This article summarizes and analyzes the recent decision of the Karnataka High Court in the case of Gameskraft Technologies Private Limited dated 11th May 2023, and attempts to evaluate the legal remedies available to the GST department, in case it wishes to not accept and challenge this decision. Considering that this decision is in the context of online rummy, which is a card game, this note also analyses the consequences this decision may have for the fantasy gaming industry.
I. Summary of the decision
The GST department issued a Show Cause Notice ("SCN") to M/s Gameskraft Technologies Private Limited ("Gameskraft") demanding GST of approximately Rs. 21,000 crores in respect of the games played for stakes on the online platform of Gameskraft. Rummy constituted about 96% of the total revenues of Gameskraft.
The GST department raised the GST demand treating the online games played with stakes as betting and gambling and sought tax at the rate of 28% on the entire revenue of Gameskraft (i.e., on the platform fees along with the payouts to the winners). Gameskraft challenged this SCN before the Hon'ble Karnataka High Court in writ. Certain gaming federations also intervened in the writ filed by Gameskraft and made their respective submissions.
The primary issue therefore before the Ld. Single Judge of the Karnataka High Court ("Ld. Single Judge") was whether games such as Rummy which are predominantly based on skill, whether played with or without stakes, amount to 'gambling or betting' under Entry 6 of Schedule III of the Central Goods and Services Tax Act, 2017 ("CGST Act"). This question was answered in the negative and the writ petition filed by Gameskraft was allowed.
Relying on the various decisions of the Hon'ble High Courts and Hon'ble Supreme Courts, the HC held that rummy is a 'game of skill' and cannot be equated with lotteries, betting and gambling. The Ld. Single Judge held that rummy whether played online or offline, continues to be a game of skill.
It was held that Entry 6 of Schedule III covers actionable claims in respect of games of skill and only excludes actionable claims in respect of lottery, betting and gambling. Since games of skill such as rummy are not betting or gambling, they are not taxable under the CGST Act.
Further, the HC held that in a game of mixed chance and skill, if the game is predominantly and substantially a game of skill, it would not be gambling, and that other online/digital/electronic games which are also substantially or preponderantly games of skill and not of chance, are not gambling.
II. Analysis of the decision
The contention of the GST department was that rummy was a game of chance as there is no way of knowing who the player will be competing with and when skill is not a criteria to play a game and only staking money was a criterion, the success depends principally on chance and not on skill. Further, the GST department also argued that when money is staked on a game of skill, this amounts to a separate transaction of betting and gambling the outcome of which is uncertain.
The above contentions of the GST department were refuted by Petitioners primarily on the ground that rummy is a game of skill and cannot be equated with betting and gambling and this position is well settled by the Hon'ble Courts. It was argued that merely placing stakes on games of skill does not make it betting or gambling.
The Ld. Single Judge agreed with the contentions of the Petitioner and relied heavily on the decisions of various Hon'ble High Courts and Hon'ble Supreme Court to conclude that rummy is indeed a game of skill. The Ld. Single Judge held that games which require predominantly skill to succeed cannot be regarded as betting or gambling activity.
Gameskraft also argued that it was not supplying any actionable claims and that it was merely a platform for which it charges platform fees. On this point, the Ld. Single Judge held that actionable claims only in respect of lottery, betting and gambling are taxable under Entry 6 of Schedule III of the CGST Act.
However, it is noteworthy that the order dated 11.05.2023 does not deal elaborately with all the contentions of the GST department in the SCN. Furthermore, the observations of the Ld. Single Judge in the order dated 11.05.2023 regarding other games of skill appears to be in the nature of obiter dicta. This is because the case of Gameskraft was primarily in respect of online rummy. Therefore, the observations of the Ld. Single Judge on other games (whether online or offline) were unwarranted and do not lay down any binding precedent on games which will have to be examined independently.
Therefore, while the decision of the Ld. Single Judge reiterates the position that rummy is a game of skill, the said decision may not have precedential value in respect of other games (whether online or offline).
This decision does not decide upon another crucial aspect in detail – whether there was actually a supply of 'actionable claim' or not in the manner in which the business is being operated? Though Gameskraft argued that it was merely a platform provider, for which service it charged its fees and discharged the GST liability, the decision does not venture into answering the correctness of this claim. The decision simply states that since actionable claims are taxable under GST law only if they are in the nature of lottery, gambling or betting, the question that needs to be answered is that whether rummy amounts to lottery, gambling or betting. Having answered such question in the negative, the Ld. Single Judge did not require answering the larger question on actionable claims. [we should be mindful of decision of the Bombay HC where it has been held that there indeed is a supply of actionable claims in online fantasy gaming].
III. Legal remedies available to the GST department
Since the order has been passed by a Ld. Single Judge of Karnataka High Court, the GST department has the option of filing a Letters Patent Appeal challenging the order dated 11.05.2023 before the division bench of the Karnataka High Court. Alternatively, the GST department may also choose to directly approach the Hon'ble Supreme Court by filing a Special Leave Petition against the order dated 11.05.2023. In either of these scenarios, the GST department is likely to press for an immediate stay on the operation of the order dated 11.05.2023 while the appeal is pending.
On maintainability, it could be argued that the writ petition should've been dismissed on grounds of alternate remedy itself, since such writ petition bypasses the entire adjudication procedure and sets a wrong precedent. On merits, the GST department may argue that the HC decision does not consider the peculiar facts and that even in games of skill, there are elements of betting an gambling and it is this aspect that is sought to be taxed by the GST department. However, overall given that the judgment of the Karnataka HC is reasoned and detailed, these challenges are not forceful.
The issue of taxation of online gaming (including card games, e-sports, and fantasy gaming) has now been long contested between the assessees and the revenue. For income-tax purposes, the law has recently been amended vide Finance Act, 2023, and changes have been brought to TDS as well as substantive taxation provisions in the Income-tax Act, 1961 [read more], to bring clarity in how incomes arising from online gaming are to be taxed.
One may anticipate similar amendments being made to the GST law in the near future. Amendments to Entry 6 of Schedule III, the GST rate schedule, Rule 31A of the CGST Rules, and definitions clauses, could be expected in case the legislature wishes to go down the statutory amendment route to bring clarity to the subject matter.
In this regard, it is also important to note that on 24.05.2021, the GST Council constituted a Group of Ministers ("GoM") on casinos, race courses and online gaming. The terms of reference of the GoM was to inter alia examine the issue of valuation of services provided by online gaming portals and to examine whether any changes are required in the legal provisions to adopt a better means of valuing these services. As per publicly available information, the GoM has submitted its report to the GST council in December 2022 and the said report of GoM is likely to be taken up by the GST Council in the meeting scheduled on 11.07.2023.
As per media reports, it has been reported that the GoM are likely to propose GST rate of 18% on games of skill. Even if this is proposed, it is still not clear as to whether the rate of 18% would be applied only on the platform fee retained by the online platforms or the same would be levied on the entire amounts (including payouts) collected from the players.
Therefore, any amendment to the GST law would be considered by the GST Council in the next meeting wherein the report of the GoM would be deliberated upon and the decision of the Ld. Single Judge may also be taken into consideration.
It is however noteworthy that amendments to the CGST Act, if any, are likely to be prospective in nature. This is for the reason that the issue involved is one of interpretation and the gaming industry has been taking a largely consistent stand. Therefore, it is quite unlikely that the amendments, if any, would be made retrospective in nature.
IV. Consequences for the fantasy gaming industry
This decision of the Karnataka HC in the case of Gameskraft would apply primarily in respect of rummy, whether online or offline, and may be naturally extended and apply to other card games such as poker.
The issue as to whether online fantasy games offered by various companies would also qualify as games of skill is still an open question. The GST department argued in Gameskraft case that past court decisions on whether fantasy games constitute betting and gambling were decided without examining the underlying facts of such games. Therefore, the decision in the case of Gameskraft would not be of considerable help in respect of online fantasy games. The online fantasy games have to be examined independently and on their own merits to determine whether in such games, the element of skill is predominant or element of chance. For example, in the case of online ludo, the determination as to whether it is a game of skill or game of chance is highly debatable.
The GST department took a contention before the Karnataka High Court that even in games of skill played for stakes, at the time when the player enters the game, the outcome continues to be uncertain (because the payment of stakes is the only eligibility criteria and not the qualification/expertise of the player). On this basis, it was contented that even games of skills played for stakes have an element of betting and gambling. Though this argument has been rejected by the Ld. Single Judge, the GST department is likely to continue taking this stand and seek to levy GST accordingly.
In conclusion, the recent decision of the Karnataka High Court in the case of Gameskraft Technologies Private Limited has held that online rummy, being a game of skill, cannot be categorized as gambling or betting and therefore is not taxable under the Central Goods and Services Tax Act. While this decision reiterates the position that rummy is a game of skill, it may not have precedential value for other games, both online and offline.
The GST department has the option to challenge this decision by filing an appeal before the division bench of the Karnataka High Court or directly approaching the Supreme Court. The outcome of these legal remedies remains uncertain. Furthermore, the decision does not provide detailed analysis on whether there was a supply of actionable claim in the manner in which the business was operated, leaving that aspect unanswered.
The implications of this decision for the fantasy gaming industry are yet to be fully determined, as the classification of online fantasy games as games of skill or chance requires independent examination. It is likely that amendments to the GST law will be considered in the future to bring clarity to the taxation of online gaming, and the report of the Group of Ministers on casinos, race-courses, and online gaming may play a role in shaping these amendments. Overall, the legal and tax landscape for online gaming continues to evolve, and further developments are expected in the near future.
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.