Opinion Menaka Guruswamy writes on GST on online gaming: Taxing luck, not skill
SC decision on distinguishing games of skill from chance will shape taxation
Online gaming follows a long tradition of being protected from the kind of taxation that chance attracts — since it shares a history with horsing! And that is why the evolution of such human conduct is deeply interconnected. (Representational Photo) Should the state tax us on our winnings due to chance? Or should it tax us on the winnings of our skill alone? Is the state entitled to a part of the returns on our skills? And has it no right to anything that brings us returns that can be attributed to that mythical concept — “luck” or “chance”?
These were the questions that came to mind when I read the Karnataka High Court’s decision in Gameskraft Technologies Private Limited v Directorate General of Goods Services Tax Intelligence, written by Justice S R Krishna Kumar and delivered on May 11, 2023. In this case, Gameskraft Technologies Private Limited (Gameskraft) received a Goods and Services Tax (GST) intimation notice demanding Rs 21,000 crore. Through a bunch of petitions, the company not only challenged the intimation notice, but also other orders of attachment of the company’s bank accounts by the Directorate General of Goods Services Tax Intelligence (Directorate), and a host of show cause notices from the Directorate.
Gameskraft is an online intermediary company, which runs platforms that enable its users to play online games against each other. The company states that it has over 10 lakh users based all over India, while being headquartered in Bengaluru. Gameskraft is registered under the Central Goods and Services Act, 2017 (GST Act).
A central argument of Gameskraft is that the impugned “showcause notices erred in understanding the actual business practice” of Gameskraft. The only set of services provided by it is the facilitation service as an online intermediary. Gameskraft contended that the money paid by players to the prize pool was merely held in trust and it had no right, or lien or interest over this, as it merely charged a service fee for the service provided on which GST had been already paid. Meaning that the service that was provided was the platform to enable online gaming, and the prize money contributed by players did not belong to the company. And what the company retained was simply the service fee on which GST had been paid. In short, there is no supply of goods otherwise by the provider.
Now, for a quick overview of how games (online or in person ) are taxed in India: In essence, the settled law is that games of skill may not be taxed, while games of chance may be taxable. Building on this foundation, Justice Kumar in the Gameskraft case held that the online/electronic/digital “rummy” and other such games played on the platform provided by the company were not taxable as “betting” and “gambling” under the CGST Act and attendant rules or under the Intimation Notice of Rs 21,000 crore. Entry 6, Schedule III of the CGST reads as “actionable claims, other than lottery, betting and gambling”. This means that lottery, betting and gambling can be taxed under CGST.
Further, the Karnataka HC in Gamescraft relies on Supreme Court judgments that make it clear that “lottery, betting and gambling” as per Entry 6 of Schedule III has been interpreted to mean as not including games of skill. The judge concludes that online rummy, whether played with or without stakes as well as other online games which are “substantially and predominantly” games of skill will not be taxed akin to games/activities premised on luck.
The judgment is also a deep dive into the history of the jurisprudence of games of chance vs games of skills in India and around the world. Readers will be interested to know that section 65B(15) of the Finance Act, 1994 defined “betting or gambling as putting on stake something of value, particularly money, with consciousness of risk and hope of gain on the outcome of a game or a contest, whose result may be determined by chance or accident, or on the likelihood of anything occurring or not occurring”. Over the years, the Supreme Court has brought this provision to life by crafting jurisprudence that distinguishes primarily between gambling activities and games of skill.
Online gaming follows a long tradition of being protected from the kind of taxation that chance attracts — since it shares a history with horsing! And that is why the evolution of such human conduct is deeply interconnected. A key question that is relevant to the outcome of the case being discussed is: How did the courts distinguish horse racing from the card game of rummy? Indian and American courts have over the years concluded that horse-racing on the turf of a club is a game of skill. This is premised on the understanding that racing by the horses is a test of “equine speed and stamina. The horses are trained to run and their form is constantly watched by experts”. That since the horses and jockeys are highly trained, and their form is watched closely, even betting on horse racing is not a persuasion of chance but a honed skill — because it is premised on astute assessment.
Similarly, the card game rummy, (and I must add one taught to me by my paternal grandmother, a connoisseur of the game) has been held to be a game of skill. Rummy is premised on memorising the fall of cards and the building up of sequences and patterns amongst the cards. In general, courts have ruled rummy (as opposed to “three-card” ) to be a game of skill and not chance. Hence, in Gamescraft, the court extends this protection to online rummy as well.
More awaits us on this fascinating case and the questions it raises. The judgment by the Karnataka High Court has been challenged by the Directorate General of Goods and Services Tax Intelligence before the Supreme Court, and will be heard soon. We await the hearings eagerly!
The writer is a Senior Advocate at the Supreme Court
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