Supreme Court to set tax regime for online gaming

The world of taxation has witnessed many regulatory controversies in the past, but very few have held the attention of policymakers like the online gaming industry has managed to do lately. India has experienced exponential growth in revenue generation since the pandemic, and this is expected to increase multi-fold in coming years.

Unfortunately, this booming industry has faced multiple ambiguities in its taxation, as there have always been divergent rulings from various judicial forums across the country. A decade ago, it would have been difficult to imagine the mind-boggling tax demands, ranging up to billions of dollars, faced by many industry players today.

Now, though, the viability of the industry hangs on the final decision taken by the Supreme Court in relation to the legality of a 28% tax levied on online gaming companies for the period since the inception of GST.

Traditionally in India, gambling and betting have been widely discouraged, resulting in some states permitting gambling with certain regulations, whereas other states have completely banned it. Gambling is a state subject, and only the states in India are entitled to formulate the regulations for gambling within their respective areas.

The litmus test for determining whether a game amounts to gambling or not is assessing what predominates in that game – skill or chance. The difference in treatment of skill-based games and chance-based games has existed since India’s partition.

The law of the land has always been clear that games of skill do not fall within the definition of gambling/betting, and so are not subject to state levies. The distinction has had a substantial influence on the status of online rummy in India, and has garnered the attention of policymakers.

The Supreme Court, in the case of State of Andhra Pradesh v K Satyanarayana & Others, specifically examined the game of rummy on the basis of the influence of skill versus chance. The court ruled rummy to be a game of skill, even though it involves shuffling and dealing of cards, which inherently carry the element of chance.

However, considering rummy requires the strategic discarding of cards to build a strong hand, it was finally assessed as a game of skill. Skill-based games are akin to commercial activities, and are constitutionally protected under article 19 (1)(g) pertaining to the right to practise any profession.

Against this background, the GST Department raised tax demands on several industry players on the grounds that the activity of online gaming is akin to gambling and would therefore attract GST at 28%. The Karnataka High Court, in the case of Games Kraft Technologies, ruled in favour of the taxpayer and held that the mere reason that a game is being played online does not uplift it to become a game of chance for taxability purposes.

A final verdict in that case is still pending before the Supreme Court. Amid the ongoing chaos, the 50th meeting of the GST Council decided to bring statutory amendments and categorise online gaming on a par with gambling and betting activities. This subjects what was earlier considered a game of skill to a significantly higher tax levy of 28%, a tax bracket reserved for “sin-category” goods and services such as casinos and gambling.

The implications of the amendment have the industry worried. A clarificatory amendment, unlike substantive amendments, does not bring a fundamental change in the law and can be applied retrospectively. The amendment increases the tax rate to 28%, and on the entire value of the pot, too, which is a substantial change to the law.

The amendment is also going a step further by tarring varied types of gaming with a single brush, ultimately creating an additional liability for the industry. It is clearly a substantive change to the law, and thus cannot be deemed “clarificatory” in any sense.

The Supreme Court will shortly commence its final hearing and if all goes well, will pull the plug on the protracted tax overhang on online gaming. The industry has high hopes that the court will rethink the nuance and work out a structure that does not occasion the industry’s death at its nascent stage.

Shankey Agrawal is a partner, and Lopamudra Mahapatra is an associate at BMR Legal.