The Supreme Court is hearing the Centre’s argument that GST applies to online gaming regardless of whether it involves skill or gambling. The government stated that tax law is blind to the nature of the activity crime or otherwise.
The Supreme Court heard a case that may transform the taxation and legal status of online gaming in India, involving the Directorate General of Goods and Services Tax Intelligence (DGGSTI) and Gameskraft Technologies Pvt. Ltd, among others.
The government informed the Supreme Court that the application of the Goods and Services Tax (GST) is based not on the legality of the activity, but rather on the nature of the transaction.
Represented by Additional Solicitor General (ASG) N. Venkataraman, the Revenue’s arguments contend that placing bets on uncertain outcomes regardless of whether the game is based on skill or chance constitutes betting and gambling. Consequently, the actionable claims that arise from these transactions would be subject to GST.
The Revenue asserted that any game where the outcome is uncertain and participants wager money to win more than they bet falls under the definition of betting and gambling. This interpretation extends to fantasy sports, rummy, and even casinos.
The Revenue dismissed the position of online gaming companies, which argue that skill-based games—such as rummy are constitutionally protected and therefore should not be classified as gambling when played for stakes.
The ASG emphasized that the protection from criminal liability under state gaming laws does not imply that these games are exempt from being considered betting or gambling in terms of taxation.
Venkataraman stated,
“Games of skill being protected under gaming legislations has no bearing on GST, a taxing regime,”
Gaming companies and industry associations maintain that skill-based games played for stakes do not equate to gambling. They argue that the Revenue is attempting to overturn established jurisprudence that differentiates between skill and chance-based games, referencing Supreme Court precedents such as the RMDC-I and Satyanarayana judgments.
Venkataraman remarked,
“Only because it is gambling, there was a requirement to carve out a protection for wagering and betting on games of skill under the two acts. Just because there is a protection from prosecution, games of skill played with stakes does not cease to be gambling.”
He added,
“It was a policy decision that was taken at that time to protect gambling to the extent that it was in relation to games of skill. For the purpose of taxation, whether or not it is a crime is of no consequence and as long as the underlying transaction is gambling, the taxable event is triggered.”
However, the Revenue rejected these interpretations as selective and lacking context. They pointed out that the RMDC-I ruling did not address staking on skill games, rendering it irrelevant for claiming constitutional protection for such activities.
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A significant point of debate centers around the interpretation of Entry 34, List II of the Constitution, which grants states the authority to legislate on “betting and gambling.” While some High Courts, particularly in Karnataka and Tamil Nadu, have interpreted this to mean “betting on gambling” (i.e., only on games of chance), the Revenue argued that this interpretation alters the Constitution’s intent.
According to the ASG, betting and gambling are interchangeable terms in both legal and common usage.
Asserting that even betting on skill-based games involves risk and uncertainty, he stated,
“To interpret ‘betting and gambling’ as only ‘betting on gambling’ amounts to judicial overreach,”
To support its position, the Revenue referenced the Constituent Assembly Debates, where lawmakers like T.T. Krishnamachari and Dr. B.R. Ambedkar acknowledged that even rummy, when played with stakes, could be deemed gambling, and that states should have the authority to regulate or prohibit such activities.
Quoting Krishnamachari, the Revenue noted that when games like rummy are played for high stakes, “it takes the form of gambling.”
The Revenue reinforced its argument with historical rulings, including:
- Dyson v. Mason, where UK courts determined that playing any game for money constitutes gaming, regardless of skill.
- King Emperor v. Arjoon Singh and Re Musa, where Indian courts ruled that it is the stake, not the game type, that defines gambling.
- Panna Lal v. Emperor, which held that games of skill played for stakes are gambling but may be exempt from prosecution due to specific legal protections.
The Revenue argued that these decisions collectively support the view that staking on games irrespective of skill constitutes gambling and can thus be regulated or taxed.
Regarding RMDC-I and II, the Revenue indicated that these decisions clarified that skill-based competitions requiring an entry fee are not gambling. However, if the entry fee serves as a stake linked to potential winnings, it becomes gambling.
They further argued that in online gaming, participants are often encouraged to place repeated stakes, transforming what may appear to be skill-based games into structured gambling systems.
In the case of K.R. Lakshmanan v. State of Tamil Nadu, which addressed horse racing, the Revenue emphasized that the ruling dealt exclusively with third-party betting and cannot be generalized to imply that staking on skill games is constitutionally protected.
The Revenue also highlighted the 1968 Supreme Court decision in State of Andhra Pradesh v. K. Satyanarayana, which recognized rummy as a game of skill but suggested that when played for stakes, it requires protection under the gambling act, indicating it would otherwise qualify as gambling.
The ASG expressed concern over recent High Court rulings that narrowly interpreted Entry 34, arguing that such interpretations hinder the enforcement of GST on actionable claims from betting and gambling.
He urged the Supreme Court to clarify that staking on skill-based games does not exempt them from the classification of betting and gambling.
The outcome of this case is anticipated to have a profound impact on the online gaming industry, the application of GST, and the regulatory authority of states. Should the Supreme Court uphold the Revenue’s interpretation, gaming companies offering skill-based games with stakes may face a 28% GST, akin to casinos and lotteries.
The hearing is ongoing, with potential ramifications that could reshape India’s rapidly expanding online gaming sector.