Case Law: Gameskraft Technologies Private Limited Vs Directorate General of Goods Services Tax Intelligence (Karnataka High Court)
The petitioner in this case operated an online platform for playing skill-based games, particularly Rummy. The tax department issued a Show Cause Notice (SCN) alleging that the petitioner was involved in “betting/gambling” and evading GST by misclassifying the supply as services. The main question before the court was whether offline or online games like Rummy could be considered “gambling or betting” as defined in the Goods and Services Act, 2017.
The High Court examined the distinction between games of skill and games of chance. It concluded that games of skill, including Rummy, whether played with or without monetary stakes, should not be considered gambling. The court emphasized that the test of predominance would apply, and if a game is predominantly based on skill, it is not gambling. The court also noted that the taxation of skill-based games falls outside the scope of the term “supply” under the CGST Act.
Based on these considerations, the High Court held that the online Rummy game and other similar games on the petitioner’s platform should not be taxed as “Betting” and “Gambling.” Furthermore, the court declared the SCN to be illegal, arbitrary, and without jurisdiction.
Rs.2,09,89 Crore rupees of SCN was issued. Petitioners quoted 51 judgements Respondent quoted 44 judgments in the above case law.
Fact of Case:
M/s.Gameskraft Technologies Pvt. Ltd., (for short ‘the GTPL’) claims to be an Online Intermediary Company incorporated in June 2017, who runs technology platforms that allow users to play skill based online games against each other. It is contended that the said company is a legally compliant company, who has been duly filing GST returns and has paid GST and is a bonafide taxpayer.
The Petitioner merely hosts the games and the discretion to play a game and the stake for which it is to be played entire lies with the players with no role of the Petitioner, who seeks to demonstrate the same by the following illustration:
Assuming that ‘A’ and ‘B’ have downloaded the mobile application of the Petitioner and intend to play a game of rummy against each other by using the Petitioner’s online platform/mobile application. As per the construct of the game, ‘A ’ and ‘B’ has to deposit INR 200 each for participation in the game. The winner at the end of the game gets INR 360 as winnings. Further, for allowing ‘A’ and ‘B’ to use its platform for participating in the game of rummy hosted by the Petitioner, it would charge INR 20 each from ‘A’ and ‘B’. Therefore while ‘A ’ and ‘B’ deposit INR 200 each, the winner gets INR 360 and INR 40 is retained by the Petitioner as its ‘platform fee’. During the course of the game, INR 360 is held by the Petitioner in a designated account and on this amount, the Petitioner has no lien or right. The money is transferred back to the winner at the end of the game. Therefore, what the Petitioner retains is INR 40 which is its consideration for facilitation of the game play and on which the Petitioner has been depositing GST.
Issue Involved:
The main question/issue that arises for consideration in these petitions is, whether offline/online games such as Rummy which are mainly/preponderantly/substantially based on skill and not on chance, whether played with/without stakes tantamount to ‘gambling or betting’ as contemplated in Entry 6 of Schedule III of the Goods and Services Act, 2017.
Decision of Karnataka High Court :
“In a game of rummy, certain amount of skill is required because the fall of the cards has to be memorised and the building up of rummy requires considerable skill in holding and discarding cards. Therefore, a game of rummy isa game of skill as held in Satyanarayana supra.”
- There is a distinction between games of skill and games of chance. Games like rummy are considered games of skill, whether played online or offline, with or without stakes.
- Wagering contracts (risk against someone else’s on the basis of the outcome of an unpredictable event) are recognized as part of business under Section 2(17) of the CGST Act, but this does not mean that lottery, betting, and gambling are the same as games of skill.
- The terms “lottery, betting, and gambling” in Entry 6 of Schedule III of the CGST Act should be interpreted based on court decisions, which do not include games of skill.
- Entry 6 in Schedule III of the CGST Act excludes actionable claims (such as games of skill) from the scope of supply, while games of chance like lottery, betting, and gambling are taxable.
- Taxation of games of skill falls outside the scope of “supply” according to Section 7(2) of the CGST Act read with Schedule III.
- A game of chance played with stakes is considered gambling. A game of skill, with or without stakes, is not gambling. A game that involves a mix of chance and skill is gambling if chance predominates, while it is not gambling if skill predominates.
- Rummy is predominantly a game of skill, not chance, whether played with stakes or without. There is no distinction between physical and online rummy, as both are predominantly games of skill.
- Online games other than rummy that are predominantly games of skill are also not considered gambling.
- The terms “Betting” and “Gambling” used in Entry 6 of Schedule III of the CGST Act are not applicable to online rummy or other online games that are predominantly games of skill.
- Online rummy and other online games played on the petitioners’ platforms are not taxable as betting or gambling under the CGST Act and Rules. The issued show cause notice to the petitioners is illegal, arbitrary, and without jurisdiction or authority of law, and it should be quashed.
In conclusion, the decision of the High Court in this case will have a significant impact on the gaming industry, particularly online skill-based games like Rummy. The court’s ruling that such games should not be considered gambling provides clarity and legal protection for operators in the gaming industry. It recognizes that skill-based games played with or without stakes are distinct from games of chance.
However, it is important to note that the possibility of the Supreme Court reviewing or overturning this decision remains. The interpretation of laws relating to gaming and gambling can vary, and future judgments may shape the regulatory landscape further. Nonetheless, the High Court’s decision is a welcome development for the gaming industry as it establishes a precedent in favor of recognizing and distinguishing skill-based games from games of chance.
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