Skill or Chance Irrelevant Once Participation is Conditioned Upon Staking Money: Supreme Court Upholds 28% GST Levy on Online Gaming [Read Order]

The Supreme Court of India ruled that online games played for stakes acquire the character of betting and gambling under the Goods and Services Tax (GST) framework, even where the underlying game involves skill.

The case arose from a batch of appeals, writ petitions and transferred cases concerning GST on online gaming, fantasy sports, casino transactions and actionable claims. The lead appeals were filed by the Directorate General of Goods and Services Tax Intelligence against the Karnataka High Court judgment dated 11 May 2023, which had quashed show cause notices issued to Gameskraft Technologies Private Limited and others.

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The department had issued show cause notices under Section 74(1) of the CentralGoods and Services Tax Act, 2017. It alleged that the online gaming operators had short-paid GST by treating their activity as supply of services and paying tax only on platform fee. The department argued that the operators were supplying actionable claims in the nature of betting and gambling and GST was payable on the full value of stakes.

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Gameskraft and other operators argued that games such as rummy, poker and fantasy sports are games of skill. They argued that the presence of money does not convert a game of skill into gambling. They also argued that they provide only an online platform and earn platform fee or commission. According to them, the prize pool belongs to players and cannot be treated as consideration received by the operator.

The Revenue argued that the decisive factor is the staking of money on an uncertain outcome. They argued that once players stake money with the hope of winning, the transaction becomes betting and gambling for GST purposes, irrespective of whether the underlying game is one of skill or chance.

The bench comprising Justice J.B. Pardiwala and Justice R. Mahadevan accepted the Revenue’s position and observed:

“The character of betting and gambling does not depend exclusively upon whether the underlying activity is a game of skill or a game of chance, but upon the existence of stakes placed upon uncertain future contingencies. Consequently, even where the underlying activity involves substantial elements of skill, once participation is conditioned upon staking money or money’s worth upon uncertain outcomes, the resulting transaction acquires the character of betting and gambling within the framework of the GST legislation. Accordingly, online gaming activities, including fantasy sports and other games played on digital platforms involving staking upon uncertain outcomes, constitute betting and gambling for purposes of the GST framework.”

The court explained that GST was not being levied on the activity of betting or gambling simpliciter. It held that the levy was on the taxable supply of actionable claims arising from betting and gambling. The Court observed:

“The levy is upon the taxable supply of actionable claims and not upon the activity of betting or gambling simpliciter.”

The court further rejected the argument that online gaming operators are mere intermediaries. It observed that organised gaming platforms create and operate the commercial ecosystem in which participants acquire contingent beneficial interests in movable property. The Court held:

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“The online gaming operators are not mere intermediaries facilitating transactions inter se between participants, but themselves constitute suppliers of such actionable claims within the framework of the GST legislation.”

On valuation, the court held that the amount staked or appropriated towards participation constitutes consideration under Section 2(31) of the CGST Act. It found no statutory basis to exclude prize pools, winnings, payouts or similar components while determining taxable value.

The court upheld Rule 31A of the CGST Rules as a valid machinery provision. It also held that the 2023 amendments, including the amendments to Entry 6 of Schedule III and insertion of Rules 31B and 31C, are clarificatory and explanatory in nature.

The court set aside the Karnataka High Court judgment and restored the show cause notices dated 23 September 2022 issued under Section 74(1) of the CGST Act. It granted the assessees liberty to file replies and raise factual and legal submissions before the adjudicating authority.

The court directed that pending show cause notices, adjudication proceedings and consequential demands relating to online gaming, fantasy sports and casino transactions must be decided in line with the valuation framework under Rules 31B and 31C, as applicable.

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