The Group of Ministers (GoM) constituted to deliberate on taxation of online gaming proposed a uniform Goods and Services Tax (GST) rate across platforms such as online gaming, casinos, lotteries, and racecourses. They recommended the imposition of the highest GST slab of 28% on all these activities, arguing that due to their potentially harmful social impact and resemblance to addictive practices, such a high rate is justified. Further, the GoM stated that no distinction should be drawn between a “game of skill” and a “game of chance” under the GST regime, proposing that all such activities involving monetary stakes be taxed equally.
However, this approach disregards a long-established judicial precedent that legally distinguishes games of skill from games of chance. The Indian judiciary has consistently held that games involving a substantial degree of skill do not amount to gambling or betting. In the landmark case of State of Bombay v. RMD Chamarbaugwala (RMDC-1) 1957 AIR 699, the Supreme Court held that games that predominantly depend on the exercise of skill are not to be considered gambling. This principle was reaffirmed in R.M.D. Chamarbaugwala v. Union of India (RMDC-2) 1957 AIR 628, where the court emphasized that competitions requiring skill fall outside the purview of betting and gambling laws.
The distinction was further elaborated in State of Andhra Pradesh v. K. Satyanarayana 1968 AIR 825, where the court ruled that rummy is a game of skill and hence does not qualify as gambling. In M.J. Sivani v. State of Karnataka AIR 1995 SUPREME COURT 1770, the court acknowledged that no game is purely skill-based, as chance plays a role in most games. Yet, it introduced the “preponderance of skill” test, or “dominant factor” test, to determine whether a game should be legally classified as a game of skill or chance. This test assesses whether skill or chance plays a more significant role in determining the game’s outcome.
Applying this principle in Dr. K.R. Lakshmanan v. State of Tamil Nadu 1996 AIR 1153, the court again emphasized that although games like rummy involve an element of chance, they primarily depend on the player’s expertise, memory, and strategic thinking. Therefore, such games must be recognized as games of skill. Likewise, the Punjab and Haryana High Court, in Varun Gumber v. Union Territory of Chandigarh, upheld that fantasy sports platforms like Dream11 involve skill, judgment, and discretion, and therefore cannot be classified as gambling.
More recently, in Gameskraft Technologies Pvt. Ltd. v. Directorate General of GST Intelligence, the Karnataka High Court held that games such as online rummy are games of skill and fall within the scope of “actionable claims” under Entry 6 of Schedule III of the CGST Act. The court held that such games do not constitute a supply of goods or services and are therefore outside the scope of GST. The ruling clarified that the CGST Act specifically includes “actionable claims” relating to lottery, betting, and gambling, thereby excluding skill-based games from taxation.
Historically, the Finance Act, 1994, defined betting and gambling as activities determined purely by chance and kept them under the negative list of services, thus exempting them from service tax. Online gaming, on the other hand, was classified as Online Information Database Access and Retrieval (OIDAR) services and taxed accordingly. This separate classification reflects a conscious legal differentiation based on the game’s nature—something the GoM’s proposed tax treatment fails to acknowledge.
The central issue is that the GoM has proposed to equate skill-based online games with lotteries and other chance-based activities. This equation is arbitrary, irrational, and legally unsustainable, as it contradicts decades of jurisprudence. Under Article 19(1)(g) of the Constitution, games of skill are considered a legitimate trade or profession and hence enjoy constitutional protection. In contrast, gambling and lotteries are categorized as “res extra commercium”, meaning activities outside the scope of lawful commerce, and do not enjoy such protection.
Taxation under GST must be non-arbitrary and comply with Article 14 of the Constitution, which ensures equality before the law. For a classification to be valid under Article 14, it must meet two conditions: (1) there should be an intelligible differentia, and (2) a rational nexus between the classification and the objective sought to be achieved. The current proposal fails both these tests. It lumps together games that are fundamentally different in character and societal impact without any logical justification.
The SC in Chamarbaugwala (Supra) had also opined that gambling is considered morally and socially harmful, warranting stricter regulation and heavier taxation. This logic, however, cannot be extended to skill-based games such as chess, football, or online rummy, which do not carry the same social stigma or harm.
Internationally, too, the “dominant factor test” is applied in several jurisdictions. Countries like the U.S., U.K., and Austria draw a clear legal and tax distinction between games of chance and games of skill. For instance, Austria taxes lottery at 18% but skill-based games at a much lower rate of 5%, recognizing their different nature and public value.
The GoM report relies on the SC’s decision in Skill Lotto Solutions Pvt. Ltd. v. Union of India, where the court held that lottery constitutes a supply of actionable claim and is taxable under GST. However, this ruling is limited to lotteries—a game of pure chance. The court in that case did not rule on the nature of skill-based games, and therefore extending its applicability to online gaming is misleading and unjustified.
The nature of the supply in online gaming is fundamentally different. The gaming platforms offer technological services such as maintaining a secure environment, facilitating deposits, managing contests, calculating points, and distributing prizes. The actual competition is among users, based on their skill and judgment. Hence, this is a composite supply involving technology and competition—not a straightforward sale of chance like in lotteries.
Further, online games of skill are structured in a way that promotes strategic thinking, skill-building, and user engagement based on merit. On the contrary, lotteries are passive, and participants rely entirely on luck. Thus, the value proposition, nature of service, and societal implications of both are significantly different.
In conclusion, the proposal to impose a uniform 28% GST on online gaming without distinguishing between skill and chance is legally flawed, constitutionally questionable, and economically regressive. It contradicts long-standing judicial precedent, violates the principles of fair classification, and ignores the very nature of online skill-based gaming. It may also be struck down by the courts if challenged. A more nuanced approach—one that distinguishes games of skill from chance—is not only legally necessary but also consistent with constitutional values and international best practices.
TAXING ONLINE GAMING AT 28% ON FULL VALUE TURNOVER: A SERIOUS FLAW?
The Indian government’s recent move to levy a 28% Goods and Services Tax (GST) on the full value of turnover in online gaming has stirred significant debate. The Group of Ministers (GoM) has recommended that this tax be imposed on the entire consideration received by the online gaming platforms, including both the platform fee and the prize pool contributed by players. However, this proposal is deeply flawed, both legally and economically, and poses a major threat to India’s emerging digital gaming industry.
Understanding the Online Gaming Model
Online gaming platforms typically charge players an entry fee to participate in contests. This entry fee has two components: the platform fee, which is the revenue earned by the gaming operator, and the prize pool, which is reserved for distribution among the winning participants. Taxing the full amount, including the prize pool, distorts the real value of the transaction and burdens both operators and users.
High Tax Rate and Its Negative Implications
Globally, the optimal tax rate for online gaming is guided by two primary considerations: channelization and tax revenue. Channelization refers to the extent to which users participate in gaming through regulated and licensed operators rather than turning to the unregulated grey market. Data from international markets show that:
- A tax rate above 20% can reduce both revenues and channelization as users shift to untaxed or offshore alternatives.
- A rate below 15% may improve channelization but results in low government revenue.
- A range of 15–20% achieves a sustainable balance between tax revenue and high channelization.
The 28% tax proposed by the GoM is far above this optimal range. This might drive gaming activity underground or push operators to move to more tax-friendly jurisdictions. Such outcomes could cause a significant loss in foreign investment and run counter to the objectives of the Digital India initiative.
Ignoring Established Tax Models
There are two primary global models for taxing online gaming: the Gross Gaming Revenue (GGR) model and the Turnover model.
- GGR Model: Tax is levied only on the operator’s actual revenue (i.e., the platform fee after deducting the prize pool). Tax rates in this model can range from 10% to 25%, depending on the jurisdiction. The UK, for example, charges 15% on GGR.
- Turnover Model: Tax is levied on the entire value of the entry fee, including the prize pool. Countries like Germany apply this model, but at very nominal rates (e.g., 5.3%).
Most countries, recognizing the limitations of the Turnover model, have now migrated to the GGR model. India’s approach, however, borrows inconsistently from both frameworks. By taxing the entire turnover at a high rate, the government is adopting the worst of both models, leading to outcomes that are neither economically viable nor globally aligned.
Misinterpretation of “Consideration”
A core legal issue with the GoM’s proposal lies in its interpretation of the term “consideration” under the CGST Act. The prize pool, contributed by users for redistribution among winners, is not a “consideration” for any supply or service. Rather, it is held in trust and is not revenue for the gaming operator.
This has been supported by the judicial precedents. In State of Rajasthan v. Rajasthan Chemists Association AIR 2006 SUPREME COURT 2699, the court ruled that tax must have a direct nexus to a taxable event. Similarly, in UOI v. Intercontinental Consultants and Technocrats Pvt. Ltd, it was held that the taxable value should only include the amount paid for the service, i.e., the quid pro quo.
Further, Section 7(2) read with Schedule III of the CGST Act excludes actionable claims—which include prize pool contributions in games of skill—from GST. Therefore, taxing the entire entry fee is not only economically damaging but legally erroneous.
Redundancy Due to Income Tax
Another issue is the redundancy of this tax measure. Budget 2023 introduced Section 115BBJ and Section 194BA under the Income Tax Act, which tax online game winnings at a flat rate of 30%. Adding a 28% GST on the entire entry fee, including prize money, leads to double taxation. The effective tax burden exceeds 100% of gross revenue, rendering the industry unviable.
Bad Precedent for Other Industries
The GoM argues that allowing taxation only on platform fees may set a precedent for other industries like manpower supply agencies and ride-hailing platforms like Ola and Uber. However, this comparison is flawed. In these services, the supplier manages and pays laborers or drivers, making the entire payment chain subject to taxation. In contrast, online gaming operators only provide a platform and collect fees for this service. Their role is akin to a digital facilitator, not a principal supplier of goods or services. Thus, comparing these sectors is like comparing apples with oranges, as noted by the Hon’ble Finance Minister of Goa.
Global Comparisons and Lessons
Countries like the UK, France, and Denmark have moved to the GGR model to ensure industry sustainability. The UK moved from a 6.75% turnover tax to a 15% GGR tax to prevent operators from shifting offshore. France too, after finding its existing regime punitive, considered migrating to GGR.
The Copenhagen Economics Report (2016) recommended a tax rate between 15–20% under the GGR model, showing that this range promotes compliance and maximizes tax revenue. Conversely, countries like Portugal and Poland, which adopted high turnover taxes, saw a rise in unlicensed operators and loss of government revenue.
Conclusion and Recommendations
India’s online gaming industry is currently valued at US$ 2.6 billion, with a user base of over 180 million. The sector has attracted US$ 2.5 billion in investments and created major unicorns like Dream Sports, MPL, and Games24x7. The 28% GST on full turnover threatens to reverse this progress.
To protect and grow the sector, the following recommendations are suggested:
1.Distinguish Between Games of Skill and Chance: The GoM must recognize the legal difference between games of skill (protected as trade under the Constitution) and games of chance (res extra commercium). This distinction is crucial for fair taxation.
2. Define Games of Skill Clearly: A well-drafted, unambiguous framework is necessary to differentiate skill-based gaming from gambling. This will ensure regulatory clarity and avoid arbitrary taxation.
3. Adopt the GGR Model: India should follow the global trend and shift to the GGR model, ensuring only platform fees are taxed. This aligns with the correct interpretation of “consideration” under GST.
4. Moderate Tax Rate (15–20%): A tax rate in this range balances government revenue needs with industry viability and user affordability.
5. Stakeholder Consultation: Policymakers should engage with industry players, legal experts, and economists to create a fair, sustainable tax regime.
6. Set GST at 18% on GGR: This rate is globally competitive, legally sound, and industry-friendly. It will prevent users from shifting to grey markets and will support India’s ambition to be a global gaming hub.
By adopting these reforms, India can secure its position as a leader in the global online gaming space, fostering innovation, investment, and digital inclusion.
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