Karnataka HC Quashes GST Enforcement Ambitions

Game of Skill Prize Pools are not Liable to GST

The High Court of Karnataka has observed that GST is not applicable to the prize pools of skill games and has quashed an ambitious ₹21,000+ crore ($2.52 billion) show cause notice (SCN) issued by GST enforcement authorities against online gaming company Gameskraft Technologies Pvt. Ltd. (GTPL), alleging GST evasion on the grandest of scales. Read more: Karnataka HC Quashes GST Enforcement Ambitions.

For comparison, the latest EY report on India’s Media & Entertainment (M&E) sector estimates the size of the country’s whole online gaming sector for 2022 at ₹13,500 crore ($1.62 billion).

The Directorate General of GST Intelligence (DGGI) produced the SCN last September. The SCN demanded payment of 28% GST over the bulk amount of entry fees. Inclusive of prize pools. This, on games offered by GTPL between 2017 and June 30, 2022, amounting to ₹77,000 crore.

Bengaluru-based Gameskraft operates RummyCulture, Gamezy, RummyPartner, and other online gaming platforms and has been charging 18% GST over its Gross Gaming Revenue (GGR) or trade margin, which is only a small portion of entry fees.

The Bench’s Reasoning follows Apex Court

Grounding its reasoning on several decisions of the Supreme Court, the Karnataka HC single judge bench of Justice S. R. Krishna Kumar has held that “There is a distinct difference between games of skill and games of chance.” And games like rummy are predominantly skill-based. Regardless whether played online or offline and for stakes or not.

Therefore, the bench reasoned, Section 7(2)(a) and Entry 6 of Schedule III of the CGST Act, 2017. Which combined postulate that “actionable claims, other than lottery, betting and gambling shall be treated neither as a supply of goods nor a supply of services,” would mean that skill gaming does not qualify as “supply” in the sense of Indian indirect tax legislation.

Prize pools are actionable claims and don’t participate in forming the operator’s revenue because the money is kept in special accounts and is directly transferred to prize winners (who pay income tax on their earnings).

The Decision Brings Much-Needed Clarity on GST Valuation Issue

While legal experts comment that the Revenue is likely to appeal the Karnataka HC decision before the Supreme Court. For the time being. The ruling provides much-needed clarity on how the government will treat online gaming in terms of GST levy.

The judicial development occurs one month before the upcoming 50th meeting of the GST Council. According to informed sources, the council is likely to make a decision on the matter. This decision will be based on revised recommendations of a special GoM (Group of Ministers). The group deals with online gaming, horse racing, and casinos.

Stakeholders Welcome the Karnataka HC Decision

“This landmark decision by the Hon’ble Karnataka High Court which reiterates six decades of jurisprudence will greatly aid gaming start-ups across India to work towards building the industry and ensure its healthy growth,” Roland Landers, CEO of the All India Gaming Federation (AIGF) welcomed the single bench verdict.

“The judgment reiterates the legal position in relation to skill-based gaming intermediaries and international best practices on taxation. A positive affirmation on GGR method of valuation on actual value addition by the platform service provider,” commented Asish Philip Abraham, Partner at Lakshmikumaran & Sridharan Attorneys

“This will have a positive impact on GST Council to consider valuation for online skill games based on Gross Gaming revenue (GGR), which is internationally accepted. As Hon’ble Finance Minister observed, stability in tax policy will boost investment in the sector,” he added.

At the beginning of May, Union Finance Minister Nirmala Sitharaman assured foreign investors. She stated that once the government’s tax policy on online gaming is finalized, clarity will facilitate investment in the sector.

“Once the policy certainty arrives, taxation becomes more … clear, it will attract investors,” FM Sitharaman said.