The Karnataka High Court on Thursday quashed a show cause notice (SCN) of Rs 21,000 crore issued to online gaming company Gameskraft Technologies, which runs platforms such as Rummy Culture, Rummy Platform and Rummy Partner.
This SCN was issued against the Bengaluru-based start-up on September 8, 2022, when the Directorate General of GST Intelligence (DGGI) found users wagered on the platform. It estimated that the face value of the total bets during 2017 and 2022 stood at Rs 77,000 crore.
Calling these activities games of chance, the DGGI levied a 28 per cent tax on the company. Along with the penalty, the total amount ballooned to Rs 21,000 crore. The GST authorities searched Gameskraft's office in November 2021 and charged it with evading taxes.
Gameskraft contested this levy, claiming it went against the legally accepted distinction between 'games of skill' and 'games of chance'. Its legal counsel maintained that games of skill do not fall into the ambit of betting and gambling. The court granted it a stay on September 23 after observing that the case involved several contentious issues.
It approached the Karnataka High Court again after the GST Intelligence authorities sent an SCN on the day the court issued the interim stay to the tax demand intimation.
Hurrah, Says The Industry
Industry stakeholders hailed the Karnataka High Court decision, which they claimed reinforces their stand in following the existing GST framework under which it operates.
In a statement, All India Gaming Federation (AIGF) CEO Roland Landers called it a landmark decision by the court, which would greatly aid gaming start-ups across India to work towards building the industry and ensure its healthy growth. "We are hopeful that this progressive decision will pave the way towards clarity and certainty from the GST Council in the GST policy for this sunrise sector," Landers added.
Sameer Chugh, chief legal officer at Games24x7, noted that the pronouncement, along with the recent progressive regulations in the online gaming sector, including the notification of rules for online gaming by the Ministry of Electronics and Information Technology (MeitY) and the amendments to the Income Tax Act made through the Finance Bill 2023, helps to reinstate the differentiation between online gaming from games of chance involving betting and gambling.
"Legitimate online skill gaming platforms have been united as an industry in developing strong and ethical self-regulatory mechanisms and have been forthcoming in their commitment to running fully compliant businesses, operating by the laws of the land. We are hopeful that the legal precedence set in this case will guide future discussions on economic and taxation policies pertaining to the skill gaming industry," Chugh added.
The Karnataka High Court order is a relief to the online gaming industry, which has been demanding clarity and certainty from the GST council about the taxation policies in the sector. Moreover, they are elated because the judgment showcases that making online gaming on par with betting and gambling is not justified. This is expected to have far-reaching effects on the sector and would work as a base for online gaming companies struggling with similar notices from GST authorities.
Ankur Gupta, Practice Leader-Indirect Tax at SW India, a Gurgaon-based tax advisory firm, pointed out that the gaming industry is already struggling with the taxability of the GST rates as the report has been pending with the GST council for more than two years now. Sensing that the online gaming industry might come under the ambit of 28 per cent, stakeholders have already made recommendations to consider the taxability of games of skills and games of luck separately and at least keep games of skill outside the 28 per cent slab.
"Coupled with this, authorities getting aggressive and demanding a tax of 28 per cent without any basis is hurting the industry badly. India is already in second position in terms of online gamers, with more than 425 million gamers. The market's growth potential is huge and is also attracting a lot of global gaming platform giants to enter the Indian market," he added.
However, the GST authority's approach, which many players claimed is based on unrealistic demands, would be detrimental to this sunrise industry and would only create more unsurmountable roadblocks. They are watching the steps DGCI will now take in the GameKraft case and whether it will pursue this case legally further.