The Supreme Court in Directorate General of Goods and Services Tax Intelligence (HQ) & Ors v Gameskraft Technologies Private Limited and Ors (‘Gameskraft case’) upheld one of the most contested amendments to the Central Goods and Services Tax Act, 2017 (‘CGST Act, 2017’). I’ve examined the background and context in Part-I, this part is a brief analysis of the judgment.
I. Actionable Claims in GST
(i) Categorizing Actionable Claims with Goods
The online gaming companies challenged the Parliament’s competence to classify actionable claims as ‘goods’ under Section 2(52) of the CGST Act, 2017. This argument was founded on three claims: (i) Sales of Goods Act, 1930 has consistently excluded actionable claims from goods and treated them as distinct categories; (ii) Article 366(12) defines good but does not include actionable claims while 366(26A) of the Constitution defines ‘services’ to mean ‘anything other than goods’. Thus, since actionable claims were not included in goods they could only be included in the category of ‘services’. (iii) the provisions of GST laws in so far as they subject actionable claims relating to betting and gambling were not constitutionally valid under Article 246A read with Article 366(12A).
The Supreme Court clarified that legislative powers of the Parliament and State legislatures were determined under Article 246A of the Constitution. The latter was introduced via the 101st Constitution Amendment and created an ‘entirely different statutory and juristic context.’ (para 50.22) Rendering any reliance on Sale of Goods Act, 1930 and its jurisprudence irrelevant to the context of GST. Thus, constitutional validity of provisions under GST laws must be determined only in reference to Article 246A and other constitutional provisions.
And the constitutionality of levy of GST on actionable claims was upheld by the Supreme Court by primarily relying on three major factors: (i) The Supreme Court referred to Article 246A of the Constitution and interpreted it liberally to hold that legislative powers of the Parliament and State legislatures included power to make laws ‘with respect to goods and services’ and the GST framework was ‘sufficiently broad and comprehensive to encompass the present transactions’ (para 50.19); (ii) Further, the legislature has wide leeway in fiscal matters and courts have a limited role as consistently upheld by various courts since R.K. Garg v Union of India and Ors; (iii) Statutory provisions of tax statutes cannot be challenged by referring to definitional clause of the Constitution – Article 366(12) – as the constitutional definition was inclusive and not exhaustive in character. And that the definition of goods under Article 366(12) did not ‘operate as a rigid constitutional restriction confining the concept of goods only to tangible movable commodities’ (para 50.21). The Supreme Court’s stance was supported by its previous observations in Skill Lotto Solutions Pvt Ltd v Union of India where it held that the Parliament was competent to include actionable claims within the definition of goods under Section 2(52), CGST Act, 2017. And it was not in conflict with the inclusive definition of goods under the Constitution. Finally, the Supreme Court also clarified that GST was not a direct tax on betting and gambling but on actionable claims arising out of betting and gambling. Which brought fore the issue of meaning of actionable claims and whether online gaming companies supplied such actionable claims to the players.
(ii) Meaning and Supply of Actionable Claims
An actionable claim requires three ingredients and as per the Supreme Court, all of them were satisfied in this case.
Claim to a beneficial interest in movable property: The monetary stakes of players were identified as the movable property and their right to participate in the game as a ‘contingent beneficial interest.’ And the mere fact that beneficial interest was contingent upon an uncertain future event – outcome of the game – was immaterial. The chance to win represented the contingent beneficial interest irrespective of whether the online gaming intermediary retained a portion of the winning amount as platform fee.
Movable Property was not in constructive or actual possession of claimant: This ingredient was also easily satisfied as all stakes deposited by players before commencing games were not freely withdrawable. And were subject to contractual and regulatory restrictions. Once monetary stakes were deposited by players, they were irrevocably committed towards gaming and their utilization was governed by outcome of the game and online gaming platform rules. Thus, the monetary stakes could not be said to be in actual or constructive possession of the claimant. Even if the stakes were not deposited in accounts of online gaming companies, but in a separate account. But the funds were in their control until the game was over and thereafter the winner was paid the money minus the platform fee.
Beneficial interest must be recognized by civil courts as affording grounds of relief: Online gaming companies contended that this ingredient was not satisfied because Section 30 of the Indian Contract Act, 1872 rendered agreements by way of wager void. Thus, since the actionable claim itself arises from betting and gambling, it cannot constitute an enforceable actionable claim in law. The Supreme Court responded to this argument with unwarranted sophistry and held that Section 30 of the Indian Contract Act, 1872:
… does not render every collateral, ancillary or connection transaction illegal or void ab initio. (para 73.2)
And added that online gaming platforms gave rise to legally recognizable rights and obligations ‘independent of any possible wagering elements.’ (para 73.4) This observation is at odds with the Supreme Court’s observations in another part of the judgment where role of online gaming companies was viewed not as mere facilitators between players but creating, structuring, administering, and supplying actionable claims within the ‘organised betting and gambling framework.’ (para 74.5) The Supreme Court was categorical in its conclusion that without online gaming companies no actionable interest capable of participation could arise at all. And that actionable claims are not supplied inter se between players but by the online gaming platform which controls the participation, stakes, and payout structures.
Thus, the betting and gambling framework was termed as both: intricately related to actionable claims and yet independent of it. For purpose of Section 30, actionable claims were held to constitute independent rights. Which contradicted the Supreme Court’s own logic: the actionable claims would not have existed but for betting and gambling. If beneficial interests relating to such actionable claims are held to be legal and not hit by Section 30 of the Indian Contract Act, 1872 it effectively amounts to making wagering contracts enforceable in law. An artificial distinction between the betting framework created by online companies, actionable claims, and beneficial interests arising out of latter holds little water.
II. Undervaluing Value of Supply
Online gaming companies also assailed the validity of valuation rules on various grounds including excessive delegation. The argument was that by levying GST on the full value of bet, Rule 31A traversed beyond Section 15, CGST Act, 2017 which enumerated rules for value of supply under GST. The Supreme Court negatived the contention. Section 15(4) and Section 15(5) of the CGST Act, 2017 respectively state that:
Where the value of the supply of goods or services or both cannot be determined under sub-section (1), the same shall be determined in such manner as may be prescribed.
Notwithstanding anything contained in sub-section(1) or sub-section (4), the value of such supplies as may be notified by the Government on the recommendations of the Council shall be determined in such manner as may be prescribed.
Reading both the provisions conjointly, the Supreme Court held that foundational statutory requirement in both provisions is identical: a prior recommendation by the GST Council. And once Rule 31A – prescribing full value of bet as value of supply – was introduced pursuant to recommendations of the GST Council, the controversy regarding precise source of delegated authority loses much of its significance. Here, the Supreme Court erred in reading requirement of GST Council’s recommendation into Section 15(4). The requirement is only prescribed in Section 15(5).
A more significant limitation was its narrow reading of Rule 31A. The Supreme Court held that Rule 31A ‘neither enlarges the charging provision nor alters the taxable event under the GST regime.’ (para 57.1) And held that Rule 31A merely provides the machinery for valuation of such supplies.
Two things that are missing from the Supreme Court’s analysis of Rule 31A:
First, that Rule 31A did not operationalize the standard valuation methodology under Section 15. The latter envisages amount paid or payable for goods or services as the value of supply. Face value of bet does not fall into either category; only the platform fee is the amount paid or payable. The remaining amount belongs to winner of the game on its completion. The fact the amount cannot be withdrawn before completion of the game is a basic requirement of the game and cannot be said to have been appropriated by the online gaming company or appropriated towards the game since the net amount – minus the platform fee- always returns to winner of the game. By equating flow of money between parties to consideration for a supply, the Supreme Court has given an unusually wide interpretation of what constitutes as consideration and supply. Contrary to previous judicial opinions and even the Revenue Department’s views on the issue.
Second, the Supreme Court erred in stating that Rule 31A did not enlarge the charging provision under the GST regime. This is only true in a superficial sense. By prescribing face value of bet as the value of supply, Rule 31A alone increased the GST liability manifold, almost to the point where discharging the said tax obligation became impossible for online gaming companies. When the measure of tax is so altered, to completely disassociate it with taxable event is scantly justifiable even if the Supreme Court adopted a formalistic interpretation. For example, charging and machinery provisions have been held to constitute a complete code. And mere presence of former is not sufficient to levy a tax. Similarly, by keeping the charging provision intact if measure of tax or tax rates are increased to a point where businesses face imminent closure, it is facile to state that taxable event has remained intact. Measure of tax and tax rates quantify tax liabilities and cannot be read in silos from the taxable event. Former determines trigger for tax while latter quantifies it, and both need to be read together to understand final tax liability of taxpayers and determine if they are arbitrary, unreasonable or disproportionate.
III. Retrospective Applicability of Amendments
New valuation rules which radically altered the measure of tax, new definitions of online gaming, and expansion of the kind of taxable actionable claims. And, yet, as per the Supreme Court the amendments were only clarificatory in nature and only introduced:
… a more detailed statutory framework governing online gaming, online money gaming and specified actionable claims within the GST regime. (para 66.1)
As noted above, the Supreme Court of the view that since the above amendments did not create a fresh levy nor introduce a taxable event for the first time, they are merely clarificatory in nature. And since the amendments merely prescribed refined or specialized valuation methodologies for online gaming and casino ecosystems, the Rules 31A, 31B, and 31C cannot be termed as arbitrary or constitutionally infirm only because they prescribed an ‘alternate methodology.’ (para 66.5)
Again, the fatal flaw here is in the Supreme Court focusing on taxable event remaining the same and not how actionable claims were made a broader category or that the valuation rules/measure of tax was changed to drastically increase the tax burden. To term the latter as an ‘alternate methodology’ is a formalistic approach that serves little purpose in examining the substance, text, and effect of the relevant provisions. Nonetheless, the Supreme Court was categorical in its conclusion that:
In the present case, taxability of actionable claims arising from betting and gambling already stood recognized under the pre-amendment statutory framework. Consequently, the challenge to retrospective application of the clarificatory amendments cannot be sustained. (para 66.8)
Completely differing from the Karnataka High Court’s stance that the Revenue Department could not trace its GST demands to a valuation rule. Thus, for the Supreme Court to term the subsequent amendments of 2023 as ‘clarificatory’ or an ‘alternate methodology’ is an unusually expansive understanding of clarification. The measure of tax was introduced de novo, even if some actionable claims were taxable before that amendment. But a narrow focus only on the latter meant the Supreme Court not addressing a core issue and allowing the Revenue Department more than necessary leeway.
IV. Some Takeaways – Between Optimism and Skepticism
The Supreme Court’s judgment in Gameskraft case is in many ways the Revenue Department’s dream. There is enough obfuscation, sophistry, and detail to convince casual readers that the underlying issues were analyzed and discussed in a threadbare manner. But that isn’t the case. Nonetheless, there some positive takeaways and a few obvious and glaring missteps. So, let me keep aside a cynical view and enlist both.
The Supreme Court was correct in reading Article 246A of the Constitution liberally and holding that the Parliament and State Legislatures possess wide powers to enact laws ‘with respect to goods and services’. And this expansive scope includes the power to make GST laws on actionable claims. The fact that Article 366(12) did not specifically include actionable claims in definition of goods was not a constraint since the constitutional definition was inclusive and not exhaustive in nature. This view aligns with previous interpretations of the scope of Article 246A in previous judgments here and here.
The Supreme Court also maintained consistency with previous judicial precedents wherein it has been held that in fiscal matters the legislature deserves greater latitude. Taxation matters are an attribute of sovereignty, serve an important goal of revenue collection, and involve complexity and technicalities that the courts are not competent to assess. And thus, not only there is presumption of constitutionality in relation to taxation laws but also the bar for proving violation of fundamental rights is higher. Courts do not easily intervene in fiscal matters.
At the same time, the Supreme Court’s engagement with arguments about excessive delegation left much to be desired. The entire analysis that the valuation rules do not traverse beyond the policy prescription of Section 15, CGST Act, 2017 does little justice to arguments raised by online gaming companies. The parameters of valuation prescribed in Section 15 – of price paid and payable – are only remotely connected to the full face of monetary stakes prescribed in Rule 31A. And how the latter amount to consideration under the CGST Act, 2017 is too thin and in ignorance of previous opinions of courts and the Revenue Department. But somehow the Supreme Court found a credible and rational nexus of Rule 31A with taxable event and left excessive delegation bereft of any serious reasoning.
Finally, we are aware that the Parliament – with ample help from the Revenue Department – has used retrospective amendments to correct ‘legislative errors’, reverse Supreme Court decisions that were found at variance with its stance. But the amendments in Gameskraft case were primarily aimed to provide legitimacy to GST demands that were struck down by the Karnataka High Court. And they did not involve mere rephrasing of provisions, but reinterpreting gambling law jurisprudence that had evolved over more than seven decades, reclassifying services into goods, changing tax rates, and measure of tax. Too paper over all these by only saying that taxable event has not changed, is perhaps the greatest shortcoming of this judgment.
V. Conclusion
The online gaming sector is effectively dead. Who killed it? Well, I’m not the jury, but the amendments of 2023, the Revenue’s persistence, the Supreme Court’s deference to the executive and the legislature, all contributed to its paralysis. Thereafter, death was a foregone conclusion. From the entire episode relating to GST demands on online gaming companies, expansion of actionable claims, introduction of new valuation rules the only winner is the Revenue Department. Not in terms of revenue collection, because the amount of GST demanded from online gaming companies will never be paid. Online gaming companies never made enough profits to successfully meet the GST demands and that too retrospectively from 2017 onwards. But, as the Supreme Court declared:
… the entire foundation of the GGR methodology proceeds on an erroneous understanding of the taxable event under the GST regime. GST is attracted upon a taxable supply and not upon the profitability of the supplier. The levy does not fluctuate depending upon whether the supplier ultimately earns profits or suffers losses in the course of business operations. (para 82.4)
But then, why tax online gaming companies such that their profitability becomes impossible because of the tax burden. I guess we will never know. At least a prohibition or a ban is a clear indication of the State no longer willing to tolerate an act or transaction. Or maybe we have found sophisticated way of imposing prohibitions by levying extortionary taxes. But, at the same time, the Union of India did prohibit online money games via The Promotion and Regulation of Online Gaming Act, 2025. And that alone would have sufficed. Why squeeze the neck by tightening the tax noose as well?
However, one thing is clear: in terms of arrogation of powers, the Revenue Department has won a license to make demands retrospectively, if it deems fit. And the demands can be legitimized by amending statutory provisions and accompanying secondary legislation if they act as hurdles to their tax demands. In fact, merely changing the rules and altering the measure of tax maybe more fruitful as it would provide them the defense that no new taxable event or new levy was introduced. And as per the Supreme Court, that is sufficient to term an amendment as clarificatory and allow its retrospective applicability.
