GST on Online Gaming: Supreme Court in Seisin, the Debate Continues

Prelude

The Supreme Court of India recently commenced a marathon hearing on the complex legal nuances contextualising online gaming within the goods and services tax laws (GST) paradigm. The issues involved in the dispute and the likely arguments expected to be projected before the Court were summarised in an earlier post.¹ As expected, the hearing spanning across 3 weeks, witnessed meticulous submissions advanced by prominent counsels addressing vivid yet intertwined issues of constitutional law and fiscal laws which brought to the courtroom various uniquely postulated propositions. Without doubt, formidable contentions have been postulated across both sides of the aisle. While the counsels have sought to persuade the Court to accept the stands they canvassed, besides highlighting the enormity of the issues involved in the dispute, its resolution, however, remains a work in progress. The hearing has remained inconclusive due to paucity of time owing to the ensuing break in the regular working days of the Supreme Court; the hearing is expected to resume in mid-July 2025.² This gives us an opportunity to look back and reflect upon the arguments which have been made so far in order to appreciate the dispute in finer detail.

Appreciating the rival contentions

It must be appreciated that the Revenue is the appellant before the Supreme Court in the lead matter in this batch in view of the fact that the Karnataka High Court concluded in favour of the taxpayers inter alia adjudging that: (a) the activity of online gaming (qua “Rummy”) is to be considered as “games of skill” (as contrasted from “games of chance”) and hence not to be taxed under the umbrella of “betting and gaming”; and, consequently (b) online gaming activity has to be taxed akin to other standard rated services which are taxed at 18% and not demerit rate of 28% applicable inter alia to betting and gambling.³

Contesting these conclusions, the Revenue has laid out multifarious layers of submissions before the Supreme Court, which have been met with equal, if not more formidable, firepower. Having said that, the contours of the arguments are wide-ranging and hence to give them proper perspective, it is expedient to enlist them in broad headings, matching the submissions with the counter-submissions.

Before proceeding further, it is expedient to note an unusual aspect of the hearing. Ordinarily a typical hearing has three rounds: (a) the appellant makes the submissions on the appeal; (b) the counter-arguments are presented by the respondent; and (c) the hearing concludes with a rejoinder by the appellant to rebut the respondent’s submissions. This scheme is not being fully followed in this hearing. This is because there are two sets of challenges before the Supreme Court; the first relates to correctness of the Karnataka High Court decision⁴, in which the Revenue is the appellant; and second relates to challenges to the validity of the 2023 Amendments and valuation provisions (described supra) which have arisen because of writ petitions preferred by online gaming platforms (OGPs) and other affected parties both before the High Courts⁵ and directly before the Supreme Court.⁶ Accepting the Revenue’s request, these petitions have been clubbed together with the Revenue’s appeal against the Karnataka High Court decision⁷. As a consequence to this peculiarity, the Revenue in its opening submissions has only put forth its arguments on its disagreement with the Karnataka High Court decision⁸ whereas the OGPs and other parties have made twin legs of submissions i.e. counter arguments to Revenue’s submissions and their independent submissions to support the challenges in the writ petitions. Owing to this, it will be in its rejoinder that the Revenue will for the first time project its submissions qua the challenge to the validity of the provisions set out in the petitions. Thus, at this stage the true canvass of the Revenue’s argument is yet to be revealed, besides some arguments yet to be addressed for certain respondents. Subject to this caveat, the broad range of the rival submissions made so far have been summarised below for making the readers abreast of the journey of the dispute travelled so far.

(A) Limitations of incumbent provisions qua Revenue’s stand prior to 2023 Amendment: Rule 31-A applies only to betting and gambling in a horse racing club and not qua online gaming?

The dispute needs to be understood in two periods; before and after 1-10-2023. This classification arises on account of the fact that in 2023 multiple substantive amendments were carried out to the GST and the Valuation Rules (2023 Amendment). The GST demands in dispute before the Supreme Court pertain to the period prior to the 2023 Amendment and whereas for the subsequent period writ petitions challenging the validity of these provisions have been filed.

Traditionally, the OGPs have been paying GST considering its activity as a service, taxable at 18% GST. This characterisation for the pre-2023 Amendment period has been disputed by the GST authorities, who choose to characterise it as a betting and gambling activity and hence taxable at 28% GST; Revenue qualifies online gaming activity as supply of goods in the nature of actionable claims in the form of chance to win in betting and gambling. The broad stand of the Revenue is that the 2023 Amendment is a surplusage which amplifies and clarifies the original intent of the law and hence the OGPs are nonetheless liable for GST at the higher rate even for the period to the 2023 Amendment. The correctness of this stand of the Revenue is one of the core issues in the ongoing dispute.

The key premise of the OGPs is that the Revenue’s foregoing stand is not supported by the statutory scheme. In particular, the OGP’s have highlighted that prior to the 2023 Amendment it was Rule 31-A of the Central goods and Services Tax (Amendment) Rules, 2018 (CGST Rules) (prescribing the “value of supply in case of lottery, betting, gambling and horse racing”) which constituted the special valuation mechanism to tax betting and gambling activity but such provision does not apply to online games. It is argued by OGPs that the remit of this provision is limited to “supply of actionable claim in the form of chance to win in betting, gambling or horse racing in a race club” and thus betting and gambling in a race club is the exclusive situation in which the Revenue can levy GST on “100% of the face value of the bet or the amount paid” and not vis-à-vis online gaming.⁹

The OGPs seek to substantiate their stand basis the following construct of the statutory provision:

(i) The expression “betting, gambling or horse racing in a race club” can only be an activity which takes place in a race club. Given the language of the provision, it is argued that the expression “in a race club” qualifies all the three mentioned activities, viz. betting, gambling and horse racing and hence the provision does not apply to online gaming activity.

(ii) The expression betting, gambling or horse racing has to be read conjunctively. The use of the word “and” in Rule 31-A is highlighted to rely upon the time-tested meaning of the expression “and” as a conjoining variable,¹⁰ which implies that Rule 31-A only embraces betting and gambling in a race club.

(iii) The fact that Rule 31-A employs the expression “totalisator” further indicates the legislative intent that Rule 31-A is limited to race clubs; because this expression “totalisator” is a concept peculiar only to race clubs where all the bets are pooled into a device (i.e. the totalisator) and thereafter distributed to the winners in accordance with their bets and result of the race.

(iv) The 2023 Amendment introduced new special valuation provisions (i.e. Rule 31-B¹¹ for online gaming, and Rule 31-C¹² for casinos) without amending the existing Rule 31-A. Thus, post-2023 Amendment both sets of valuation rules exist simultaneously. This is a clear manifestation of the legislative scheme that Rule 31-A is not relevant qua online gaming and, is limited in scope to horse racing alone.

(v) The OGPs further rely upon the Minutes of the GST Council preceding the introduction of Rule 31-A to substantiate their interpretation.

In brief, the OGPs contend that the foundational tenet is missing in Revenue’s stand that concept of betting and gambling was applicable to online gaming even prior to the 2023 Amendment. In the upcoming resumption of hearing, the Court is likely to witness the Revenue’s rejoinder to these arguments of OGPs which is based upon deconstruction of the statutory scheme.

(B) Are there any “actionable claim” in a typical online gaming activity and can online gaming platforms be said to be “supplying” such “actionable claim”?

The OGPs further argue that in an online gaming scenario neither an actionable claim exists nor is any such alleged claim supplied; hence the foundational tenet of the Revenue’s argument is misplaced because the very threshold of invocation of Rule 31-A is not met.

Exemplifying the peculiarity of the statutory scheme, the OGPs have expressed that a legal conundrum has arisen as regards the person who should be treated as the “supplier” of the alleged betting and gambling activities in online gaming scenario. The issue arises because the alleged gambling activity, if any, is between those online participants who stake their monetary bets. Thus, the supplier in betting and gambling scenario can only be the player which has placed the winning or the losing bet. However, the tax authorities have proceeded to demand the GST liability from the OGP on the alleged betting and gambling activity from the online gaming platforms as if they are the suppliers of the betting and gambling activity. This stand of the tax authorities has been consistently challenged by the OGP and, perhaps recognising merit in the challenge, the GST laws were comprehensively amended by the 2023 Amendment which inter alia introduced a deeming fiction treating OGP as “supplier” of betting and gambling embedded in the online gaming for levy of GST thereon.¹³

It is argued by the OGPs that they are at best intermediaries¹⁴ facilitating the interaction between various players and thus the liability on account of betting and gambling cannot fall upon the OGPs. The fact that a deeming fiction was specifically introduced in the GST law by the 2023 Amendment is canvassed by the OGPs to highlight that but for the amendment the OGPs cannot be considered as suppliers of betting and gambling¹⁵ and thus the demand of GST from them prior to the enforcement of the 2023 Amendment is without the authority of law.¹⁶

In addition to the aforesaid argument, which is based on the scheme of the GST laws, the OGPs have also sought to canvass the irony in the Revenue’s stand insofar as the OGPs have urged that there is no “actionable claim” to begin with, must less transfer of any actionable claim which can trigger a GST liability on account of betting and gambling supply. This claim of the OGPs is based upon a technical construction of the GST laws, based on the following variables:

(a) The claim of Revenue to tax OGPs is premised on the argument that the OGPs are supplier of “specified actionable claims”.¹⁷

(b) The expression “specified actionable claims” is defined in the GST laws to mean “actionable claim involved in or by way of: (i) betting; (ii) casino; (iii) gambling; (iv) horse racing; (v) lottery; or (vi) online money gaming”.¹⁸ In other words, “specified actionable claims” is a particular species of “actionable claim” which satisfies one or more of the attributes enlisted in (i) to (vi). Put differently, question of betting and gambling in GST context arises upon supply of an actionable claim of a specified species. Thus, the foundational premise of betting and gambling supply in GST paradigm is premised upon the existence of actionable claim and its supply. Thus, it is necessary to crystallise the meaning and scope of actionable claim.

(c) The expression “actionable claim” is defined in the GST laws as carrying “the same meaning as assigned to it in Section 3¹⁹ of the Transfer of Property Act, 1882²⁰”.²¹ In turn, the Transfer of Property Act, 1882 defines actionable claim to mean “a claim to any debt” which satisfies certain statutorily specified attributes.²²

(d) It is argued by the OGPs that at no stage of online gaming activity does any actionable claim exist and thus the premise of the Revenue to demand GST by assuming there is supply of actionable claim by OGP is unfounded. This argument of the OGP is based upon the descriptive explanation of each of the stages of how the online gaming industry operates.

(e) As contended by one of the lead counsels on behalf of the online gaming platforms, there are five stages of online gaming activity, neither of which results into supply of actionable claim. These stages are as under:

(i) Online gamer opens an account — At this stage no actionable claim arises.

(ii) Online gamer deposits money into the account — This is a pure banking transaction, hence even at this stage no actionable claim arises.

(iii) Online gamer contributes to an online game — The contribution fee equivalent is blocked from the gamer’s account; there is no transfer at this stage, accordingly no actionable claim arises at this stage.

(iv) Depending upon the outcome of the game, there can be two eventualities: (i) the online gamer loses; or (ii) the online gamer wins. In the case of loss, the blocked contribution fee is transferred out to the winner. In the case of win, the winning amount is transferred in the online gamers account. At this stage, the “debt” held by the winner is discharged (by payment of the prize) resulting into the extinguishment of such debt. Thus, even at this stage there is no “transfer” of no actionable claim. Hence, no question of supply of actionable claim arises at all.

(v) Online gamer withdraws money from the account — This is also a pure banking transaction, there is no transfer of no actionable claim.

Basis the above, according to the OGP, the transfer of money from losing player to winning player does not result into transfer of any actionable claim because there is no transfer of any “claim to any debt”. According to the OGP, the transfer of actionable claim may ensue only in a situation where the winning player assigns his/her right to prize winning to a third party.²³ However, such an eventuality is not allowed on the OGP. Thus, it is argued, the entire premise of the Revenue to treat OGP as engaged in transfer of actionable claim is fallacious and lacks factual foundations.

Furthermore, the OGP have argued that in view of the escrow account qua the online gaming participants and banking law framework regulating their activity, there cannot be a situation wherein the winning player is not paid after winning the game. Accordingly, the winner player does not hold or sue for holding an actionable claim. Thus, for this reason as well, there exists no actionable claim, must less a supply thereof, as projected by the OGP.

To summarise, it is argued on behalf of the OGP that: (a) the entire case of the Revenue is based on an assumption that the OGP are supplying actionable claims; (b) this assumption itself is unfounded because there are no actionable claims in online gaming qua players and OGP; and (c) even if there exist actionable claims, the GST demand is nonetheless unfounded because there is no supply of actionable claims by the OGP. Accordingly, the OGP contend that the consequential tax demands should be annulled.

Though it is premature (and rather speculative) to assess the outcome of the dispute given that the arguments are still to be concluded, yet from a qualitative perspective these reasons appear quite formidable, additionally, because the law to this regard is well-settled that: (a) in fiscal law paradigm “one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used”;²⁴ and (b) the “principles governing the interpretation of the taxation statutes” mandate that a “taxing statute must be read as it is with no additions and no subtractions on the grounds of legislative intendment or otherwise” wherein “the principle of strict interpretation should be applied” and “a taxing provision cannot be interpreted on any presumption or assumption”.²⁵ Thus, either way, the decision of the Supreme Court is bound to provide guardrails on the interpretative standards qua fiscal law, particularly GST legislations.

(C) The “goods” versus “service” conundrum: Changing character of online gaming

Raising the conceptual incongruity in the Revenue’s argument further, it is argued by the OGP that there is an inherent dichotomy in the Revenue’s stand insofar as it is unable to establish with fortitude the exact status of actionable claims — whether they are “goods” or “services”. This aspect attains importance because the GST laws treat goods versus services distinctively²⁶ and with the statutory provisions assigning distinct rules, for example, qua time of supply;²⁷ place of supply,²⁸ etc. for supply of goods vis-à-vis supply of services. In fact, there are special tie-breaker rules in the GST laws to ensure mutual exclusivity between the scope of goods and services inter se.²⁹ Thus, it is critical to first establish whether online gaming activity (claimed by the Revenue to be covered within subset of “actionable claims” which falls within the definition of “goods” under GST) is “goods” or “services”.

The argument of the OGPs is that since the inception of the GST regime, “actionable claim” have been statutorily included within the definition of “goods”.³⁰ However, simultaneously, “online gaming” was statutorily basketed under services from the very beginning.³¹ Certain structural changes have been occasioned by the 2023 Amendment to the GST laws.³² In terms thereof a new species of “online money gaming”³³ was carved out from the scope of “online gaming”³⁴ and brought within the umbrella of actionable claim under a new species of “specified actionable claim”.³⁵ To summarise, it is only by way of the 2023 Amendment to the GST laws that for the first time, the character of online gaming (with monetary bets) has been statutorily changed from services to goods.³⁶

The OGPs claim to have consistently paid taxes on all their activities considering them as services. It is also highlighted that this position of law (that prior to the 2023 Amendment online gaming was considered services) under the GST regime is in fact a continuation of the pre-GST scenario (i.e. service tax regime) wherein online gaming was taxed as service³⁷ notwithstanding the fact that service tax law excluded actionable claims³⁸ and betting and gambling activity from its purview.³⁹ It is, thus, argued; if the Revenue is correct that online gaming (even prior to the 2023 Amendment) is not a service but goods, then the actions of Revenue (collecting service tax under the pre-GST regime and GST by treating online gaming as service) is suspect and illegal.

According to the OGPs, the 2023 Amendment-led changes in statutory scheme have a formidable consequence inasmuch as they statutorily reposition certain online games as goods (hitherto being services) and thus they are substantive amendments to the GST laws. As a sequitur, at best, the 2023 Amendment can have prospective effect and it is not available to the Revenue to defend its position for the past.⁴⁰ For this reason, the OGP argue that prior to the 2023 Amendment under the GST laws all forms of online gaming (whether with or without monetary stakes) are services and they cannot be taxed as betting and gambling activity (which will entail classifying them as “goods”). For this reason, the OGPs commend the acceptance of the Karnataka High Court decision⁴¹ to the Supreme Court.

(D) Difference between “online gaming” and “online money gaming”: The monetary stakes test

The touchstone of the Revenue’s submission before the Supreme Court is that online games are “services” so long as they are played without monetary stakes; however, they (curiously) morph into “goods” (i.e. actionable claims in the form of chance to winning in betting and gambling) when prize winnings are involved.⁴² As a sequitur, according to the Revenue, those online games which involves prize winnings have to be differentiated and taxed as betting and gambling under the GST laws. This argument is projected by the Revenue as based upon an intermix of judicial observations⁴³ and definitions of “online gaming”⁴⁴ and “online money gaming”⁴⁵ which have been inserted into the GST laws by the 2023 Amendment.

The Revenue’s argument implies that “online gaming” is a genus whereas “online money gaming” is the specie; and, more critically, while “online gaming” is considered services for GST purposes, “online money gaming” is considered as “actionable claims” and hence “goods” under the GST laws. The argument of the Revenue also seeks to draw upon the earlier decisions of the Supreme Court which have expounded upon the GST regime and the extent of legislative powers thereunder.⁴⁶ The Revenue has also placed extensive reliance upon a decision of the Supreme Court which upholds levy of GST on sale of lottery tickets⁴⁷ notwithstanding the fact that prior to the introduction of GST the sale of lottery tickets was judicially declared as outside the levy of both sales tax⁴⁸ and service tax.⁴⁹

The counter-arguments of the OGP manifold. It is ironic that the OGP also rely upon the same decisions which have been put forth by the Revenue; the OGPs claim that the Revenue has failed to appreciate these decisions in their correct perspective. The OGP’s key arguments can be summarised as under:

(i) There exists a clear bright line distinction between “games of skill” as contrasted from “games of chance” — only the latter are covered within the scope of betting and gambling. To substantiate their perspective, heavy reliance is placed by OGPs upon settled jurisprudential reflections — spanning over six decades — to highlight that the expressions “betting and gambling”, “games of skill”, “games of chance” have acquired a distinct meaning both in their constitutional and legal sense.⁵⁰ In particular, the following legal position declared by an earlier Constitution Bench decision of the Supreme Court has been exemplified by the OGP as annulling the very foundation of the Revenue’s argument:⁵¹

23. Applying these principles to the present Act, it will not be questioned that competitions in which success depends to a substantial extent on skill and competitions in which it does not so depend, form two distinct and separate categories. The difference between the two classes of competitions is as clear-cut as that between commercial and wagering contracts. On the facts, there might be difficulty in deciding whether a given competition falls within one category or not; but when its true character is determined, it must fall either under the one or the other. The distinction between the two classes of competitions has long been recognised in the legislative practice of both the United Kingdom and this country, and the courts have, time and again, pointed out the characteristic features which differentiate them….

(ii) It is exhibited by the OGPs that the legal standard that it is only “games of chance” which are considered as within the purview of betting and gambling activity has also been accepted by the legislature insofar as various State legislations regulating betting and gambling activity clearly exclude games of skill.⁵² The Government of India’s online gaming regulations similarly maintain the distinction between these distinct species of games,⁵³ which is also pressed by the OGPs to demonstrate that even the regulatory regime confirms the OGPs’ stance.

(iii) The OGP’s further submit that the earlier decisions of the Supreme Court are categorical that “a competition which substantially depends on skill is not gambling” and only those games are covered within scope of betting and gambling activity which involve the “the act or practice of gambling on a game of chance”; for that matter even “wagering or betting on horse racing” is not gambling activity and instead a game of skill and thus, even horse-racing operators are not engaged in gambling or promotion of gambling activities.⁵⁴

(iv) It is further highlighted that the distinction between games of skills and games of chance is not just a judicial innovation and is instead linked to the constitutional scheme. This is because while the right to trade and profession are protected fundamental rights,⁵⁵ betting and gambling activity operators are denuded of such rights because their activities qualify as res extra commercium and hence are outside the constitutional protection.⁵⁶ For this reason, it is additionally argued by the OGPs, that the “games of chance” description of betting and gambling activity must receive an elocution consistent with the constitutional scheme.⁵⁷

For inter alia these reasons, the OGPs are in unison in their response to oppose the Revenue’s submission which seeks to artificially recharacterise online games of skill as betting and gambling activity only because of monetary stakes being involved. In fact, it is stressed by the OGPs that the scheme of service classification under GST framework issued by the Government itself, differentiates between online games and online betting and gambling activity.⁵⁸ It is, thus, unequivocally highlighted by the OGPs that the submission of the Revenue fails to give effect to the settled legal test for distinction between a game of skill versus betting and gambling activity; put differently, games involving a substantial degree of skill or those games which are predominantly skill-based are always outside the ambit of betting and gambling and thus cannot be taxed as betting and gambling.

(E) Scope of “betting and gambling”: Do monetary stakes translate online “games of skill” into “game of chance” or “betting and gambling”?

Another, though related, argument of the Revenue is directed towards challenging the findings in the Karnataka High Court decision⁵⁹ that online games of skill played with monetary stakes is not a subset of betting and gambling activity. According to the Revenue, the players engaged in such money-staked online games are driven by the desire to earn money and prize winnings which inter alia involves betting on their respective stances. It is further argued by the Revenue that the OGPs further fuel the gambling desires by extending bonuses/discounts to the players (besides the prize winnings) in lieu of commission charged by these OGPs, which reflects that there is also promotion of betting and gambling activities by the OGP. In other words, it is the stand of the Revenue that the OGP induce monetary bets amongst the players and are, thus, promoting betting and gambling thereby needing them to be viewed distinctively for tax purposes vis-à-vis other service providers.

The contra perspective offered by the OGPs is unequivocally precise; it rests on the premise that the distinction proposed by the Revenue is not just new and artificial but also that the distinction is illusory. This aspect is demonstrated inter alia in the following submissions for the OGPs:

(i) It is highlighted that the distinction proposed by the Revenue flows against the settled jurisprudential elocution — of over six decades — which settles the dividing lines between games of skill and games of chance. Speaking technically, it is sought to be impressed upon by the OGPs before the Supreme Court that the expressions “games of skill” and “games of chance” as well as “betting and gambling” meet the test of nomen juris.⁶⁰ Thus, it is argued that the Revenue has a heavy burden to demonstrate, which has not been discharged, which fails the Revenue’s contention to the effect that the past standards must be absolved and a new set of distinguishing criteria must be adopted qua games of skill played with monetary stakes versus games of chance.

(ii) It has been emphasised that (contrary to the Revenue’s argument) the distinction between games of skill and games of chance is not pedestaled upon the fact whether the game involves monetary stakes on winnings and instead the distinguishing criteria is, and has always been, the extent and nature of skills involved. Thus, while both games of skill and games of chance have monetary stakes, yet they are distinct. For example, a game of chess can also involve monetary bets to be earned by the winning player and yet it remains a game of skill in view of extensive skills involved in the game. On the same parity, a game of chess played online with extensive prize winnings for the ultimate winners continues to remain a game of skill and is not a betting or gambling activity unlike the contours of betting and gambling sought to be ascribed by the Revenue.

(iii) The OGPs contend that the past precedents are a guide that the distinction has been made between games of skill and games of chance despite the fact that monetary stakes are involved in both of them, as in the case of Rummy, which has been held to be a game of skill notwithstanding the clear factum of bets having been placed thereupon.⁶¹ As a logical corollary, the OGPs further contend that the characteristics attendant to physical games should attach even to online games and thus, online rummy, notwithstanding the monetary stakes, would be ascribed as game of skill and not gambling as sought to be projected by the Revenue.

For these and other reasons, the OGPs are strenuously contesting the monetary-stake distinction proposed by the Revenue to differentiate between a gaming and gambling activity.

(F) The 2023 Amendment is clarificatory? Is it a mere “surplusage”?

A specific argument appears to have been made by the Revenue that the 2023 Amendment to the GST laws, even though it expressly came into effect from 1-10-2023, would nonetheless apply from the inception of the GST regime (from 1-7-2017). The Revenue argues that the 2023 Amendment is only a “surplusage”, thus clarificatory, and does not create a fresh levy. This assertion is formidably contested by the OGPs for multiple reasons, in addition to the aspects examined in the earlier post,⁶² which can be summarised as under:

(i) The 2023 Amendment specifically provides an effective date (i.e. 1-10-2023). Hence, an argument or interpretation which seeks to give effect to it prior to this declared date amounts to ignoring the explicit date of operation of the law. Had the lawmakers intended to give retrospective effect to the 2023 Amendment, there was no limitation or cause for inhibition which prevented them from doing so.⁶³ In fact, there are many instances where the GST laws have been amended retrospectively.⁶⁴ Thus, the OGPs contend that the Revenue’s argument of applying the amended provision for the period prior runs afoul of legislative intent to make the amendment prospective.

(ii) The law is now well-settled that, in view of jurisprudential doctrines and need to protect the citizens from the scourge of retrospective taxation, that in absence of an explicit provision, tax laws shall not be assigned implied retrospectivity.⁶⁵

(iii) The consistent trend of the Supreme Court is to reject retrospective application of tax law provisions, even if they are clarificatory, if they amount to adding to the tax incidence of the citizens.⁶⁶

It is thus argued by the OGPs that the 2023 Amendment (subject to the challenge to its validity) can at best have a prospective application and in any case the 2023 Amendment cannot serve as the basis to determine GST liability for the past transactions. This contention of the Revenue is interesting, yet prima facie, the OGPs may be justified in countering the submissions of the Revenue highlighting that there is sufficient judicial authority against the surplusage principle.⁶⁷ Thus, it shall be intriguing to appreciate the Supreme Court’s determination of the issue.

(G) GST law cannot tax betting and gambling? Testing the constitutional limits of GST

In what promises to be a path defining moment for GST — delineating the scope of “supply” — a very broad argument and a fundamental objection has been raised by certain counsels for OGP who have challenged the levy of GST on betting and gambling (assuming for the sake of argument that online games of skill played with monetary stakes qualify as “betting and gambling”) as constitutionally illegal and ultra vires the Constitution of India⁶⁸. Exemplifying the scope of “betting and gambling” — deriving from its concept and basis earlier decisions of the Supreme Court — the counsels for OGPs have contended that a tax on betting and gambling can only be a tax on an “activity” and does not extend to taxing goods or articles.⁶⁹ This niche and limiting aspect of tax on betting and gambling is contradistinguished from GST which is constitutionally limited to a tax on supply of goods or services.⁷⁰ It is, thus, an argument of the OGP that there is no legislative competence to levy GST on betting and gambling activity. In fact, this argument seeks to draw upon the inbuilt limitations of GST as a fiscal subject , but for a constitutional amendment expanding its scope, cannot be applied at all to tax any goods or services by treating them as a betting and gambling activity. If accepted by the Supreme Court, this argument will redefine the scope of GST — currently understood in omnibus terms — to imply that GST cannot be levied on any gaming activity (whether games of skill or chance, whether online or offline) as a “betting and gambling” activity either for the pre or the post-2023 Amendment scenario. In other words, this would mean that GST authorities cannot tax online games with money stakes as betting and gambling.

(H) Machinery fails?

The Indian judiciary has evolved and consistently followed a principle that within a fiscal statute the charging provision and the machinery for collection of tax are so intrinsically intertwined that in the absence of one the other is rendered moot; more particularly, in the absence of a machinery for collection, the charge of the tax itself fails.⁷¹ It is argued by the OGPs that even assuming that the GST laws always sought to tax both online species of online games i.e. games of skill (played with monetary stakes) and games of chance, nonetheless the levy is defeated by the lack of any machinery provision to tax games of skill played with monetary stakes prior to October 2023.

This argument of OGPs is based on the fact that a machinery provision was introduced to ascertain the value of supply in case of online gaming including online money gaming only from October 2023;⁷² prior to this provision, the machinery in the GST law was limited to the value of supply in case of lottery, betting, gambling and horse racing which prescribes that “the value of supply of actionable claim in the form of chance to win in betting, gambling or horse racing ….”.⁷³ On this basis it is argued by OGPs that the machinery provision only applies to games of chance; as a natural corollary, therefore, it is argued, no GST levied on games of skill since there is no machinery provision prior to October 2023 which taxes games of skill.⁷⁴

The argument is supplemented by the highlighting the administrative scheme under the GST laws which for classification of goods adopts the internationally recognised “harmonised system” and thus, a Code (colloquially referred as “HSN Code”) is required to classify a supply of goods.⁷⁵ It is the argument of the OGPs that the HSN Code for specified actionable claim⁷⁶ itself was introduced alongside the 2023 Amendment⁷⁷ and hence, there is an additional reason why there is no machinery to tax for the period prior to the amendment.

In effect, the OGPs are seeking to dehyphenate the period prior to 2023 Amendment to contend that at the bare minimum the Revenue’s argument has no legs to demand GST on online gaming activity by treating it as a facet of betting and gambling for such period.

(I) Other submissions

There are a host of other submissions made by OGPs, particularly related to valuation of the supplies, which have been summarised in the earlier article and hence are not restated for sake of brevity.⁷⁸ In addition, a challenge to the validity of the valuation provision has been made by the OGPs. Certain key arguments of the OGPs in support of this challenge are summarised below:

(i) It is argued that because the measure of tax is an essential ingredient of the fiscal law which must be set out in the statutory provisions itself,⁷⁹ the scheme relating to valuation of GST on betting and gambling suffers from vice of excessive delegation because of failure of the legislature to legislate the valuation provision.⁸⁰

(ii) The valuation provision levies tax even on the amount which is not the “consideration” (or for that matter even the “income”) of the OGPs. Thus, the valuation provisions go beyond the statutory framework of the GST laws under which GST is compounded on the value of “consideration” received for the supply,⁸¹ and are thus, ultra vires.⁸²

(iii) In any case, the quantum of bets placed by the players cannot be attributed to the OGPs so as to be taxed in their hands as these amounts are held in fiduciary capacity.⁸³

Besides the contentions relating to online gaming industry, the hearing before the Supreme Court also encompasses issues relating to levy of GST on casinos and horse racing. The contentions in these cases relate mostly to the manner of computation of GST, in view of the fact that by way of subsequent amendments specific valuation provisions have been inserted in the GST laws,⁸⁴ which have fuelled questions relating to: (i) applicability of these provisions; (ii) their retrospective application; and (iii) the peculiar fact patterns of the operators which follow distinctive trade practices, such as commissions, entry fees, betting stakes, etc. The Revenue has sought to defend the valuation provisions primarily by placing reliance upon the decisions which dehyphenate the “levy of tax” and “measure of tax” to highlight that there need not be a direct correlation between the two.⁸⁵ In turn, these operators seek to exhibit that the Valuation Rules are manifestly arbitrary and thus unconstitutional.

What next

One would hope that the hearing, which is scheduled to recommence imminently, after a brief recap takes the dispute to a logical conclusion soon. The focus of attention is likely to be upon the stance of the Revenue which is expected to address (the issues flagged by the OGPs and their submissions in) the rejoinder arguments. At the cost of repetition, the complexity of the issues, the quantum involved, the limits of constitutional and legal manoeuvring available to lawmakers in the GST regime, extent of retrospectivity in fiscal legislations, etc. which are a play in this case, are inherently substantive issues, which would hopefully result into a path-breaking decision. Having said that, none of these issues are capable of a straitjacket answer and will require extensive analytical dissection of the intertwined concepts which promise an enriching judicial elocution.

At this prima facie stage, the tide seems to be tilted against the Revenue, given that: (a) the Karnataka High Court has decided in favour of the OGPs and hence there is already a determination against the Revenue; and (b) the Supreme Court has stayed the proceedings in all matters pending before the tax authorities. The OGPs, being emboldened by the presence of multiple experienced counsels and deeply researched propositions have clearly raised the bar high for the Revenue to address in the rejoinder submissions. At any rate, the decision in this dispute is likely to significantly reshape the contours of the GST laws.