GST on online gaming - need for a wild card!

With the advent of technology, there are newer ways of undertaking transactions and taxing these are getting complicated. A perfect case in point is that of the online gaming industry, which has gained humungous popularity in the past few years, especially post the COVID-19 lockdown. Typically, the companies engaged in this line of business provide an online platform for on-demand, real-time gameplay without the limitations of a physical venue and time zones. Such games could either be a ‘game of skill’ or a ‘game of chance,’ the determination of which has become a huge controversy in itself.

While the GST law does not prescribe the definitions or the differentiation in a game of ‘skill’ or ‘chance’, a prudent meaning of ‘game of skill’ could be one where the outcome is dependent on the expertise, practice, and experience of the player and not completely on chance/luck. It is worth noting that GST is applicable on lottery, betting and gambling at the highest GST rate of 28%. The government has been mulling the taxation of online gaming at 28%, bringing it at par with the rates applicable to betting and gambling.

The GST Council has been engaged in discussions at the ministerial level for deliberating the taxation of online gaming for the last two years. Contradictory views have come forth from the States on equating a game of skills with a game of chance, with no fruitful decision being materialized as yet. In fact, the Ministry of Electronics and Information Technology (MeitY) recently released a guideline on online gaming prohibiting games involving betting and wagering. It is believed that the finalization of the position is taking longer, considering the significant impact on the industry and its substantial contribution to the economy.

The Apex Court has in the past held that for games with a certain level of skill involved, it wouldn’t be considered as gambling. Most games can be a combination of skill and chance, but skill has to be the predominant factor in these games.

In this regard, it is pertinent to note that the Hon’ble Karnataka HC, in the case of Gameskraft Technologies Private Limited vs Directorate General of Goods Services Tax Intelligence1, has recently provided a few game-changer observations in favor of the taxpayer. They are as follows:

On taxability

  • As was particularized by the Division Bench in All India Gaming Federation vs. State of Karnataka2, there is a distinct difference between games of skill and games of chance; games such as rummy, etc., whether played online or physically, with or without stakes, would be games of skill and test of predominance would apply.
  • Though Section 2(17) of the CGST Act recognizes even wagering contracts as included in the term ‘business,’ but that in itself would not mean that lottery, betting, and gambling are similar to games of skill.
  • The meaning of the terms “lottery, betting, and gambling” as per Entry 6 of Schedule III of the CGST Act should be construed nomen juris, i.e., they should be construed in their legal sense instead of general parlance, and accordingly, they do not include games of skill.
  • The words ‘betting’ and ‘gambling’ in Entry 6 of Schedule III are not applicable to Online/Electronic/ Digital Rummy, whether played with or without stakes as well as to any other Online /Electronic/Digital games which are also substantially and preponderantly games of skill.
  • Entry 6 of Schedule III, taking actionable claims out of the purview of supply of goods or services, would clearly apply to games of skills, and only games of chance such as lottery, betting and gambling would be taxable.
  • Therefore, taxation of games of skill is outside the scope of the term “supply” in view of Section 7(2) of the CGST Act read with Schedule III of the CGST Act.

On what is gambling and what is not gambling

  • A game of chance played with stakes is gambling, but a game of skill played with or without monetary stakes does not take the character of betting and remains within the realm of ‘game of skill.’
  • A game of mixed chance and skill is not gambling if it is substantially and preponderantly a game of skill and not of chance.
  • There is no difference between offline/physical Rummy and Online/ Electronic/Digital Rummy; both are substantially and preponderantly games of skill and not of chance.

While the Karnataka HC judgment has unequivocally distinguished between games of skill vs. games of chance and their taxability, it would be worth waiting to see if the Revenue knocks on Apex Court’s doors, considering the stakes involved.

The lack of clear valuation principles and ambiguities in levying GST on the entire stake value has caused regulatory uncertainty amongst the stakeholders and has dampened the industry to an extent. The GST Council could play the wild card by firming up the position in line with the settled law as laid down and affirmed by the SC and various HCs over the years, including the recent Gameskraft decision.

It is expected that the GST Council keeps the regulations rational and at par with other technology platforms to attract larger foreign investments as well.

1. WP No. 19570 of 2022 decided on 11 May 2023
2. 2022 SCC Online Kar 435 (DB)

Tax Street May 2023