Online gaming companies hope for breather from new govt

Sources close to the development told Moneycontrol that though these cases are listed for hearing on May 3, they are likely to be heard only in July after the summer break.

These 30 petitions include 27 pleas transferred to the Supreme Court from various high courts, two original writ petitions filed by Head Digital and Play Games24x7, and finally, one appeal filed by the GST department challenging a Karnataka High Court verdict.

As of December 2023, these online gaming companies have been slapped with 71 showcause notices involving alleged evasion of GST of Rs 1.12 lakh crore in 2022-23 and the first seven months of 2023-24 excluding interest and penalty. Since the notices were issued under section 74, which empowers the department to impose a penalty of up to 100 percent of the tax demand, it may take the amount to over Rs 2.3 lakh crore, including interest.

Since the controversy started, the Karnataka High Court is the sole judicial body to rule on this matter. The court's order, which favoured the gaming industry, has been stayed by the Supreme Court.

Skill vs Chance, Tax Calculations and Retrospectivity

From October 1, 2023, 28 percent GST was imposed on the full face value of online gaming bets by the GST Council, which promised to review the levy after six months. The industry has been seeking to have the 28 percent GST calculated on the gross gaming revenue instead of the face value of bets.

Gross gaming revenue (GGR) is the difference between the amount wagered minus the amount won. Full face value refers to the bet value or contest entry amount. Gaming companies think it is incorrect to levy a tax on the full face value because every time a game is played, a user must pay 28 per cent GST on the deposits made; this will make these platforms more expensive and less accessible to the masses. As of now, these online gaming platforms are partially or fully absorbing the GST. However, this may not be sustainable in the long run.

However, the biggest blow to the gaming companies came when the GST Council imposed the tax retrospectively (from the past). Further, as per the Council’s interpretation of retrospectivity, all online games involving bets played between August 2017 and 1 October 2023, irrespective of skill or chance, needed to pay a GST rate of 28 percent on the full value of the bets placed, as it fell under the category of gambling.

The courts in India have, from time to time, noted that the game of skills cannot be taxed on par with a game of chance. Games of skill are those that require skill to play and win. A game of chance does not require any skill to succeed, and hence, they are taxed at a higher rate. However, the GST Council’s decision does not make any such differentiation. In early 2023, the Bombay High Court asserted that rummy was a game of skill; this was in a petition filed by Games24x7 in the context of an RBI action over FEMA violations.

In November 2023, the Madras High Court struck down a part of Tamil Nadu’s online gaming regulation act, which banned all online games; it noted that the law could apply to game of chance but not game of skills. The court asserted that rummy and poker, whether played online or offline, are games of skill.

Also, the decision to apply the tax retrospectively seems to go against existing government policy, enunciated most famously in the case of Vodafone and others, where the state eventually dropped the retrospective tax demands in 2021 after prolonged legal battles.

Following the council's decision, online gaming companies have been served with huge tax demands.  The gaming companies started challenging these notices in the respective high courts, because of which a total of 27 petitions came to be filed across the country in 2023.These notices were issued after the GST law was amended in August 2023.

Further, two companies, Head Digital and Play Games24x7, filed writ petitions in the Supreme Court questioning the constitutionality of the decision of the GST council to impose the 28 percent GST retrospectively.

  The Gameskraft case in Karnataka HC

In September 2022, a GST intelligence unit issued a show-cause notice to Gameskraft Technology, alleging that the company failed to pay Rs 21,000 crore in GST, the biggest such claim in the history of indirect taxation. The notice was for the period between 2017 and June 30, 2022

Gameskraft Technology Pvt. Ltd (GTPL) was also accused of promoting online betting through cards, casual and fantasy games such as Rummy Culture, Gamezy, and Rummy Time. Gameskraft allegedly was not issuing invoices to customers, the officials alleged.

GST officials slapped a 28 percent tax on betting amount of nearly Rs 77,000 crore. "GTPL was engaged in the betting by allowing its players/gamers to place bets in the form of money stakes on outcome of card games played online," the authorities said.

This dispute was slightly different as it was argued at the high court on whether rummy was a game of skill or game of chance. Another issue in this case was whether Gameskraft was providing services that involved actionable claims or instances of taxation.

The company challenged the notice in Karnataka High Court. After hearing the case for months, the Karnataka HC accepted Gameskraft’s arguments and set the GST department’s notice aside. HC held that rummy was a game of skill, which was why Gameskraft was not supplying any actionable claim. This came as a big blow to the department.

Appeal before Supreme Court

However, the GST department appealed against this judgment directly before the Supreme Court instead of filing an appeal before a division bench of the same HC.

At the Supreme Court, Additional Solicitor General Venkatraman, who appeared for the GST department, argued that the observations made by the HC in the judgment had put a pause on other showcause notices, creating a problem for the GST department. He argued that the department has put a pause on at least 35 different showcause notices owing to the HC's judgment.

In September 2023, the apex court stayed the judgment of the Karnataka HC on the very first day of hearing. SC observed that it would not want any high court to follow this order, explaining its decision to stay it with immediate effect.

This enabled the GST department to send notices.

What has happened in the Supreme Court so far?

After the SC stayed the Gameskraft case in September 2023, the writ petitions filed by the two companies came up for hearing in December 2023.

The SC refused to grant any interim relief to the companies against the retrospective tax demand notices they received. Senior advocate Harish Salve appeared for the online gaming companies and urged the court to pass a direction to the government not to act on the demand notices till the SC considers the case. He told the court that the companies are under pressure from the GST department as they are being constantly probed for details. Salve told the court that while they are providing the requisite details, any adverse order will put these companies under further pressure. But the court refused to pass any such order.