Central Idea

The Supreme Court has issued an interim stay on the Karnataka High Court’s ruling that online games, such as rummy, should not be taxed as ‘betting’ and ‘gambling’ under the Central Goods and Services (GST) Act, 2017.
This decision follows the Union Cabinet’s approval to increase the GST rate for online games from 18% to 28%.
The interim stay aligns online skill games played for stakes with online gambling for taxation purposes.

Why discuss this?

The GST department had issued a show-cause notice to a company for dues worth Rs 21,000 crore, which was quashed by the Karnataka High Court.
The Karnataka HC had ruled that online rummy is a game of skill and should not be taxed as gambling.

Karnataka High Court Ruling: The Karnataka HC had determined that online rummy is substantially a game of skill, not chance, and should not be considered gambling. This ruling was based on the Goods and Services Act, which taxes games of skill at 19% and games of chance at 28%.
GST Department’s Notice: The GST department had issued a notice to GamesKraft under Section 74(5) of the CGST Act, demanding a substantial sum to be deposited along with interest and penalty by September 16, 2022. This notice was challenged in the Karnataka HC and led to an interim stay.
Show-Cause Notice: Following the interim stay, the GST department issued a show-cause notice under Section 74(1) of the CGST Act to GamesKraft and its founders, CEOs, and CFOs. This notice sought an explanation regarding the tax evasion and penalties.
Distinction between Skill and Chance: The Karnataka HC emphasized the distinction between games of skill and games of chance, citing relevant legal precedents. It noted that the question of whether a game of skill could still be classified as gambling remained to be seen.

The Supreme Court’s interim stay temporarily taxes online skill games played for stakes on par with online gambling.
The Karnataka High Court’s ruling that online rummy is a game of skill and not gambling has been challenged by the GST department.
Legal distinctions between games of skill and games of chance remain a subject of debate and legal scrutiny in India’s taxation system.

State List Subject: The state legislators are, vide Entry No. 34 of List II (State List) of the Seventh Schedule, given exclusive power to make laws relating to betting and gambling.
Distinction in laws: Most Indian states regulate gaming on the basis of a distinction in law between ‘games of skill’ and ‘games of chance’.
Classification of the dominant element: As such, a ‘dominant element’ test is utilized to determine whether chance or skill is the dominating element in determining the result of the game.
Linked economic activity: Staking money or property on the outcome of a ‘game of chance’ is prohibited and subjects the guilty parties to criminal sanctions.
‘Game of Skill’ debate: Placing any stakes on the outcome of a ‘game of skill’ is not illegal per se and may be permissible. It is important to note that the Supreme Court recognized that no game is purely a ‘game of skill’ and almost all games have an element of chance.

This case reflects the need for a nuanced approach in crafting tax policies that adapt to the evolving landscape of online entertainment and gaming.
Further legal proceedings will likely shed more light on the classification of such games and their tax implications.