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Recently, a SCN, to the leading online gaming platform company named "GAMESKRAFT TECHNOLOGIES PRIVATE LIMITED", has been issued, attempting to impose a 28% GST on the entire entry fees paid by the participants. Around Rs. 21,000 crore of goods and services tax liability is at stake, perhaps making the notice the highest disputed amount in an indirect tax case against an entity.

Arguments from GST Department

According to GST Department, the notice was issued after it was found that people betted on the platform. The contention of the department is that,

  • Since it was game of chance, a rate of 28 per cent was applied, and after penalty the total amount comes to over Rs. 21,000 crore.
  • The company makes profits and gains from such games of rummy played on its platform. This qualifies as betting and gambling.
  • Hence, liable to be taxed at the rate of 28% on the entire entry fee i.e. on total amount pooled by the participants to participates in the game.
  • Additionally department submitted, whether online rummy is a game of skill or game of chance is a factual assessment.
  • It has argued that a game constitutes a 'game of skill' only when the success depends on the skill of the player.
  • In the present case, the company does not record skills of the player and assigns a table solely based on the stakes involved. Therefore, it is a game of chance.
  • The company's argument that an amount staked by a player is directly proportional to the level of skills he possesses in the game of rummy is fundamentally flawed.
  • The practice of the company ends up in them profiting out of the stakes involved, a practice clearly prohibited by the existing precedents. Even if we assume that it's a game of skill, playing with stakes makes it 'betting', according to the authority's submissions.
  • Company is involved in the supply of 'actionable claims' in the nature of betting as against 'service' as claimed by it. Pointing to the contract between Company and its users, the department has said that the winners get a sum in exchange of the betting amount, clearly making it an actionable claim.
  • This practice of the company is in the nature of facilitating betting and is liable to be taxed on the entire bet value and not on the revenue accrued to the company.
An area of litigation in GST - Actionable claim (Perspective of Gaming Industry)

Reply By Company

Gameskraft has maintained that online rummy is a game of skill and does not amount to betting. So, the exemption under law for actionable claim is applicable.

The company has made following reply;

  • That rummy is a 'game of skill' and is therefore constitutionally protected. It is also settled law that the character of rummy being a game of skill does not change when it is played online.
  • The company is merely an intermediary, which provides services for skilled players in exchange of a fee, much like Ola or Uber.
  • There are two transactions. First, facilitation services provided by it for online skill-based gaming. Second, the actual playing between the players/users and the subsequent transfer of the winnings. In the first transaction, Company earns a consideration in the form of 'platform fee' on which GST is duly deposited. Whereas the second transaction is purely between the players, and the company merely holds and manages the money/deposits of the players for easy accountability and settlement at the end of the game. So, there is no case of profit.

The Hon'ble Karnatka High Court passed an interim order in the matter, staying an intimation notice issued. One of the question that the Hon'ble high court would have to decide is whether the gaming company can be said to be involved in a transaction in an actionable claim. The outcome of this case is eagerly awaited as it will have significant impact on the entire online gaming sector.

 

Analysis

I. Game of Skill or Chance?

Game of Skills: Games which enable players to use their abilities and experience to win, rather than just depend on uncontrolled future events, can be considered as Game of Skills. A game of skill can be decided based on the player's physical or mental expertise. If any strategizing or mathematical skill is required, the game will most likely be categorised as skill-based.

These types of games allow players the opportunity to explore their capabilities and encourage a better understanding of how the games work. Players can find new ways to improve and implement different strategies in the game and are required to practice, making progress regarding their success rate.

Game of Chance: With these games, players will wager money or something by selecting several options and then pressing a button, hoping that it will land on their choice. In this types of games, gamer is not able to control the outcome by using his/her expertise or abilities. Playing cards, roulette, dice or picking a numbered ball are all examples of chance games.

II. Constitution of India

Part III - Article 19:

Clause (1) All citizens shall have the right -

(a)..

(g) to practice any profession or to carry on any occupation, trade or business.

Clause (6) provides as "Nothing in sub clause (g) of the said clause shall affect the operation of any existing law in so far as it imposes, or prevent the State from making any law imposing, in the interests of the general public, reasonable restrictions on the exercise of the right conferred by the said sub clause, and, in particular, nothing in the said sub clause shall affect the operation of any existing law in so far as it relates to, or prevent the State from making any law relating to,

(i) the professional or technical qualifications necessary for practising any profession or carrying on any occupation, trade or business, or

 

(ii) the carrying on by the State, or by a corporation owned or controlled by the State, of any trade, business, industry or service, whether to the exclusion, complete or partial, of citizens or otherwise.

Part XIII - Article 301 :

Freedom of trade, commerce and intercourse.

Subject to the other provision of this part, trade, commerce and intercourse throughout the territory of India shall be free.

III. Current position of GST on Gaming activities

Section 2(1) of the CGST Act,2017 "actionable claim" shall have the same meaning as assigned to it in section 3 of the Transfer Property Act, 1882.

(actionable claim" means a claim to any debt, other than a debt secured by mortgage of immoveable property or by hypothecation or pledge of moveable property, or to any beneficial interest in moveable property not in the possession, either actual or constructive, of the claimant, which the Civil Courts recognise as affording grounds for relief, whether such debt or beneficial interest be existent, accruing, conditional or contingent - Transfer Property Act, 1882.)

Section 2(52) of the CGST Act,2017 "goods" means every kind of movable property other than money and securities, but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply.

However, as per schedule III to the CGST Act- Actionable claims, other than lottery, betting and gambling are neither a supply of goods nor a supply of service.

Meaning - Only lottery, betting and gambling are considered as supply in for the purpose of GST and all other actionable claims are neither a supply of goods nor a supply of service.

Rule 31A(3) - CGST Rules, 2017 - The value of supply of actionable claim in the form of chance to win in betting, gambling or horse racing in a race club shall be 100% of the face value of the bet or the amount paid to the totalisator.

Transactions / activities in actionable claim are outside the ambit of GST, except the, lottery, betting and gambling. In the context of online games such as Rummy or Fantasy sports games, the primary case of the Department of Revenue is generally that these qualify as games of chance that can be said to be betting or gambling, thereby attracting GST.

In relation to taxation, currently, GST @18% is levied on casinos, horse racing and online games where no betting or gambling is involved. The rate is 28% for online games involving betting or gambling.

IV. Important Case Laws

Bangalore Turf Club Ltd vs State of Karnataka: (Karnataka HC)

The petitioners in this writ petition inter alia challenge the legislative intent of making the petitioners liable to pay GST on the entire bet amount received by the totalisator and declare the amendments which inserted Rule 31A(3) to the CGST Rules as being ultra vires the CGST Act.

The Hon'ble Court (Single Judge) allowed the petition and quashed the Rule 31A(3) of the CGST Rules,2017 (amended), as ultra vires the provisions of the CGST Act,2017 and resultant, quash the same insofar as it concerns the petitioners. Consequently, declare Rule 31A of the Karnatka Goods and Service Tax Rules,2017 as ultra vires the provisions of KGST Act, 2017 and quash the same insofar as it concerns the petitioners.

However, after writ appeal by the department, the operation of above order has been stayed till the next hearing by two member bench. The final outcome of this appeal is awaited.

Skill Lotto Solutions Pvt. Ltd vs Union of India: (Apex Court)

In this writ petition, petitioner contended that the levy of GST on lotteries-considering it as goods-is violative of the fundamental right and contrary to the SC judgement that held that lotteries were merely actionable claims and cannot be defined as 'Goods". The apex court dismissed the petition and held, the inclusion of actionable claim in definition "goods" as given in section 2(52) of CGST Act, 2017 is not contrary to the legal meaning of goods and is neither illegal nor unconstitutional. When Act, 2017 defines the goods to include actionable claim and included only lotteries, betting and gambling for purpose of levy of GST, it cannot be said that there was no rational for including these three actionable claim for tax purposes.

Way Forward

Gaming industry representatives met officials from the finance ministry in September, making a case for why a game of skill should be taxed differently. The industry has argued that online games of skills were protected under Article 19(1)(g) and 301 of the constitution.

There is no doubt that one must keep an eye out for increasing litigation on taxability of an actionable claim, It is important to note that such litigation will have an impact on various legs of a transactions, viz. on what qualifies as the actionable claim, the presence of a service in the entire arrangement, the valuation of services and the rate of tax applicable. Taxpayers must be cautious on this litigation path.

Going forward, as a preparatory step, it is important for all the online gaming companies to be prepared in advance with proper documentation (legal and commercial) evidencing the position adopted to classify their activities as game of skill.


 

Published by

Shahejad R. Sayyed
(Chartered Accountant in Practice)
Category GST   Report

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