India: Bombay High Court: Fantasy Sports Gaming Is Not Gambling; GST Inapplicable On Pooled Amounts!

Last Updated: 18 July 2019
Article by Ashish Sodhani and Inika Charles
  • Bombay High Court rules in favour of Dream11 to hold that games played on its platform amount to games of skill and not chance.
  • Rules applicability of GST only on the service fee charged by the platform for the services provided by it.
  • Rejects argument that GST should be payable on the whole amount pooled in by the players.

Recently, the High Court of Bombay ("High Court") in the case of Gurdeep Singh Sachar v. Union of India,1 following the judgment of the High Court of Punjab and Haryana ("P&H High Court") ruled that no betting or gambling is involved in the fantasy games operated by Dream11 as their result is not dependent upon winning or losing of any particular team in real world on any given day. It further ruled that Goods and Service Tax ("GST") is not applicable on the entire deposit received from the player but only on the consideration which is payable / collected for the supply of goods or services or both within the platform.

Background

The case before the High Court of Bombay stems from a Criminal Public Interest Litigation ("PIL") filed against Dream11. Dream 11 is fantasy sports platform based in India that allows users to play fantasy cricket, hockey, football, kabaddi and basketball. The PIL alleged that Dream11 was carrying out illegal operations of gambling/betting/wagering in the guise of Online Fantasy Sports Gaming ("OFSG") and hence should be penalized under the Public Gambling Act, 1867 ("Act"). The PIL also alleged that Dream11 was in violation of the Central Goods and Service Tax Act, 2017 ("CGST Act") read with Rule 31A of Central Goods and Service Tax Rules, 2018 ("CGST Rules").

Section 7 of the CSGT Act provides that certain activities under Schedule III of the CGST Act shall neither be treated as a supply of services, or supply of goods, and would therefore be exempt from the levy of GST. Schedule III lists "actionable claims, other than lottery, betting and gambling" as one such activity. Rule 31A of the CGST Rules determines the value of supply for the calculation of GST in the case of lottery, betting, gambling and horse racing. As per this rule, the value of supply of an actionable claim in the form of chance to win in betting, gambling (...) is "100% of the face value of the bet or the amount paid into the totalizator." It was on this basis that the Petitioner contended that the entire amount paid by the player would be the basis of calculation for GST which for betting, gambling or lottery is currently applicable at the rate of 28%.

Contentions of the Petitioner

The contentions of the Petitioner primarily revolved around the following:

  • Fantasy games are nothing but means to lure people to spend their money for quick earning by taking a chance, and most of them end up losing their money in the process, which is thus "gambling/betting/wagering, being different forms of "gambling".
  • Upon entering in various contests and putting alleged betting money in those contests, the player receives a tax invoice which taxes only the money that Dream11 retains towards services of providing the platform to the players. For the balance amount, i.e. the stake put in by the player to play the contest an "acknowledgement" is given. This "acknowledgement" amount collected from each player is pooled in as Escrow Account and their contribution ultimately gets distributed amongst the players themselves as price money immediately upon conclusion of game, as a result of which, some players get more than their contribution, and some lose money. and not the entire amount which is put as stake by the player.
  • Since these activities are nothing but 'gambling' or 'betting', even if this acknowledgement amount is separately kept in an Escrow account and not retained by Dream11, GST should be payable on this amount as the activity carried out by the platform is nothing but 'betting' or 'gambling' and should therefore be governed by Rule 31A(3) of CGST Rules.
  • Like horse racing, the said Rule shall apply even in such fantasy games amounting to gambling and/or betting and/or wagering, and thus GST at the rate of 28% shall be payable on 100% amount collected by Dream11 and not at the rate of 18% which is currently being paid on the amount that is retained by Dream11 for services of providing the platform.

Contentions of Dream11

Dream11 contended the following:

  • The games available on Dream11's platform are not in the nature of betting / gambling. This fact has already been decided by the P&H High Court2 wherein the court ruled in favor of Dream11 and held that success in Dream 11's fantasy sports basically arises out of user exercise of superior knowledge, judgment and attention thus, as per their skill; and that their fantasy games are exempt from the application of the penal provisions, in view of Section 18 of the Act, and held that they have protection guaranteed under Article 19(1)(g) of the Constitution of India. In reaching their decision, the P&H High Court relied on the Supreme Court's decision of K. R. Lakshmanan v. State of Tamil Nadu3 ("Lakshmanan case") to hold that playing fantasy sports games required the same level of skill, judgment and discretion as in case of horse racing.
  • A Special Leave Petition against this judgment of P&H High Court was admittedly dismissed by the Hon'ble Supreme Court vide Order dated September 15, 2017.
  • An explanation of how the game works on the platforms was given wherein it was explained that the players compete against such virtual teams created by other users / participants. The winners are decided based on points scored, using statistical data generated by the real-life performance of the players on the ground. Further, the deadline to create a team is latest by the official match start time and no changes can be made after the deadline. The participants do not bet on the outcome of the match and merely play a role akin to that of selectors in selecting the team. Therefore, the games played on their platform is a 'game of skill' and not of 'chance', and therefore outside the purview of Rule 31A(3) of the CGST Rules.

Issues before the High Court

  1. Whether the activities of Dream11 amount to 'Gambling' / 'Betting'?
  2. Whether Rule 31A(3) of CGST Rules should be applicable to Dream 11?

Ruling

The High Court ruled in favor of Dream11 and rejected the contentions of the Petitioner. Reliance was placed on the decision of the P&H High Court and the Lakshmanan case to hold that the games played on the Dream 11 platform were games of skill and not games of chance. The court ruled that if the result of the game/contest is determined merely by chance or accident, any money put on stake with consciousness of risk and hope to gain, would be 'gambling' or 'betting'. Since that is not the case in case of fantasy games played on the Dream 11 platform, the same does not amount to gambling or betting. It rejected the argument of the Petitioner that the result would depend largely on extraneous factors such as, who amongst the players actually play better in the real game on a particular day, which according to the Petitioner would be a matter of chance, howsoever skillful a participant player in the online fantasy game may be.

In respect of the issue on payment of GST, the High Court rejected the allegation of the Petitioner that Dream 11 has evaded GST by erroneous classification of the games played on their platform. It held that only if their OFSG is 'gambling' or 'betting', there is a scope to infer the possibility of any tax evasion. It further ruled that the amounts pooled by the players in the escrow account is an 'actionable claim' as the same is to be distributed amongst the winning participating members as per the outcome of a game. As discussed above, under the CGST Act, 'actionable claims' other than lottery, betting and gambling are neither considered to be 'supply of goods' nor a 'supply or services', and are hence exempt from the levy of GST.

Since OFSG on Dream 11's platform is not in the nature of betting or gambling, the High Court ruled that money pooled in by the players cannot be subject to GST. It further rejected the argument of the Petitioner that the money so deposited by the players should fall under the definition of consideration and hence taxable to GST. The scope of definition of 'consideration' extends only in relation to "the supply of goods or services or both". Since, the said activity or transaction relating to the actionable claim qua the amounts of participants pooled in escrow arrangement, for which only acknowledgement is given, is neither supply of goods nor supply of services, the same is clearly out of the purview of the expression 'consideration'. The Bombay High Court further agreed with Dream 11's view that GST is payable only on the consideration which is payable / collected for the supply of goods or services or both within the platform at the rate of 18%.

Analysis

  • Game of Skill: The ruling of the High Court should bring about cheer to the OFSG industry. The decision of the High Court is welcomed move as there may have been earlier some doubt on whether the decision of the P&H Court in followed in other states. Ruling by Bombay High Court in favor of Dream 11 and giving a reasoned order, will further strengthen the position of OFSG.
  • Applicability of GST: The ruling of the High Court gives much needed clarity to the skill gaming industry on applicability of GST. The High Court in its right mind has understood how the game works in practice and the only service provided by Dream 11 is that of providing the players with a platform on which they can come together and play. Therefore, the charge of GST only on the service fee is completely justified. Another way to look at this would that the value of services that Dream11 is providing is equivalent only to the service fee that they are charging on a game to game basis. Once the fact is clarified that any game is a game of skill, the same logic should apply to other skill game formats. They also should only be charged at 18% on the value of the services provided by them and not on the whole amount pooled in by the players.
  • Escrow Account: In the instant case, Dream11 was using an escrow account where the money of the players was being pooled and from which the winner was being paid. This has been an important question that the gaming industry has been trying to answer. While the High Court order does not go into this aspect, the fact that if an escrow account is maintained the money is pooled should help in establishing in that the money's in the escrow was never the money of the platform but belonged to the players and hence there should be no GST on such money's.

However, the important question that needs consideration is what if the platform does not maintain an escrow account? Whether or not GST should be applicable in that case? It is quite clearly understood that the money that belong to the players is not considered revenue of the platform and are accordingly calculated and disclosed in the balance sheet. Therefore, by implication, there should be no requirement to maintain a separate escrow account for the purposes of exemption from GST on such amounts. However, this question remains unanswered.

Footnotes

1 Bombay High Court, Criminal Public Interest Litigation Stamp No.22 Of 2019.

2 Shri Varun Gumber v. Union Territory of Chandigarh and Ors., CWP No. 7559 of 2017.

3 K. R. Lakshmanan v. State of Tamil Nadu, AIR 1996 SC 1153.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions