On 11 May 2023, a Single Judge Bench of the Karnataka High Court delivered a judgment in the Gameskraftcase[1] deciding that the actions of the Revenue Department against online intermediary company, M/s Gameskraft Technologies Pvt Ltd (‘GTPL’) had no basis in law. The Revenue Department inter alia has issued an intimation notice under Section 74(5), CGST Act, 2017 calling GTPL to deposit Rs 21,000 crores (appx) along with penalty and interest. The impugned intimation notice, and the subsequent show cause notice issued under Section 74(1), CGST Act, 2017 were the subject of the dispute.
Before I delve into the judgment, I think it is worth clarifying that the gambling law jurisprudence in India divides games into games of skill and games of chance. The latter are typically understood to be synonyms of gambling/betting. And if a game has elements of both skill and chance, then the predominant element decides the nature of the game, e.g., a game which is predominantly skill-based is understood to be a game of skill while a game which is predominantly game of chance is classified as a game of chance.
Core Issue
GTPL’s/Petitioner’s main argument was that they are not involved in ‘betting/gambling’. While the petitioners relied on various judgments to support their two claims, their claim is best understood through description of their business model. The petitioners claimed that they operated a platform and acted as an intermediary for players to play a game of rummy. For example, two players ‘A’ and ‘B’ intending to play rummy would download their mobile application. Both players would deposit Rs 200 each, and the petitioner for facilitating and hosting the game would charge Rs 20 each from both the players and keep the remaining Rs 360 in trust. At the end of the game, the petitioner would disburse Rs 360 to the winner. The petitioner claimed that it had no lien or right over the prize money of Rs 360. Its revenue from the above transaction was only Rs 40 on which it paid GST.
Petitioners claimed that the ‘buy-in’ amount or gross transaction money facilitated through their platform – which in the above example was Rs 400 – could not be treated as their revenue. The amount belonged to the players, and petitioners had no lien or right over the said amount, which in this case the Revenue Department alleged was Rs 70,000 crores. And presumably the gross transaction amount was the basis of GST demand of Rs 21,000 crores.
Petitioners further claimed that they were not involved in supply of actionable claims. And that actionable claims if any were between the players which was also irrelevant because actionable claims were exempt from GST. Schedule III of the CGST Act, 2017 lists activities or transactions which shall be treated as neither supply of goods nor supply of services. Entry 6 of Schedule III states as follows:
Actionable claims, other than lottery, betting and gambling.
Thus, actionable claims unless they are lottery, betting and gambling are outside the purview of GST. And the petitioners claimed that neither are they involved in supply of actionable claims nor are the games on their platform, specifically rummy, captured by ‘lottery, betting and gambling’ since rummy is a game of skill and not a game of chance.
The petitioners relied on the decades old Indian jurisprudence that has clearly held rummy to be a game of skill. And petitioners argued that playing rummy online does not impart it the character of a game of chance and neither does playing rummy with stakes change its character from a game of skill to a game of chance.
Revenue Department Makes Incredulous Arguments
As is evident from the preceding discussion, the Revenue Department’s claim that the petitioner’s activities were subject to GST would have only succeeded if they could prove that the petitioners supplied actionable claims in the form of lottery, betting and gambling. And since it was the game of rummy in question, they had to establish that the game of rummy played online and with stakes would amount to a game of chance for it to be included in the phrase ‘lottery, betting and gambling’. To establish its case, the Revenue Department indulged in an exercise of selective, non-contextual and self-serving interpretation of relevant precedents. The Revenue Department made various far-fetched arguments, and to highlight its approach, I will elaborate on its two central claims, i.e., a game of skill when played with stakes transforms into a game of chance. In this case, it meant that rummy, a game held to be a game of skill, should be viewed as a game of chance since the players involved placed stakes on the game. Further, the commission charged by the petitioners should not be viewed as a commission but earning profits and gains from stakes because their commission amount varied depending on the stakes placed on the game and was not an across the board charge.
The Revenue made bizzare claims based on their incorrect interpretation of the jurisprudence on game of skill and game of chance. To begin with, they denied that rummy was a game of skill, contrary to well-established jurisprudence[2] that stated otherwise. Instead, they quoted selective paragraphs out of context to back their incredulous claim.
The High Court was not swayed by the Revenue Department’s fanciful interpretive exercise and instead reiterated that rummy is a game of skill ‘where predominantly skill is exercised to control the outcome of the game.’ (para 5) It added that a playing rummy with stakes does not make it a wagering contract, since a wager requires that the person placing the wager should have no interest in the outcome of a game while a player is clearly interested in winning the game. The High Court stated that:
The game of rummy played with stakes is played between players on the basis of the assessment of their own skill. Therefore, while playing for stakes, the player makes a value judgment on his/her skill. The outcome of the game is determined predominantly by the skill of the players. Therefore, rummy played with stakes same cannot be viewed as a ‘forecast’ or a shot at the “hidden target”. (para 11)
The Revenue relied on the Satyanarayana case to argue that petitioner’s earning commission fee for facilitating rummy with stakes on its platform amounted to facilitating gambling and running a gaming house. Satyanarayana case had clearly held that rummy is a game of skill even if played with stakes. The Supreme Court had added that if there is evidence of gambling or owner of house or club was making a profit or gain from rummy, the offence of running a gaming house could be established. The Karnataka High Court correctly read the ratio of Saynarayana case to hold that charging a sitting fees is not profit in context of a common gaming house and that organizer of a skill-based game is not prohibited from charging a fee from the players of the game. (para 5 and 7). Accordingly, petitioners making profits and gains from rummy played on their platform cannot be accused of running a common gaming house. The High Court concluded that:
Irrespective of who wins, the Petitioners, in terms of its contract with the players, collects a percentage of the amounts staked as its platform fees / commission for providing its services as an intermediary. Thus, the Respondents cannot be permitted to supply words to these observations and say that placing of stakes on a game of skill amounts to gambling. In any event, from a reading of the whole judgment, it is evident that this last line is not the ratio of the judgment at all. (para 10)
The edifice of the Revenue’s case collapsed with the Karnataka High Court rejecting its above two arguments. The High Court concluded that all the issues raised and argued were covered by Supreme Court’s judgment in All India Gaming Federation case[3], i.e., whether played physically or online, with or without stakes, game of skill does not lose its character and is determined by applying the predominance test.
Karnataka High Court Dismisses the Revenue’s Case
The Karnataka High Court combed through practically the entire post-Independence jurisprudence on game of skill v/s game of chance, cited the precedents copiously, highlighted relevant paragraphs of the ratio to emphasise that the context and meaning of the judgments was opposite to the Revenue Department’s arguments. The High Court concluded that the Revenue Department’s case was based on fragile footing and observed:
After having dealt with the rival contentions as stated supra, it is significant to state that a perusal of the impugned show cause notice as well as contentions and submissions of the respondents will clearly indicate that the same are an outcome of a vain and futile attempt on the part of the respondents to cherry pick stray sentences from the judgments of various Courts including the Apex Court, this Court and other High Courts and try to build up a non-existent case out of nothing which clearly amounts to splitting hairs and clutching at straws which cannot be countenanced and is impermissible in law. (emphasis added) (para 7)
Accordingly, the High Court held that there is no difference between online and offline games of rummy and rummy does not become a game of chance if played with stakes. It held that Entry 6, Schedule III of CGST Act, 2017 was not applicable to only rummy played with or without stakes or any games which is preponderantly a game of skill and thus petitioner’s platforms were not taxable as ‘betting and gambling’ as contended by the Revenue Department. The show cause notice issued to petitioner’s was quashed for being illegal, arbitrary and without jurisdiction or authority of law.
Way Forward
The Revenue Department has made repeated claims that online gaming companies indulge in significant tax evasion. The credibility of tax evasion claims has not been established through actual numbers and neither has any evidence been shared publicly. But, CGST Act, 2017 and the IT Act, 1961 empower the Revenue Department sufficiently to tackle tax evasion and build a case of contravention of tax laws.
However, after reading the Gameskraft judgment, the picture that emerges is that the Revenue Department had pre-determined that the online gaming platforms facilitate games of chance/gambling and earn the entire amount of transactions undertaken through them. And every argument was then moulded and force-fitted to reinforce the initial conclusion. The Karnataka High Court saw through the Revenue Department’s exercise and correctly chided it for indulging in such an exercise. In fact, so far-fetched was the Revenue Department’s claim that the High Court could have just referred to its previous decision in All India Gaming Federation caseand dismissed the Revenue Department’s claims. However, the detailed 325 page decision in this case might act as a deterrence for the Revenue Department since its central premise has been outrightly, painstakingly and comprehensively dismissed by the High Court by citing every major case on gambling law in detail. Whether the Karnataka High Court’s decision would deter the Revenue Department in any manner is tough to predict; but, if past is any indication the Revenue Department is likely to treat it as a minor hiccup in its pursuit of revenue, come hell or high water.
[1] Gameskraft Technologies Pvt Ltd v DGGSTI 2023 SCC OnLine Kar 18.
[2] State of Andhra Pradesh v K. Satyanarayana & Ors AIR 1968 SC 825, at para 12.
[3] All India Gaming Federation v State of Karnataka & Ors AIR 2022 SCC OnLine Kar 435.