Indirect Tax Alert - Rummy, being a ‘game of skill’ is not classified as ‘gambling’ and hence, not leviable to GST
19 May 2023
Facts of the case
- M/s. Gameskraft Technologies Pvt. Ltd. (Taxpayer) runs a technology platform on which users can play online games against each other.
- The users/ players choose the games based on the amount they want to stake to match their skills with other players who want to play for a similar amount. The Taxpayer merely hosts such games on its platform.
- Pursuant to the investigations carried out by the Tax Authorities, the Taxpayer received a Show Cause Notice (SCN) alleging that the Taxpayer is involved in facilitating ‘betting and gambling’, which amounts to a supply of ‘actionable claims’ on which, applicable GST has not been discharged, seeking to raise a demand of INR 209.89bn (USD 2.54bn).
- Aggrieved, the Taxpayer filed a Writ Petition challenging the validity of the aforesaid SCN before the Hon’ble Karnataka High Court. Additionally, Intervention Applications, supporting the contentions/ submissions of the Taxpayer were also filed by the All India Gaming Federation and E-Gaming Federation (Intervenors).
- The main issue involved in the Writ Petition filed before the Hon’ble High Court was whether offline/ online games such as Rummy, predominantly based on skill and not on chance, played with or without stakes result in ‘gambling or betting’ as contemplated in Entry 6 of Schedule III to the Central Goods and Services Tax Act, 2017 (CGST Act).
Contentions of the Taxpayer
- The SCN issued by the Tax Authorities is without jurisdiction or authority of law and the same deserves to be set aside on the following grounds:
- ‘Games of skill’, being distinct from the ‘games of chance’, can never be classified as ‘gambling’ or ‘gaming’ or ‘betting and gambling’.
- For distinguishing between skill and chance, Courts have applied the ‘predominance test’ which implies that where the skill element is more than chance, the game would be a ‘game of skill’ and where the chance element is more than skill, the game would be a ‘game of chance’.
- It is well settled that ‘games of skill’ played with monetary stakes do not partake in the character of ‘betting’.
- More than 96% of the games played on the platform were ‘Rummy’ which is a ‘game of skill’ as per the settled judicial precedents. The character of ‘Rummy’ being a ‘game of skill’ does not change when it is played online.
- Discounts/ incentives are provided by the Taxpayer to market the business/platform and the same cannot change the nature of games played on the platform.
- The Taxpayer is merely entitled to receive a ‘platform fee’ which is a consideration for facilitating games on the platform on which, the Taxpayer has discharged applicable GST. However, amounts deposited by the users/ players (for onward distribution to the winning players) are merely held by the Taxpayer in ‘trust’ and in its fiduciary capacity. The Taxpayer does not have any lien or right over such money.
Contentions of the Intervenors
- Taxpayer provides a technology-based platform to the players for playing games against which, it receives a platform fee from the users/ players. The operators (such as the Taxpayer) discharge applicable GST on such platform fees.
- The contribution towards the prize pool is not a consideration for providing platform services and the operators have no interest in the same. The question of discharging GST on these amounts would not arise because -
- These amounts are not towards the supplies made by the operators
- These amounts are towards the consideration for the supply of actionable claims which is specifically classified neither as a supply of goods nor as a supply of services as per Entry 6 of Schedule III to the CGST Act.
- ‘Gambling’ is an act of playing a ‘game of chance’ and playing ‘games of skill’ for stakes would not amount to ‘gambling’. It is undisputed that ‘Rummy’ is a ‘game of skill’ as the player with greater skill is more likely to win against players with inferior skills.
Contentions of the Tax Authorities
- The present petition, challenging the SCN is premature and is filed without exhausting the alternate remedy (of furnishing replies to the SCN with the Tax Authorities), and hence, not maintainable.
- The platform allows players of online rummy to place stakes and bet on the outcome of the game. ‘Rummy’ is nothing but a pure game of chance because
- The platform does not record the skill of a player
- The platform does not disclose the skill of a particular player to all the players seated at a table
- A player of rummy has no choice but to make a conscious decision as to against whom he can compete
- Thus, when skill is not the qualifying criterion and placing stakes is the only criterion, the success of the game principally depends on chance. Accordingly, rummy is a ‘game of chance’ and hence, amounts to ‘betting and gambling’.
- ‘Game of skill’ and ‘game of chance’ have a common aspect viz., the uncertain outcome of the game. Therefore, placing stakes on an outcome of a game, irrespective of the game being of skill or chance would amount to ‘betting and gambling’.
Observations of the Hon’ble High Court
- It is a settled law that the High Courts have the discretion of not entertaining a Writ Petition in cases where an effective alternative remedy is available to the aggrieved person. However, one of the exceptions to the aforesaid principle is where the SCN is issued without jurisdiction or authority of law. Given that the Taxpayer has specifically contended that the SCN issued by the Tax Authorities is without jurisdiction or authority of law, the Writ Petition was held to be maintainable.
- On perusal of the provisions of the CGST Act, it was observed that -
- Entry 6 of Schedule III to the CGST Act provides that actionable claims, except lottery, betting and gambling are neither considered as a supply of goods nor as a supply of services.
- Referring to the principle laid down by the Hon’ble Supreme Court1, it was observed that while the term ‘business’ under the CGST Act includes ‘lottery, betting and gambling’, such inclusion cannot be construed to imply to treat ‘lottery, betting and gambling’ at par with other ‘games of skill’.
- Law relating to the Game of Skill and Game of Chance
- Applying the principle in various judicial precedents2, it was observed that –
- Tax on competitions, where success is predominantly dependent on skill is not governed under the then Entry 62 of List II of the Seventh Schedule to the Constitution of India (List II) which included betting and gambling but will be a tax under Entry 60 of List II i.e., as a trading activity.
- A player involved in a game of skill does not forecast victory but plays with the confidence that he will win. He is not betting or gambling on something but is confident in his skills.
- There is an element of 'chance' in each game including a 'game of skill', wherein "skill" may not always prevail. However, where the ‘exercise of skill’ can control the 'chance' element involved such that the better skill would prevail more often than not, such activity would qualify as a ‘game of skill’.
- Applying the law laid down by various Courts3, it was observed that rummy is not a game where the outcome is predicted or forecasted but is a game where success and outcome of the game are substantially and predominantly dependent on the exercise of the player’s skill. Thus, rummy is predominantly a ‘game of skill’ and not a ‘game of chance’.
- Taxpayer is not interested in the outcome of the game played by players on its platform and earns platform fees/ commission (for providing intermediary services), irrespective of who wins the game.
- Playing with or without stakes can never be a criterion to determine whether a game is a ‘game of skill’4.
- Both rummy and poker are ‘games of skill’ as they involve considerable memory, working out percentages, the ability to follow the cards on the table and constant adjustment to the changing possibilities of unseen cards. Though poker may not have been recognised in any previous judgment in India to be a ‘game of skill’, the Law Commission in its 276th Report accepted ‘poker’ to be a ‘game of skill’.
- The terms ‘gambling’, ‘game of chance’ and ‘game of skill’ have developed secondary meanings in judicial parlance as follows:
- ‘Gambling’ or ‘game of chance’ are held to involve ‘chance’ as a predominant element
- ‘Game of skill’ has an exercise of skill which can control the chance.
- Interpretation of ‘betting’ and ‘gambling’
- It is a settled law that when words used in a statute acquire a technical meaning because of their authoritative construction by a superior law, they must be understood in that sense when used in a similar context in subsequent legislations.
- Accordingly, the terms ‘betting’ and ‘gambling’ under Entry 6 of Schedule III to the CGST Act must be given the same interpretation as has been given to them by the courts in the context of Entry 34 of List II of the Seventh Schedule to the Constitution.
- In view of the above, it can be construed that these terms do not and cannot include ‘games of skill’ within their ambit.
Ruling by the Hon’ble High Court
- The difference between ‘games of skill’ and ‘games of chance’ is as follows:
- Game of chance played with stakes is ‘gambling’.
- Game of skill played with or without stakes is not ‘gambling’.
- Game of mixed chance and skill where it is substantially and preponderantly a game of chance (and not of skill) is ‘gambling’.
- Game of mixed chance and skill where it is substantially and preponderantly a game of skill (and not of chance) is not ‘gambling’.
- Thus, games such as rummy, etc., whether played online or physically, with or without stakes will be ‘games of skill’ and the ‘test of predominance’ would apply.
- ‘Lottery, betting and gambling’ as contemplated in Entry 6 of Schedule III to the CGST Act should be construed nomen juris (i.e. in their legal sense instead of general parlance) to conclude that it does not include ‘games of skill’.
- Taxation of ‘games of skill’ is outside the scope of the term ‘supply’ in view of Section 7(2) of the CGST Act read with Schedule III of the CGST Act.
- Rummy (whether played online or physically), being substantially and preponderantly a ‘game of skill’ and not of chance, whether played with or without stakes would not amount to ‘gambling’ and hence, would be covered under Entry 6 of Schedule III to the CGST Act.
- In view of the above, the Impugned SCN is illegal, arbitrary and without jurisdiction or authority of law, and hence, is quashed.
BDO India Comments
The aforesaid ruling provides a relief to the Online Gaming (OG) industry indicating that as long as the games facilitated through the platform are ‘games of skill’, the same would not be leviable to GST on the entire stake money and only the platform fees would be subject to GST. In arriving at the aforesaid conclusion, the Hon’ble High Court reiterated the settled legal principles (laid down by the Hon’ble Supreme Court/ various High Courts) governing the differences between ‘games of chance’ and ‘games of skill’.
It is important to note that while the Hon’ble High Court has set aside the Impugned SCNs, the issue as regards taxability qua online gaming is a subject matter of discussion before the GST Council and is anticipated to be taken up in the upcoming 50th GST Council meeting, likely to be scheduled in June 2023. The online gaming industry would look forward to clarity regarding the taxability of the OG Platforms.
[M/s. Gameskraft Technologies Pvt. Ltd. Vs DGGSTI, [TS-181-HC(KAR)-2023-GST], dated 11 May 2023]
1 Skill Lotto Solutions Pvt. Ltd. Vs. Union of India [2020 (43) GSTL 289 (SC)]
2 State of Bombay Vs. RMD Chamarbaugwala [AIR 1957 SC 699] and RMD Chamarbaugwalla Vs. Union of India [AIR 1957 SC 628]
3 State of Andhra Pradesh Vs. K. Satyanarayana & Ors. [AIR 1968 SC 825], Dr. K. R. Lakshmanan Vs. State of Tamil Nadu [1996 (2) SCC 226], M.J. Sivani and Ors. Vs. State of Karnataka [1995 (6) SCC 289] and All India Gaming Federation Vs. State of Karnataka [2022 SCC OnLine Kar 435 (DB)]
4 Head Digital Works Pvt. Ltd. Vs. State of Kerala [2021 SCC OnLine Ker 3592]