The hearing on a batch petitions pertaining to the constitutional validity of the taxation as well as regulatory aspects of online gaming has entered its final week in the Supreme Court week.
The apex court this week will hear the arguments by the governments of Karnataka and Tamil Nadu on their decisions of banning or curbing online gaming through respective local legislations, as the hearing on the taxation matter of over 100 e-gaming firms and casinos concluded last week.
Lawyers representing lead parties (online gaming firms) such as Gameskraft, Baazi Networks, SBN Gaming Networks, and First Games Technology, however, told Moneycontrol that they may get another opportunity to present final arguments to the court.
The core issue being argued is whether online games, such as rummy and fantasy sports, are “games of skill” or “games of chance”. And whether the GST should be levied on “full face value of bets” or the “actual transaction value”. The retrospective notices are also being challenged as they allege non-payment of tax on misclassification of these games by the e-gaming firms.
Full face value of bets refers to the entire amount of money (or its equivalent, like chips or tokens) that a player wagers in a game, regardless of whether it’s a game of skill or chance. Whereas, actual transaction value means revenue earned by the online gaming platform for providing its services. It’s essentially the commission, or service fee, the platform takes from the total money involved in a game.
In October 2023, the central government had issued a notification “clarifying” that a 28% GST is applicable on online gaming, on the full-face value of bets. This has been a contentious point for the industry, as it significantly increases the tax burden compared to previous models. For instance, if you deposit Rs. 1,000, and GST is applied at 28% on the full face value of the deposit (which is then used for betting), Rs. 280 goes to GST, leaving only Rs. 720 for gameplay.
Online gaming companies say that GST should only be levied on this “actual transaction value” (their commission/revenue), as that’s the true “supply of service” they provide.
The 2023 clarification also removed the distinction between “games of skill” and “games of chance” (betting/gambling). The government maintains that such tax liability for the industry had existed even before, and hence considers retrospective notices valid.
The industry, however, argues that the GST laws until the October 2023 amendment provided for 18% tax on gross gaming revenue or GGR (platform fee) for “games of skill” and 28% on “games of chance” (gambling/betting).
“This batch of matters before the Supreme Court is of existential importance to the entire gaming sector in India – whether online or physical, whether skill-based or gambling,” an tax expert told Moneycontrol. He is representing Gameskraft, which has appealed against a Rs 21,000-crore GST notice.
“The total estimated retrospective GST demand against this sector is around Rs 1.5 lakh crores – which is several times higher than the total revenue earned by this sector. None of these companies would be in any position to pay such retrospective GST demands,” he said.
The central government in 2024 had admitted in Parliament that 71 show-cause notices had been issued to online gaming companies, flagging GST evasion of Rs 1.12 lakh crore. The industry, however, says the tax notices are worth over Rs 2 lakh crore.
Another tax expert said: “With massive tax demands, the very survival of several online gaming companies is at stake. A lack of judicial clarity could trigger widespread closures, adversely impacting employment, investment, and innovation in the sector.”
“At the same time, the case holds wider social implications. Concerns around money laundering, gambling addiction, and mental health, including reported suicidal tendencies, underline the need for a balanced regulatory framework,” he added.
On July 24, the Karnataka government told the Supreme Court that the state has the legal right to restrict acts of risking money on the “unknown result” of an event, and has the constitutional duty to ensure public health and social order.
In a written submission to the apex court, the state said it has the duty to arrest “vices of gaming addiction that may lead to economic impoverishment of the players, while affording miscreants an avenue to engage in fraudulent activities at the former’s expense”. The state is appealing the 2022 ruling of the Karnataka High Court that struck down provisions of a 2021 state legislation, the ‘Karnataka Police (Amendment) Act, 2021’, which had placed restrictions on online games of skills played for “betting and gambling”.
Meanwhile, Casinos have told the apex court that GST can’t be levied on betting, as it’s neither a good or a service. Casino also argue that GST, if at all levied, should be imposed on transaction and not the entire value of chips purchased.
