Trivedi and Parashar (Advocates and Solicitors)
Karnataka High Court- Karnataka High Court quashed Rs. 21,000/- crore GST notice.
In a landmark judgment with far-reaching consequences on the online gaming sector in India, a single judge bench of the Karnataka High Court, in the matter of Gameskraft Technologies Private Limited v. Directorate General of Goods and Service Tax Intelligence & Others [W.P. 19570 of 2022, has quashed and set aside a INR 21,000 crore (~USD 3 Billion) goods and services tax (“GST”) show cause notice against GTPL – the biggest tax notice ever issued in India, as per some reports. The Petitioner was involved as an intermediary in hosting a platform that allows users to play skill-based online games against each other. The present writ petition arose before the High Court after the Petitioner received a show cause notice from the Respondent u/s 74(5) of the Central Goods and Service Tax Act, 2017 ("Act").
The Respondent alleged that the Petitioner had evaded GST by classifying their supply as "services" instead of "actionable claims" in the form of "betting" or "gambling." It was argued that, in line with Rule 31A of the Central Goods and Service Tax Rules of 2017, the Petitioner should be subject to 28% tax on the actual face value of the participation fee and not just the 10% fee charged for acting as the facilitator of the game. Furthermore, the entire "buy-in" sum for playing the game of Rummy should be deemed the Petitioner's revenue and, therefore, be treated as an "actionable claim" like betting and gambling, subject to 28% GST. The Petitioner contended that the Supreme Court and high courts have held that Rummy is a "game of skill" rather than a "game of chance." Therefore, for the purposes of taxation under the Act, the Respondent cannot equate such games to "betting" or "gambling" and, hence, subject them to the 28% slab. GST is a tax on ‘supply’ of goods and services, however, the Petitioner is an online intermediary who only provides services of facilitating skill-based game plays between the players.
Before the Karnataka High Court, the issue was whether the game of Rummy hosted by the Petitioner was preponderantly a "game of skill" or a "game of chance."
The Karnataka High Court, after carefully analyzing the nature of Rummy and determined that Rummy was a single transaction, and any stakes placed depended on the player's knowledge, confidence, skill, and ability. Furthermore, the Court observed that Rummy involved using skill to control the outcome rather than forecasting or predicting the result. It was emphasized that Rummy required the memorization of card falls and considerable skill in holding and discarding cards. Finally, it was held that the terms "betting" and "gambling" under Entry 6 of Schedule III of the Act must be given the same interpretation given to them by the courts, in the context of Entry 34 of List II of the Seventh Schedule to the Constitution and the Public Gambling Act, 1867.
Therefore, the terms "betting" and "gambling" appearing in Entry 6 of Schedule III of the Act do not and cannot include games of skill within their ambit. The Court clarified that games of skill fell outside the scope of "supply" under the Act, which only applied to lottery, betting, and gambling.
The Karnataka High Court further criticized the Respondent's Show Cause Notice, describing it as a futile attempt to cherry-pick statements from judgments and build a weak case. The court deemed the notice void ab initio and without merit and quashed the notice worth Rs. 21,000 crore against the Petitioner.