Centre argues online gaming firms are 'suppliers', rejects HSN code as prerequisite for GST payment

The core issue being argued is whether online games, such as rummy and fantasy sports, are "games of skill" or "games of chance"

The Central government has begun presenting rejoinders to the arguments presented by online gaming companies in the Supreme Court, starting Monday. Two key issues, related to e-gaming firms being supplier of goods and services, and payment of tax despite an absence of HSN Code for the service provided, were argued over two days.

Online gaming companies qualify as "supplier" under Section 2(105) of the CGST Act, and would therefore become the "taxable person", the Centre told the Supreme Court.

"The assesses argued the online gaming companies cannot be treated as suppliers under Section 2(105)1 of the CGST Act. This submission requires to be rejected…” additional solicitor general (ASG) N Venkatraman told the top court on Monday in a written rejoinder, seen by Moneycontrol.

Section 2(105) defines a "supplier" as a person who supplies goods or services or both. In 2023, the Act was amended to include specific provisions related to online gaming. A person who organizes or arranges the supply of specified "actionable claims" (such as betting, casinos, gambling, etc.), including a person who operates a digital platform for such supply, is also deemed to be a supplier of such actionable claims.

"What is being taxed by the Revenue (tax authorities) is the supply of actionable claim. The players are supplied with an actionable claim only by the gaming companies. By an invitation to sign up on the platform, by devising a mechanism to place stakes on the outcome of each game, by conducting the game as per the rules and regulations set by them, by receiving the stakes and regulating how they are to be handled, the online gaming companies are at the centre of the entire transaction," said Venkatraman.

"To put it simply, can the players be recipients of a supply of actionable claim if the online gaming companies are removed from the transaction. The answer would be in the negative. Without the companies, no supply takes place," he said, adding that online gaming companies therefore becomes supplier, and become taxable persons.

The ASG also retorted to another argument, which made a case for non-payment of tax due to a lack of HSN Code, suitable for tax payment of some actionable claims by online gaming companies.

HSN codes are used under GST to categorize goods for taxation purposes. These codes directly correspond to a specific rate, and by using the correct code, a business can accurately determine the GST rate applicable to their product.

In the rejoinder, Venkatraman highlighted that the assessees are of the view that since there is no HSN code for actionable claims, as a result of which tax invoices on all claims could not be issued.

"This submission is equally misconceived. When it is not possible to mention a HSN code, the assessee will have to follow the clarification issued by the Ministry of Finance in Circular 06/06/2017 dated 27.08.2017. The assessee will have to fill 'any chapter' in the invoice and issue the same. The expression 'any chapter' is indicative that there is no corresponding Tariff Entry," said Venkatraman.

"The Circular mentioned above was issued in the context of sale of lottery tickets, which is nothing but a supply of actionable claims. The same would equally govern the transaction in question which too is a supply of actionable claim, arising out of betting and gambling," he added.

Sudipta Bhattacharjee, Partner, Khaitan & Co, said: "The hearings in the online gaming batch before the Supreme Court of India is likely to finally conclude this Friday - after more than 30 days of hearing in which almost the entire real money gaming industry in India (online platforms as well as physical casinos) was a party." Bhattarcharjee is representing Gameskraft, which has appealed against a Rs 21,000-crore GST notice.

Moneycontrol reported last week that the hearing on a batch petitions pertaining to the constitutional validity of the taxation as well as regulatory aspects of online gaming has entered its last leg in the Supreme Court.

The core issue being argued is whether online games, such as rummy and fantasy sports, are "games of skill" or "games of chance". And whether the GST should be levied on "full face value of bets" or the "actual transaction value". The retrospective notices are also being challenged as they allege non-payment of tax on misclassification of these games by the e-gaming firms.