Stakes Over Skill: Gameskraft Judgement And Its Tax Implications

The recent judgement of the Supreme Court (SC) in  Directorate General of Goods and Services Tax Intelligence & Ors. V. Gameskraft Technologies Private Limited (Gameskraft ) will reshape the tax regime in the online gaming industry. The divisional bench comprising Justice  J.B. Pardiwala and Justice R. Mahadevan held that the determinative factor for classification for betting and gambling is  not a game of skill or chance but the money  staked on uncertain outcomes. If there is the existence of stakes on the platform then that would constitute betting and gambling. The court ruled that such platforms  supply ‘actionable claim’ as goods under Section 2(52) of the Central Goods and Services Tax Act, 2017 (CGST) , so the  Goods and Services Tax (GST) is levied at 28% on the total prize pool or total amount deposited.

This article focuses on Gameskraft judgement across three dimensions: first, its implications on the online gaming industry; second the retrospective operation of the 2023 CGST amendments concerning Rules 31B and 31C; third the tension between  legislative and executive powers resulting from the  judicially conferred retrospectively upon executive rule making.

HOW STAKES REDEFINED THE SKILL DEFENSE 

Nearly seven decades have passed, the doctrine of substantial degree of skill is as old as the Indian constitution. This doctrine was first recognised in The State of Bombay vs R. M. D. Chamarbaugwala (RMDC). In the judgment the SC gave  legitimacy to the game of skill and held that it falls under the ambit of  Article 19(1)(g) of  The Constitution of India and  game of chance falls under the ambit of betting and gambling under entry 34 of state list.  The SC in the State of Andhra Pradesh v. K. Satyanarayana, held that rummy is a game of skill as it involves special knowledge of arrangement and melding of cards, hence it does not fall under gambling. The doctrine was unravelled in Dr. K.R. Lakshmanan v. State of Tamil Nadu, the court held that predominance of skill over chance comes outside the ambit of betting and gambling.

The recent Gameskraft judgement shifted  from predominance of skill test to wager test, i.e. focus shifted to money staked on uncertain outcome. The judgement brought three major challenges to the online gaming industry. First, it separated the GST character from its character under gambling and consumer laws. A platform may operate legally yet liable to pay 28% GST on full pool prize of stakes as a supplier of actionable claims arising from betting and gambling. Second, it took away the fundamental protection under 19(1)(g) of The Constitution of India. Third, it broke the trust of the gaming industry that was built over 7 decades by judicial precedents in favour of online rummy and fantasy games as constitutionally protected from the ambit of betting and gambling.

However, the situation in the present case is different. The question is not whether games of substantial skill simpliciter can be prohibited by virtue of Entry 34 List II. Such games would not amount to gambling and hence enjoy the protection of Article 19(1)(g) of  The Constitution of India . The question is that when a player or third person places a bet on the uncertain outcome of a game of skill, with the hope of earning an amount more than he has staked, would such an act, which indubitably amounts to betting, not be covered by the expression “betting and gambling” used in Entry 34 and thus be amenable to regulation by the State Legislature. It indicates that even the much relied upon decisions in the two RMDC cases left scope for the State Legislature to regulate activities wherein the uncertain outcome of a future event is to be forecasted.

Even in a game of skill, the outcome of the game being played by multiple players is an uncertain future event, and even with much exercise of skill, can never be predicted with certainty. We would also like to observe that a game of skill, played without stakes dependent on the outcome is very different from a societal perspective as compared to a game of skill played with stakes on the outcome of the game. The former does not amount to betting or gambling, but the latter amounts to betting, and thus falls within the purview of the legislative powers of the state.

EXPLANATORY RULES OR FRESH LEVY? THE RETROACTIVE TRAP.

Earlier, the online gaming industry paid GST at 18% under the Gross Gaming Revenue Model (GGR), which was levied exclusively on the platform fees retained by the operator. The SC, in the Gameskraft Judgement, by departing from the GGR model, held that GST at 28% must be levied on the Gross Bet Value (GBV), i.e., the total pool of money deposited by the player. The SC held that this is not a fresh levy of tax but merely clarificatory since the online gaming money is now specified as an actionable claim. Such claims were already being taxed at 28% since 1 July 2017 ,that’s why the amendment will operate retrospectively.

The SC ignored and effectively bypassed the well-settled principle of Commissioner of  Income Tax   v. Vatika Township Pvt. Ltd , where it was  laid down that “A legislation is presumed to be prospective unless a contrary intention appears from its express terms or by necessary implication.” The notification itself declared an operative date of 1 October 2023 for the amendment. While the parliament itself has fixed a date, a court cannot hold the amendment to have a retroactive effect, labelling it as a clarification.

The 2023 amendment did not merely clarify the old established structure, but it completely changed it. Prior to this amendment, operators paid 18% on the platform fees. Post-amendment, 28% applies to 100% of player deposits. This is a total change in the tax regime, not just a mere clarification; it is a substantive change.

The court’s reasoning is contradictory in itself. The original Schedule III of the CGST Act excluded actionable claims other than betting and gambling and lottery from the definition of supply, which rendered them non-taxable. By 2023 amendment online gaming was also included in the taxable category. But if online gaming has been taxable since 2017, there is no reason to amend Schedule III at all. Amendment by parliament itself showcased that there was a need for amendment, as the prior framework was insufficient. Stating the amendment as clarificatory is a logical inconsistency.

CONCLUSION

The Gameskraft judgement marks a sharp turning point in the tax regime in two aspects. First it displaces the predominance of skill test with wager test which was intact from seven decades. Rendering skill v chance debate/test for the purpose of GST irrelevant. A platform while operating in the legal domain has to give 28% GST which is a lump sum to ask for. Second, the retrospective effect of the amendment  creates another problem. By characterising the amendment as clarificatory, it contradicts the date of operation by parliament and the very core of legislative intent.

The purpose of the amendment is legitimate but the very method is not legitimate in itself. There is a need for a proper balanced framework which imposes a prospective and clear tax obligations.