By Vikas SN SN & Maryam Farooqui
The Supreme Court’s final decision in the GST department’s alleged Rs 21,000 crore goods and services tax (GST) evasion case against skill gaming firm, Gameskraft, will determine the fate of the retrospective GST liabilities for all real-money gaming companies, according to legal experts.
They said that any unfavourable ruling from the apex court could be the final nail in the coffin for the skill-based gaming industry that is already reeling under the GST Council’s recently announced 28 percent GST regime.
On September 6, the Supreme Court stayed the Karnataka High Court’s judgment that had quashed the GST department’s show-cause notice to the Bengaluru-based skill gaming company in May 2023.
In the notice, a GST intelligence unit had alleged that the company had failed to pay Rs 21,000 crore in GST, the biggest such claim in the history of indirect taxation. The notice was for the period between 2017 and June 30, 2022. A bench led by Chief Justice of India, D Y Chandrachud, is likely to hear the case for final hearing in three weeks.
“The ghost of retrospective taxation for the online gaming industry has been revived” said Jay Sayta, a technology and gaming lawyer.
Ankit Jain, Partner, Ved Jain & Associates also said the Supreme Court’s decision will have far-reaching implications for the entire real-money gaming sector.
“The Karnataka High Court had previously created a sort of benchmark by ruling that ‘games of skill’ could not be taxed under (28 percent) GST, a classification that covers a large part of the gaming industry. If this judgment had remained untouched beyond December 31, 2023, the GST department would have faced restrictions on back-dated tax collections, particularly for transactions from FY 2018-19 and earlier,” he said.
“Specifically for Gameskraft, the pause allows the GST department to resume its standard tax collection procedures. Gameskraft will, in all likelihood, be planning to file an appeal to the GST Appellate authority. The immediate challenge will be the need to make a substantial pre-deposit of Rs 100 crore to the GST department before filing the appeal. This could be a notable financial burden for the company” he added.
Sayta noted that the show cause notice proceedings against Gameskraft have been revived until the ad-interim stay on the High Court orders is not vacated or until the proceedings in the Supreme Court do not reach a conclusion. “It is currently unclear whether the department intends to proceed with coercive action against Gameskraft, such as freezing of bank accounts and assets” he said.
During the hearing, the Chief Justice orally observed that the Supreme Court does not want any other High Court to follow this order. It has directed Gameskraft to file their response to the case and permitted the Directorate of Revenue Intelligence of GST to file a rejoinder to the same.
Joyjyoti Misra, Group General Counsel at Gameskraft said that they, along with the skill gaming industry associations, will put forth their submissions before the Supreme Court in the coming weeks.
“We have full faith in the judiciary and are confident that the Supreme Court will reaffirm the settled law of over five decades once again and vindicate our and the industry’s position” he said in a statement.
Legal experts say that the Supreme Court’s interim order could also pave the way for the GST department to accelerate the process of issuing tax demand orders to other skill-based gaming companies.
During the case hearing in the Supreme Court, Additional Solicitor General (ASG) N Venkatraman had argued that the GST department had put a pause on at least 35 different show cause notices due to the Karnataka High Court’s judgement.
Abbas Jaorawala, Senior Director and Head, Direct Tax, Khaitan Legal Associates, noted that Supreme Court staying the Karnataka High Court’s judgment seems to suggest that there is merit in the argument of the GST authorities i.e. the activity of real-money online gaming irrespective of being a game of skill or chance is supply of actionable claim towards betting/gambling.
“Since the position of the GST authorities has been that the GST council decision is clarificatory, and not a prospective taxation policy, the SC decision in case of Gameskraft will be critical to settle this issue” he said.
What are the allegations?
In September 2022, GST officials had accused Gameskraft of promoting online betting through cards, casual and fantasy games such as Rummy Culture, Gamezy, and Rummy Time. Gameskraft, allegedly, was not issuing invoices to customers, the officials said.
GST officials had therefore slapped a 28 percent tax on the betting amount of nearly Rs 77,000 crore. “GTPL was engaged in betting by allowing its players/gamers to place bets in the form of money stakes on the outcome of card games played online,” the authorities said.
The gaming platform submitted fake/back-dated invoices, which was uncovered during a forensic examination of the documents, they alleged, adding that the company was also inducing its customers to bet as there was no way of returning the money once it was added in the wallet.
At the time, Gameskraft had argued that its offerings qualify as skill-based gaming activities, which attracted only 18 percent GST on the platform fee, which the company deducted from the entry fee paid by players. The fee typically ranged between 5-15 percent of the contest entry amount with the rest of the money channeled towards the players’ prize pool, it said.
In July 2023, the GST Council decided to impose the top GST slab of 28 percent on the full face value, irrespective of whether it is a game of skill or chance. On August 2, it provided partial relief by recommending that GST be levied on deposits instead of every bet placed, in order to avoid repeat taxation.
Revenue Secretary, Sanjay Malhotra, however had mentioned that GST rates on real-money gaming were always 28 percent on full face value and this amendment was only clarificatory in nature.
The council, headed by Finance Minister Nirmala Sitharaman, has asked all states to implement the new tax rates by October 1, 2023. It also agreed to review this decision six months after implementation.
On August 11, the last day of the Monsoon Session, Sitharaman introduced bills to amend the Central and Integrated GST laws and it was passed in both Lok Sabha and Rajya Sabha. President Droupadi Murmu also gave her assent to the amendments on August 19.
Subsequently, states such as Haryana, Goa and Arunachal Pradesh have passed similar amendments to their respective state GST laws.
Real-money gaming segment accounted for 77 percent of India’s gaming sector revenues in 2022 which stood at Rs 13,500 crore, as per a recent FICCI-EY report. These revenues are set to grow to Rs 16,700 crore in 2023 and Rs 23,100 crore in 2025, it said.