The conclusions drawn regarding the CGST Act, the construction of terms, and the taxability of online/electronic/digital Rummy game and other similar games on Gameskraft Technologies’ platform are as follows:
According to the decision in the case of All India Gaming Federation v. State of Karnataka (2022 SCC OnLine Kar 435), there is a clear distinction between games of skill and games of chance. Games like rummy, whether played online or offline, with or without stakes, are considered games of skill, and the test of predominance should be applied.
While Section 2(17) of the CGST Act acknowledges wagering contracts as part of business, it does not mean that lottery, betting, and gambling are considered the same as games of skill. The interpretation of the terms “lottery, betting, and gambling” under Entry 6 of Schedule III of the CGST Act should be understood in their legal sense (nomen juris), which excludes games of skill.
The terms “betting” and “gambling” also apply to GST, and therefore, they are not applicable to online/electronic/digital rummy, whether played with or without stakes, as well as other online/electronic/digital games that predominantly involve skill.
Taxation of games of skill falls outside the scope of the term “supply” under Section 7(2) of the CGST Act, 2017, in conjunction with Schedule III of the CGST Act. Entry 6 in Schedule III clearly excludes actionable claims related to games of skill from the purview of the supply of goods or services. Only games of chance, such as lottery, betting, and gambling, are subject to taxation.
Background and Legal Journey of the Case: Gameskraft Technologies Pvt. Ltd. (GTPL) is a company that provides an online platform for players to engage in skill-based games like ‘Rummy.’ GTPL charges a platform fee for facilitating these games, on which they deposit 18% GST. The issue began in November 2021 when officials from the Directorate General of Goods and Services Tax Intelligence (DGGSTI) conducted a search and seizure at GTPL’s premises. Following the search, summons were sent to GTPL.
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 of GTPL’s bank accounts. The GST Authorities alleged that GTPL had suppressed taxable value by claiming discounts. They also argued that GTPL was involved in “betting and gambling,” and therefore, the amounts wagered by players on GTPL’s platforms should be subject to taxation.
GTPL challenged the order before the Karnataka High Court in the Gameskraft Technologies v. DGGSTI case. The Court granted interim relief to GTPL, allowing them to operate their bank accounts for specific purposes. However, the GST Authorities issued an Intimation Notice under the provisions of the CGST Act, demanding INR 21,000 crores. They claimed that GTPL had misclassified its services as goods and was engaged in the supply of “actionable claim,” which should be classified as goods and subject to GST under Rule 31A of the Central Goods and Services Tax Rules.
GTPL challenged the Intimation Notice in a second writ petition, Gameskraft Technologies v. DGGSTI, and the Karnataka High Court, in its order dated 23-09-2023, stayed the operation of the notice. A third writ petition, Ramesh Prabhu v. DGGSTI, was filed when the GST Authorities issued the disputed show cause notice to GTPL on 23-09-2022.
The issue under consideration: The matter before the court involved determining whether games like Rummy, whether played offline or online, predominantly rely on skill rather than chance, and whether they should be considered as “gambling or betting” as defined in Entry 6 of Schedule III of the Goods and Services Act, 2017. The issue was whether these games, played with or without stakes, can be classified as gambling or betting.
Court’s Analysis and Findings:
The court found Gameskraft’s petition to be maintainable based on the specific jurisdictional contention raised against the notice issued by the respondents. It acknowledged the well-established legal precedent that lottery, betting, and gambling are considered harmful and fall under the category of “res extra commercium,” beyond the scope of commerce. The court conducted a thorough examination of the provisions of the CGST Act, 2017, particularly Section 7, which provides an inclusive definition of “supply.”
The court clarified that Section 7 was retroactively amended to clarify that the entries in Schedule II of the CGST Act are solely for classification purposes and do not constitute independent supplies. Section 7(1)(a) explicitly includes various forms of supply made for consideration in the course or furtherance of business. Additionally, the court analyzed the definition of “business” as per Section 2(17) of the CGST Act, which also encompasses activities like wagering. However, the term “wager” is not specifically defined in the CGST Act. By considering the definition of “wager” in the Indian Contract Act, along with legal dictionaries and the rule of ejusdem generis, the court concluded that “any other similar activity” in Section 2(17) includes activities akin to wagering.
Regarding the definition and scope of “betting and gambling,” the court observed that the principle of “res extra commercium” applies to these activities in other laws. However, under the GST law, the definition of business is broader and includes betting, gambling, and lottery. The court further explained that Schedule III explicitly excludes lottery, betting, and gambling from the generic term of actionable claims to ensure they can be taxed. Consequently, it is necessary to determine whether games of skill fall under actionable claims or within the subset of lottery, betting, and gambling for taxation purposes.
The court relied on the Supreme Court case of State of Karnataka v. State of Meghalaya, (2023) 4 SCC 416, and noted that since the expression “betting and gambling” was removed from Schedule 7 List II Entry 62 of the Constitution to allow taxation of betting and gambling under the GST regime, the same interpretation should be applied to the expression in Schedule III Entry 6 of the CGST Act. Thus, the terms “betting” and “gambling” in Entry 6 of Schedule III should be interpreted in the same manner as per the Constitution and the Public Gambling Act, 1867. Consequently, games of skill cannot be considered within the scope of these terms.
The court dismissed the respondents’ arguments regarding rummy played with stakes being seen as a form of “forecast” or a “hidden target.” It clarified that when rummy is played with stakes, it involves players assessing their own skill and making value judgments. The outcome of the game is predominantly determined by the players’ skill. The court also examined relevant cases decided by the Supreme Court and High Courts, including its own Division Bench decision in All India Gaming Federation v. State of Karnataka, 2022 SCC OnLine Kar 435. The court emphasized that playing games of skill for stakes does not constitute gambling, as held in the Division Bench decision, which considered all relevant precedents laid down by the Supreme Court.
Furthermore, the court acknowledged that the words “gambling,” “game of chance,” and “game of skill” have acquired specific legal meanings. Hence, these terms should be interpreted in their legal sense rather than their general meaning. While “gambling” or a “game of chance” relies primarily on chance, a “game of skill” involves skill that can influence chance to some extent. Although chance cannot be entirely eliminated, the decisive factor is the predominant element. In the case of rummy, a certain level of skill is required as players need to remember the cards and strategically arrange them.
Author – Ketan Joshi (Senior Associate) Co-Author – Anura Biyani (Intern)
