Online real-money gaming companies are currently embroiled in a significant legal battle, challenging the Indian government’s imposition of a 28% Goods and Services Tax (GST) on their services. The case, with an estimated financial impact of $2.5 trillion, is poised to be one of the largest tax disputes in India’s history. The Supreme Court heard arguments on Tuesday, July 15, 2025, and has scheduled the final hearing for July 25, 2025.
Key Arguments by Online Gaming Companies:
Senior Advocate V. Sridharan, representing the online gaming companies, presented several key arguments challenging the GST levy:
- Lack of Statutory Authority for Rule 31A: Sridharan argued that Rule 31A of the GST Rules, introduced in 2018 to prescribe the valuation method for betting and gambling, lacked proper statutory authority under the Central GST (CGST) Act. He contended that the rule was issued without first notifying “actionable claims” as taxable supplies, rendering it ineffective and invalid.
- Improper Classification of Actionable Claims as “Goods”: The petitioners argued that attempts to tax actionable claims like betting and gambling as “goods” through amendments to the Goods Rate Notification were flawed. They highlighted that until October 1, 2023, there was no entry for actionable claims in the Customs Tariff Schedule, making their classification as goods unsustainable under GST.
- Inconsistent Treatment as “Services”: Sridharan emphasized that gambling and online gaming had been consistently treated as “services” under various GST notifications and the Integrated GST Act. The abrupt reclassification of these as “goods” for taxation purposes lacks legislative coherence, according to the petitioners.
- Distinction Between Platform Fees and Prize Pool Contributions: The gaming companies drew a crucial distinction between platform fees, on which GST is already paid, and prize pool contributions made by players. They asserted that prize pool contributions are held in trust and returned to winners, thus not constituting “consideration” and, therefore, should not be subject to GST.
- Operator’s Role as Platform Provider: The petitioners clarified that in online games, players compete against each other, with the operator merely providing platform services. They argued that the platform operator has already discharged GST on these platform services and should not be held liable for supplies made “inter se” (between the players) concerning the prize pool.
- Retroactive Imposition Without Statutory Backing: The online gaming firms claim that attempts to retroactively impose GST without proper statutory backing violate fundamental tax principles and should be struck down as ultra vires (beyond one’s legal power or authority).
- GST as a Contract-Based Tax: In response to a query from the bench, Sridharan clarified that “GST is a contract-based tax,” implying that the tax should apply to the service provided by the operator to the player, not to the entire game as a transaction between players.
Government’s Stance:
The government’s reliance for imposing the 28% GST stems from Rule 31A of the GST Rules, introduced in 2018. The case specifically addresses the absence of clear taxing provisions to enforce tax collection before the October 2023 overhaul of the GST framework for online gaming.
Takeaways:
- Massive Financial Stakes: This case is a monumental tax battle in India’s history, with an estimated financial impact of $2.5 trillion. The outcome will significantly affect the online gaming industry.
- Debate Over “Goods” vs. “Services”: A core contention is whether online gaming should be classified as “goods” or “services” under GST, with companies arguing for the latter based on past classifications and the nature of their operations.
- Challenging Retroactive Taxation: The online gaming companies are challenging the retroactive application of the 28% GST, arguing it lacks statutory backing and violates fundamental tax principles.
- Platform Fees vs. Prize Pool: The distinction between taxable platform fees and non-taxable prize pool contributions is a critical point of contention that could redefine how online gaming revenue is assessed for GST.
- Supreme Court’s Decision Awaited: The final hearing is set for July 25, 2025, and the Supreme Court’s decision will have far-reaching implications for the online gaming sector and potentially for other digital services in India.
- Impact on the Future of Online Gaming in India: The ruling will set a precedent for how online real-money gaming is taxed in India, directly impacting the industry’s growth and operational models.
Online real-money gaming companies on Tuesday opposed in the Supreme Court the imposition of 28 per cent goods and services tax (GST) on their services, arguing that the levy was fundamentally flawed and contrary to the legal framework.
Appearing for the online gaming companies (petitioners), Senior Advocate V Sridharan argued that the GST provisions before October 2023 were inadequate to impose 28 per cent tax on online gaming operators in the manner attempted by the authorities. The government’s reliance on Rule 31A of the GST Rules (value of supply in case of lottery, betting, gambling and horse racing), introduced in 2018, was challenged because it lacked statutory authority under the Central GST (CGST) Act.
Sridharan said that Rule 31A, which prescribed the valuation method for betting and gambling, did not comply with the mandatory two-step process under Section 15(5) of the CGST Act. Specifically, the rule was issued without first notifying “actionable” claims as taxable supplies, rendering it ineffective and invalid, he added.
The senior advocate contended that attempts to tax actionable claims like betting and gambling as “goods” by amending the Goods Rate Notification were also flawed. Until October 1, 2023, there was no entry for actionable claims in the Customs Tariff Schedule, making their classification as goods unsustainable under GST.
Sridharan pointed out that gambling and online gaming were consistently treated as “services” under various GST notifications and the Integrated GST Act, and that this abrupt reclassification lacked legislative coherence.
The petitioners explained to the court the distinction between platform fees, on which GST is already paid, and prize pool contributions made by players, which are held in trust and returned to winners. They claimed that prize pool contributions do not constitute consideration and thus cannot be taxed under GST.
In the case of online games, they argued that these games are played against each player, with the online gaming operator merely providing platform services, and that the platform operator, as the supplier of platform services, has discharged GST during the relevant period at the specified rate. “However, the operator does not make any other supplies and only holds the Prize Pool as a deposit to be settled in favour of the winner, which is decided between the players. Thus, the operator cannot be made liable for supplies made inter se (between the players),” Sridharan said.
The division bench of Justices J B Pardiwala and R Mahadevan asked the senior advocate if the entire game will be treated as a transaction, to which Sridharan said, “GST is a contract-based tax.” The case deals with the absence of clear taxing provisions to enforce tax collection before the October 2023 overhaul.
The petitioners claim that attempts to retroactively impose GST without statutory backing violate fundamental tax principles, and must be struck down as ultra vires (acting or done beyond one’s legal power or authority).
The Supreme Court scheduled July 25, 2025, as the date for the final hearing in the case involving show-cause notices issued to several online gaming firms. The case, with an estimated financial impact of ₹2.5 trillion, is one of the biggest tax battles in India’s history. The matter will continue on Wednesday.
Source: Business Standard
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