The Centre on Monday told the Supreme Court that online gaming activities, even those involving skill, amount to betting and gambling when played with monetary stakes, and must therefore be taxed at 28% under the Goods and Services Tax (GST) framework.
The Directorate General of GST Intelligence (DGGI), appearing before a bench led by Justice JB Pardiwala, argued that the nature of a game, whether skill-based or chance-based, becomes irrelevant when stakes are involved. Additional Solicitor General N. Venkataraman, presenting the government’s case, asserted that gaming outcomes tied to uncertain results constitute “speculative outcomes,” thereby falling squarely under gambling.
“How can gaming companies contend that games of skill, when played for stakes, are not betting and gambling?” Venkataraman posed to the bench, underlining the government’s core argument. At the heart of this legal battle are show-cause notices served to 71 online gaming companies and casinos for alleged tax evasion, totalling a staggering Rs 1.12 lakh crore. The government maintains that these companies incorrectly applied an 18% GST rate, applicable to regular services, instead of the 28% applicable to betting and gambling.
The government’s stand draws upon a landmark Constitution bench ruling in the Satyanarayana case, which held that any game played for stakes with an uncertain outcome qualifies as gambling under Section 30 of the Contract Act. The matter carries enormous implications for the viability of India’s booming online gaming industry. “The instant matter will have huge significance on the viability of the entire business of online gaming. With the enormous tax implications involved, the online gaming industry has everything at stake,” Smita Singh, partner, S&A Law Offices, told financialexpress.com
While the GST Council’s 2023 clarification and subsequent amendment made it mandatory for gaming platforms to pay 28% GST on the full face value of bets starting October 1, companies are now battling retrospective tax demands dating back to July 2017. Industry players argue that this tax should apply only to the platform fee, essentially the commission they earn, and not to the entire bet amount.
“The online gaming industry has been paying GST @18%. However, subsequent to the amendments in GST provisions, the gaming companies have also challenged the government’s decision to levy GST @28% retrospectively on the entire face value of online bets placed, instead of on the platform fee, which essentially is the commission charged by these gaming companies from the participants entering a game,” Singh noted.
She further criticised the inclusion of winner payouts in taxable turnover. “As per the stand taken by the tax authorities, even the award money received by the winners from these gaming companies is to be included in the turnover of the gaming platforms, in spite of the factthat such award money is not accrued to these gaming platforms.”
The amendment has also led to a contentious shift in the classification of online games from services to “actionable claims,” previously a category reserved for activities like lottery and horse racing. “Treating gaming as an actionable claim also consequently changes the classification of such online games from services to goods. This is a stark deviation from the basic principles of classification of goods and services and confronts the scheme of GST itself,” Singh pointed out.
This legal standoff has cast a long shadow over the sector, which had witnessed explosive growth over the past decade. Singh warns that the current policy framework is already taking a toll. “With the introduction of 28% GST on the entire amount paid by the participant customers and 30% income tax on the winnings, the earning of the customers have gone down, resulting in lessor number of participants and gaming companies facing significant losses, thus, challenging the viability of the online gaming industry.”
The Supreme Court’s verdict, when delivered, will likely reshape the regulatory and taxation architecture for online gaming in India and determine the future of a sector that has grown into a multi-billion-dollar industry, now standing at a legal and financial crossroads.