Interim Ban on Online Gaming Taxation

  • The Supreme Court has ordered an interim stay on the Karnataka High Court’s finding that online games like rummy should not be taxed as ‘betting’ or ‘gambling’ under the Central Goods and Services (GST) Act of 2017.
  • This decision comes after the Union Cabinet approved raising the GST rate on online games from 18% to 28%.
  • For tax purposes, the interim stay connects online skill games played for stakes with online gambling.

Why are we debating this?

  • The Karnataka High Court overturned a show-cause notice issued by the GST department to a corporation for dues totaling Rs 21,000 crore.
  • The Karnataka High Court determined that online rummy is a skill game that should not be taxed as gambling.

Online Games That Are Exhausting

  • The Karnataka High Court ruled that online rummy is primarily a game of skill rather than chance and should not be deemed gambling. This decision was predicated on the Goods and Services Act, which taxes skill games at 19% and chance games at 28%.
  • Notice from the GST Department: The GST department issued a notice to GamesKraft under Section 74(5) of the CGST Act, requesting a large sum, plus interest and penalty, by September 16, 2022. This notice was challenged at the Karnataka High Court, resulting in an interim stay.
  • Following the temporary stay, the GST department issued a show-cause notice to GamesKraft and its founders, CEOs, and CFOs under Section 74(1) of the CGST Act. This notice demanded an explanation for the tax evasion and fines.
  • Distinction between Skill and Chance: Citing pertinent legal precedents, the Karnataka High Court emphasised the distinction between games of skill and games of chance. It was observed that it remained to be seen if a game of skill could still be characterised as gambling.

Important takeaways

  • The Supreme Court’s temporary injunction taxes online skill games with stakes comparable to online gambling.
  • The GST department has contested the Karnataka High Court’s finding that online rummy is a game of skill rather than gambling.
  • Legal disparities between skill and chance games continue to be a source of contention and legal scrutiny in India’s taxation system.

The Future of Online Gaming

  • State List Subject: Under Entry No. 34 of List II (State List) of the Seventh Schedule, state lawmakers have the only authority to enact legislation governing betting and gambling.
  • Legal distinction: Most Indian states regulate gaming based on a legal difference between “games of skill” and “games of chance.”
  • The major element is classified as follows: As a result, a ‘dominant element’ test is used to evaluate whether chance or ability is the more important factor in determining the outcome of the game.
  • Associated economic activity: Betting money or property on the outcome of a ‘game of chance’ is illegal and punishable by law.
  • ‘Game of Skill’ debate: Betting on the outcome of a ‘game of skill’ is not necessarily unlawful and may be permitted. It is worth noting that the Supreme Court acknowledged that no game is fully a “game of skill,” and that practically all games contain an element of chance.

@the end

  • This case demonstrates the importance of taking a sophisticated approach when developing tax regulations that adapt to the changing world of online entertainment and gaming.
  • More legal action will very certainly shed more light on the classification of such games and their tax implications.
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