A welcome ruling by Karnataka HC on virtual fantasy games vis-à-vis GST

The Karnataka High Court recently delivered an important judgment that has far-reaching implications for the online gaming industry in India. In a case involving Gameskraft Technologies Private Limited (GTPL), the court quashed a whopping tax demand of GST of Rs 21,000 crore, the largest ever issued in India. This ruling not only clarified the position of GST on online gaming but also validated the industry's practice of paying tax only on the platform fee/revenue earned by online gaming companies rather than the total bets placed on their platforms.

The court made crucial conclusions specific to the gaming industry, distinguishing between games of skill and games of chance. It clarified that activities like lottery, betting, and gambling are distinct from games of skill. The terms "betting" and "gambling" mentioned in the Central Goods and Services Tax Act 2017, were deemed inapplicable to online/digital rummy and other predominantly skill-based games. Additionally, it affirmed that rummy, whether played with or without stakes, is a game of skill and not gambling. Similarly, other online games primarily based on skill were also exempted from the gambling category.

Although fantasy games and sports have become a rage in recent times because of the allure of making a fast buck, it is not a new concept. The origin of fantasy games can be traced back to the 19th century. A fantasy sport game is a game where participants decide the composition of virtual teams by selecting real players or athletes of their chosen sport. These virtual teams are pitted against each other on a virtual platform that hosts contests that participants can enter into after paying an entry fee. Thus, the participant essentially operates in the capacity of a selector and team manager. The performance of these virtual teams is then evaluated on the basis of real-life performance of the athletes constituting the team.

Genesis of the litigations in respect of online games goes back to 2017, when a writ petition was filed in the High Court of Punjab and Haryana [Varun Gumber v. Union Territory of Chandigarh & Others], wherein, it was alleged that illegal gambling activities were being carried out by the now popular platform Dream11. The court examined various aspects as to how Dream11 operates and the role of a participant player paying entry fees. The Public Gambling Act 1867, while laying down the law regarding public gambling stipulates that the provisions of this Act do not apply to games of 'mere skill'. The court stated that a participant in a contest on Dream11 had to study and evaluate the strengths and weaknesses of athletes available for selection for which they were required to possess substantial skill. The expression 'mere skill' was interpreted to mean 'substantial skill or preponderance of skill' and that skill constituted a game where skill of player dominated over the element of luck. Thus, it was found that Dream11 did not indulge in the activities either on part of the platform or on part of the participant that could be construed as gambling or betting and therefore, the writ petition was dismissed vide order dated 18th April, 2017. A Special Leave Petition challenging order of the High Court of Punjab and Haryana was filed before the Supreme Court, which was dismissed.

In addition to whether operations of Dream11 constitute gambling or betting, another question was raised in a PIL filed in Bombay High Court [Gurdeep Singh Sachar v. Union of India] regarding GST liability of the company on their activities.

Upon entering contests by paying entry fees, participants receive a tax invoice in which GST is charged on the amount retained by the platform as commission which is 20% of the total sum staked by the player. The balance 80% of the amount is not charged to GST as it is kept in a separate Escrow Account meant for ultimate distribution amongst the contest participants. The point of contention was that if the gaming activity in question constituted gambling or betting, Rule 31A(3) of CGST Rules, 2018 was applicable and GST would have to be charged on 100% of the amount collected.

The court in this matter pronounced that the amount pooled into the Escrow Account was an 'actionable claim' as it was ultimately meant for distribution among winning participants and fell under Entry 6 of Schedule III of the CGST Act 2017. Such actionable claim was to be treated neither as supply of goods nor supply of services and would therefore, be exempt from GST levy. Thus, it was outside the purview of Rule 31A(3) of the CGST Rules, 2018. This decision of the Bombay High Court was challenged before the apex court in a Special Leave Petition, which was dismissed.

In this backdrop, the Karnataka High Court's judgment has brought much-needed clarity to the nature of the games offered by the online gaming industry in India, specifically on the differentiation between games of skill and games of chance and applicability of GST thereon. The judgment carries several crucial conclusions specific to the gaming industry. First, it distinguishes between games of skill and games of chance, making it clear that lottery, betting, and gambling are distinct from games of skill. Furthermore, the court clarified that the terms "betting" and "gambling" mentioned in the CGST Act 2017, do not apply to skill-based online games like rummy. It emphasized that Entry 6 in Schedule III of the CGST Act 2017, which excludes actionable claims from the purview of GST, is applicable to games of skill but not to games of chance. The court firmly stated that rummy is considered a game of skill, whether played with or without stakes, and should not be categorized as gambling.

This judgment carries significant implications for the online gaming industry in India. It offers clarity on the applicability of GST on the online games and distinguishes between games of skill and games of chance. With this legal recognition and protection, skill-based online gaming platforms in India receive a safety net. However, it is not out of place to mention that the revenue department may file an appeal against this judgment.

The final decision of the government on the taxability of online games and the resolution of related issues will play a crucial role in shaping the future of the online gaming industry in India.

(The author is a former Principal Chief Commissioner of CGST Mumbai & Principal Partner GGC Legal Mumbai. The views expressed are his own)