes would be games of skill and test of predominance would apply; the said judgement is a total and complete answer not only to the various contentions urged by the respondents but also covers the issues / questions that arise for consideration in the instant petitions.
• Though Section 2(17) of the CGST Act recognises even wagering contracts as included in the term business, that in itself would not mean that lottery, betting and gambling are the same as games of skill.
• Entry 6 in Schedule III to the CGST Act 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.
• 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.
• A game of chance played with stakes is gambling. A game of skill whether played with stakes or without stakes and skill is not gambling, if it is substantially and preponderantly a game of skill and not of chance.
• Rummy is substantially and preponderantly a game of skill and not of chance. Rummy whether played with stakes or without stakes is not gambling;
• The subject Online/Electronic/Digital Rummy game and other Online/Electronic/Digital games played on the Petitioners’ platforms are not taxable as ‘Betting’ and other Online/Electronic/Digital games which are also substantially and preponderantly games of skill and not of chances are also not gambling.
(Shantanu Guha Ray is the Asia Editor of Central European News [CEN] and NewsX, two top news platforms in the UK. He is also a columnist for MoneyControl and BQ Prime)
