Whether online/ digital rummy played on Gameskraft is taxable under GST Act? Karnataka HC answers

Karnataka High Court: In a significant and 325 pages long decision impacting the online gaming industry, the bench of S.R. Krishna Kumar, J.*, while deliberating over a bunch of petitions filed by Gameskraft Technologies challenging the actions initiated against them by the Directorate General of Goods and Services Tax Intelligence (DGGSTI) including a GST Intimation Notice to the tune of Rs 21,000 crores, held that the impugned notice issued on 23-09-2022 issued by the DGGSTI is illegal, arbitrary and without jurisdiction or authority of law. The decision to quash the impugned notice was reached on basis of the following conclusions:

Conclusions regarding CGST Act, Construction of the terms and Taxability-

• Online/Electronic/Digital Rummy game and other Online/Electronic/Digital games played on the platform provided by Gameskraft Technologies are not taxable as ‘Betting’ and ‘Gambling’ under the CGST Act and Rules or under the impugned show cause notice issued by the DGGSTI.
• As it was particularised in All India Gaming Federation v. State of Karnataka, 2022 SCC OnLine Kar 435, there is a distinct difference between games of skill and games of chance; games such as rummy, etc., whether played online or physical, with or without stakes, would be games of skill and test of predominance would apply.
• Section 2(17) of the CGST Act recognises even wagering contracts as included in the term business, but that in itself would not mean that lottery, betting and gambling are similar as games of skill.
• In the light of Supreme Court precedents, 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, which do not include games of skill.
• The expressions, ‘ Betting’ and ‘Gambling’ are applicable for the purpose of GST also and consequently, the words, ‘ Betting’ and ‘Gambling’ contained in Entry 6 of Schedule III to the CGST Act are not applicable to Online/Electronic/Digital Rummy, whether played with stakes or without stakes as well as to any other Online/Electronic/Digital games which are also substantially and preponderantly games of skill.

• Taxation of games of skill is outside the scope of the term “supply” in view of Section 7(2) of the CGST Act, 2017 read with Schedule III of the CGST Act. Entry 6 in Schedule III to the CGST Act taking actionable claims out of the purview of supply of goods or services, would clearly apply to games of skill and only games of chance such as lottery, betting and gambling would be taxable.

Conclusions as to What is Gambling and What is not Gambling-

Is Gambling:

• A game of chance whether played with stakes is gambling.

• A game of mixed chance and skill is gambling if it is substantially and preponderantly a game of chance and not of skill.

Is not Gambling:

• A game of skill whether played with stakes or without stakes is not gambling.
• A game of mixed chance and skill is not gambling, if it is substantially and preponderantly a game of skill and not of chance;
• Rummy is substantially and preponderantly a game of skill and not of chance. Rummy whether played with stakes or without stakes is not gambling;
• Online/Electronic/Digital Rummy whether played with stakes or without stakes is not gambling. Furthermore, there is no difference between offline/physical Rummy and Online/Electronic/Digital Rummy, and both are substantially and preponderantly games of skill and not of chance.

• Other Online/Electronic/Digital games which are also substantially and preponderantly games of skill and not of chance are also not gambling.

Background and Legal Trajectory of the Case: Gameskraft Technologies Pvt. Ltd., is provider of online platforms facilitating players to play games of skill like ‘Rummy’, online. GTPL charges a ‘platform fee’ for providing a platform to players to play games, GTPL charges on which GST at the rate of 18% is deposited.

The issue originated November 2021 when officials of the Directorate General of Goods and Services Tax Intelligence (DGGSTI) conducted a search and seizure at the GTPL premises. Upon conclusion of the search and seizure, and summons were sent. On 17-11-2021, the DGGSTI issued a provisional attachment order under Section 83 of the Central Goods and Services Tax Act, 2017 attaching all the bank accounts of GTPL. The GST Authorities alleged that GTPL indulged in suppression of taxable value by claiming of discounts. They were of the view that GTPL indulges in ‘betting and gambling’ and therefore, amounts that are staked in the games by the participating players on the GTPL platforms, are taxable.

GTPL challenged the afore-stated order before Karnataka High Court in Gameskraft Technologies v. DGGSTI, wherein the Court granted interim relief to GTPL and permitted it to operate the bank accounts for specific purposes. However, the GST Authorities issued an Intimation Notice under the provisions of CGST Act, for a demand of INR 21,000 crores alleging that GTPL misclassified its supply as services and was involved in the supply of ‘actionable claim’ which is classified as goods, and that the GST ought to have been paid under Rule 31A of the Central Goods and Services Tax Rules. The Intimation Notice was challenged by GTPL in a second writ petition, Gameskraft Technologies v. DGGSTI wherein the Karnataka High Court in its order dated 23-09-2023 stayed the operation of the same.

A third writ petition, Ramesh Prabhu v. DGGSTI was filed when the GST Authorities went on to issue the impugned show cause notice to GTPL on 23-09-2022 itself.

Issue for consideration- The issue before the Court for consideration was that whether offline/online games such as Rummy which are mainly/preponderantly/substantially based on skill and not on chance, whether played with/without stakes, are equivalent to ‘gambling or betting’ as contemplated in Entry 6 of Schedule III of the Goods and Services Act, 2017.

Major Contentions-

Petitioners: The petitioner contended that basic construct of an online skill-based game facilitated by Gameskraft is that it has no role/ influence insofar as the playing of the games are concerned. The users/players choose the games based on the amount they want to stake to match their skills against other players who want to play for a similar amount. Gameskraft merely hosts the games. It was submitted that activities undertaken by Gameskraft were in the form of betting/gambling which is an actionable claim and not a service. Impugned notice had grossly erred in understanding the actual business practice of Gameskraft as the only set of service provided by it is the facilitation service as an online intermediary.

Pointing out the respondent’s allegations vis-à-vis bonuses wherein it was alleged that by providing discounts / bonuses, Gameskraft induces the players to indulge in more game plays, the counsels contended that a player exercising their own discretion to use the amount lying in their withdrawal wallet to play further games cannot be equated to an inducement.

It was argued that the impugned notice was premised on the fact that the Gameskraft is involved in the supply of ‘actionable claim’ which is ex-facie erroneous. Gameskraft merely facilitates the playing of skill-based games between users/players on its technology platforms in return for consideration in the form of platform fees, on which Gameskraft has duly submitted GST. ‘Actionable claim’ if any, is between the players, which is not taxable under GST laws.

Counsels for Gameskraft contended that Games of skill” are always a distinct class and for distinguishing between skill and chance, the Courts have applied ‘predominance’ test. ‘Rummy’ per se in law has always been designated as a game of skill. Distinction between skill and chance has been maintained in all statutes because States have no competence over skill but only chance. There is a rationale behind this distinction, as it goes to the root of legislative competence.

Game of skill, whether played physically or virtually, the same ‘predominance’ test applies to ascertain the true character of the game. The counsels relied on several decisions from various High Courts which had held that Rummy played with stakes is not considered as ‘gaming’ or ‘gambling.

It was submitted that there is an element of ‘chance’ in each game and a ‘game of skill’, may not necessarily be such an activity where “skill” must always prevail; however, where in an activity the “exercise of skill” can control the element of ‘chance’ involved in the particular activity, such that the better skilled would prevail more often than not, such activity qualifies as a game of skill. While playing Rummy, a player makes a value judgment on his/her skill. The outcome of the game is determined predominantly by the skill of the players. Therefore, rummy played with stakes and the same cannot be viewed as a ‘forecast’.

Respondents:Per contra, the respondents argued that challenge to a show cause notice is premature therefore not maintainable.

It was further submitted that Gameskraft allows players of online rummy to place stakes and bet on the outcome of such games of rummy. In addition to this, Gameskraft is making profits and gains from such games of rummy played on its platform, which would amount to betting and gambling.

While rebutting Gameskraft’s contention that rummy played in its platform is a Game of Skill, the respondents argued that it is nothing but a pure game of chance. The respondent’s counsels pointed out that the only criteria to enter a particular table in Gameskraft’s platform is to stake a particular amount. Once an amount is staked, the platform places the player in a table where fellow players have also staked an equal amount. Further, the platform does not record the skill level of a player and does not disclose the skill level of a particular player to all the players seated at a table. Therefore, a player of rummy on Gameskraft’s platform has no choice to make a conscious decision as to against whom he can compete.

Therefore, when skill is not the qualifying criteria and placing stakes by a player is the only criteria to enter a table on Gameskraft’s platform, the success of the game principally depends on chance and not skill and therefore, in the facts and circumstances, the game of rummy is a game of chance.

It was submitted that Gameskraft charges 10% of the total amount of stakes placed by the players seated at a particular table as its commission. This is nothing but making profits and gains from the stakes placed on the outcome of games of rummy.

Court’s Analysis and Findings:

• The Court held the instant petition to maintainable in view of the specific contention raised by Gameskraft that the impugned notice issued by respondents was without jurisdiction.
• The Court observed that there is sufficient jurisprudence to show that lottery, betting and gambling will be seen as noxious and per se classified ‘res extra commercium’ as beyond commerce.
• The Court did a detailed analysis of the provisions of CGST Act, 2017 especially Section 7 which defines ‘supply’ inclusively. The Court stated that Section 7 was amended retrospectively to make it clear that the entries covered in Schedule II to the CGST Act, 2017 are merely for classification purposes and would not by itself constitute supply on standalone basis. Section 7(1)(a) specifically includes all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal which are made or agreed to be made for a consideration by a person in the course or furtherance of business. Furthermore, the purpose of Section 7(1)(d) is to only classify an activity as supply of goods and supply of services.
• Analysing the definition of ‘business’, the Court stated that business as per Section 2(17) of CGST Act also includes wager or any other similar activity,; however, ‘wager’ has not been defined in the CGST Act. Considering the definition of ‘wager’ as stated in Section 30 of the Indian Contract Act and several law lexicons/ dictionaries and applying the rule of ejusdem generis, the Court stated that the phrase in Section 2(17) “any other similar activity’ would include those activities that are akin to wager.
• Regarding the definition and meaning of ‘betting and gambling’, The principle of “res extra commercium” applies to betting, gambling, wagering for the purpose of other laws. However, with respect to GST law, the definition of business is much wider to include ‘wager’ or ‘any other similar activity’. Therefore, for the purpose of GST, business also includes, betting, gambling, lottery, etc.
• The Court further stated that Schedule III clearly excepts lottery, betting and gambling from the generic term of actionable claims to ensure that it could be taxed, therefore it is necessary to understand the interpretation of games of skill to understand whether they fit into the realm of actionable claim on one side or whether they would fit into the realm of the sub sect of actionable claim, that is, lottery, betting and gambling so that they could be subjected to tax. The Court relied on State of Karnataka v. State of Meghalaya, (2023) 4 SCC 416, and stated that as the expression “betting and gambling” was omitted from Schedule 7 List II Entry 62 of the Constitution to give way for taxation on “betting and gambling” to be subsumed under the GST regime, the expression “betting and gambling” in Schedule III Entry 6 of the CGST Act must also be interpreted in the same manner.
• The Court said that the terms “betting” and “gambling” under Schedule III Entry 6 of the CGST Act must be given the same interpretation given to them by the superior courts i.e., in the context of Schedule 7 List II Entry 34 of the Constitution and the Public Gambling Act, 1867. Therefore, the terms “betting” and “gambling” appearing in Entry 6 of Schedule III of the CGST Act does not and cannot include games of skill within its ambit.
• The Court rejected the contentions of the respondents vis-à-vis rummy played with stakes can be viewed as ‘forecast’ or ‘hidden target’. The Court pointed out that game of rummy played with stakes is played between players based on the assessment of their own skill. Therefore, while playing for stakes, the player makes a value judgment on his/her skill. The outcome of the game is determined predominantly by the skill of the players.
• The Court also analysed relevant cases decided by the Supreme Court like R.M.D. Chamarbaugwalla v. Union of India, 1957 SCR 930 [RMDC 2]; State of A.P. v. K. Satyanarayana, (1968) 2 SCR 387 etc.; Madras and Kerala High Courts, along with its own Division Bench decision in All India Gaming Federation v. State of Karnataka, 2022 SCC OnLine Kar 435. The Court observed that decision of the Division Bench in All India Gaming Federation is not sub-silentio as contended by the respondents for it specifically holds that playing games of skill for stakes does not amount to gambling and neither it is per incuriam, for it refers and considers all the relevant precents laid down by the Supreme Court.

• The Court stated that the words “gambling”, “game of chance”, “game of skill” has developed meanings in judicial parlance. Therefore, applying the principle of nomen-juris, the words should be construed in their legal sense, instead of general parlance. While “gambling” or “game of chance” have been held to involve chance as a predominant element, on the other hand “game of skill” has an exercise of skill which can control the chance. The element of chance cannot be completely overruled in any case but what is to be seen is the predominant element. “In a game of rummy, certain amount of skill is required because the fall of the cards has to be memorised and the building up of rummy requires considerable skill in holding and discarding cards.”

[Gameskraft Technologies Pvt. Ltd. v. DGGSTI, 2023 SCC OnLine Kar 18, decided on 11-05-2023]

*Judgement written by Justice S.R. Krishna Kumar

From a GST perspective, a team of indirect tax lawyers headed by Sudipta Bhattacharjee (Indirect Tax partner at the law firm Khaitan & Co.) led the charge for Gameskraft in this long-drawn legal battle from the time the investigation started in November 2021. As per Sudipta, “This is truly a momentous occasion for the entire online gaming sector in India. After the clarity on the regulatory front from MEITY recently, this judgment will go a long way in achieving certainty of tax position under GST for the sector and should mitigate investor concerns in this regard. The judgment, while historic in its import, is completely in line with more than 60 years of settled law as laid down and repeatedly affirmed by the Hon’ble Supreme Court and various High Courts.”

Advocates who appeared in this case-

Udaya Holla, Sr. Advocate, Dr. Abhishek Manu Singhvi Sr. Counsel A/W Onkar Sharma, Suhaan Mukherji, Siddhartha HM, Nikhil Parikshith, Abhishek Manchanda, Chandan Prakash Pandey, L. Nidhiram Sharma, Vyasakiran Upadhya, , Manjunath B., Varun Thomas Mathew, Advocates

N. Venkataraman, ASG A/W Jeevan J. NeeralagI, Advocate; Mukul Rohtgi, Senior Counsel A/W Pradeep Nayak & Anupama Hebbar; Sankeerth Vittal and Karan Gupta, Advocates FOR IMPLEADING APPLICANT ON IA 1/2022

Arvind Datar and Sajjan Poovayya, Senior Advocates A/W Raksha Agrawal, Sameer Singh and Ravi Raghavan for IMPLEADING APPLICANT ON IA 2/2022