Gameskraft and the GST Dispute: Skill vs. Chance in Online Gaming

The online gaming industry in India has emerged as a vibrant and rapidly growing sector, driven by young population and technological advancements. However, this industry faces significant challenges due to a contentious tax dispute under the Goods and Services Tax (GST) regime. The core issue revolves around whether online gaming activities, particularly games like rummy, constitute a “game of skill” or a “game of chance” and how they should be classified and taxed under the GST laws. This debate has led to a massive tax demand of ₹1.12 lakh crore against online gaming companies, with the Supreme Court poised to deliver the Director General of Goods and Service Tax Intelligence v Gameskraft Technologies^[1] judgement that could shape the industry’s future. This blog delves into the nuances of this ongoing dispute by exploring the judicial precedents, statutory amendments, and broader implications for India’s digital economy.

Gameskraft Technologies Pvt. Ltd. (GTPL), an online intermediary company incorporated in June 2017, operates technology platforms that allow users to play skill-based games, predominantly rummy, against each other. With over 10 lakh users across India, GTPL is headquartered in Bengaluru and is registered under the CGST Act and Karnataka Goods and Services Tax Act (KGST Act). The company claims to be a compliant taxpayer, having paid approximately ₹1,600 crores in taxes under GST and Income Tax laws up to June 2022.

The dispute arose in Gameskraft Technologies v DGGST^[2] when the DGGI issued a Show Cause Notice (SCN) dated September 23, 2022, alleging that GTPL was involved in betting and gambling by supplying actionable claims, misclassifying their services, and evading GST. The SCN demanded a staggering ₹2,09,89,31,31,501, along with interest and penalties, prompting GTPL, its Chief Financial Officer, Chief Executive Officers, and founders to file writ petitions under Articles 226 and 227 of the Constitution of India to quash the SCN and related actions, including provisional attachment orders on their bank accounts.

MAIN ARGUMENTS BY PETITIONERS

1. Rummy as a Game of Skill: The petitioners asserted that over 96% of the games on GTPL’s platform are rummy, which has been consistently recognized by the Supreme Court and various High Courts as a game of skill, not chance. They relied on landmark judgments such as State of Andhra Pradesh v. K. Satyanarayana^[3] and K.R. Lakshmanan v. State of Tamil Nadu ^[4], which establish that rummy’s outcome depends predominantly on skill, involving memory, strategy, and decision-making. They argued that this legal position remains unchanged whether rummy is played offline or online.
2. Nature of GTPL’s Services: GTPL contended that it merely facilitates skill-based games as an online intermediary, charging a platform fee (e.g., ₹40 per game in a ₹400 buy-in scenario, where ₹360 is awarded to the winner). The petitioners emphasized that the buy-in amounts are held in trust for players and are not GTPL’s revenue. They argued that taxing the entire buy-in amount (over ₹70,000 crores) as revenue was a malicious mischaracterization, as GTPL only retains the platform fee, on which it duly pays GST.
3. Constitutional Protection: The petitioners argued that their business of facilitating skill-based games is a legitimate activity protected under Article 19(1)(g) of the Constitution, which guarantees the right to practice any profession, trade, or business. They cited cases like RMD Chamarbaugwala v. Union of India^[5] to assert that games of skill, even when played with stakes, do not constitute gambling and are constitutionally protected.
4. Misapplication of GST Laws: The petitioners contended that the SCN wrongly classified their services as supplying actionable claims (taxable as goods) instead of services under SAC 998439. They argued that actionable claims, as per Entry 6 of Schedule III of the CGST Act, are excluded from GST except for lottery, betting, and gambling. Since rummy is a game of skill, it does not fall under these exceptions, and GTPL’s platform fees are appropriately taxed as services.
5. Procedural Irregularities and Malice: The petitioners alleged that the SCN was issued with malice, especially since it followed interim orders in earlier writ petitions (W.P. No. 22010/2021 and W.P. No. 18304/2022) staying coercive actions. They argued that the respondents cherry-picked stray sentences from judgments to build a baseless case and ignored the stay on the Intimation Notice dated September 8, 2022, violating principles of natural justice (audi alteram partem) and reasonableness (Wednesbury test).

MAIN ARGUMENTS BY RESPONDENTS

1. Premature Challenge: The respondents argued that the writ petitions challenging the SCN were premature, as it is merely a notice requiring GTPL to respond, and the matter should proceed through the statutory adjudication process.
2. Rummy as a Game of Chance: The respondents contended that rummy, as played on GTPL’s platform, is a game of chance, not skill. They argued that the platform’s design, where players are matched based on stakes rather than skill levels, eliminates the skill-based selection of opponents, making the outcome dependent on chance. They relied on State of Andhra Pradesh v. K. Satyanarayana asserts that rummy with stakes constitutes betting and gambling.
3. Profit from Stakes: The respondents alleged that GTPL’s 10% commission (termed as a platform fee) is directly tied to the stakes placed, indicating that the company profits from betting activities. They argued that this commission structure aligns with the Supreme Court’s observation in Satyanarayana that profiting from stakes amounts to gambling.
4. GST Applicability: The respondents claimed that GTPL’s activities involve supplying actionable claims, taxable as goods under the CGST Act, rather than services. They argued that the entire buy-in amount constitutes the taxable value, as GTPL facilitates betting transactions.
5. Distinction Between Online and Offline Games: Citing M.J. Sivani v. State of Karnataka^[6], the respondents argued that online games, due to their potential for manipulation and lack of transparency in player skill levels, differ from physical games and may be classified as games of chance.

ANALYSIS OF COURT

1. Distinction Between Games of Skill and Games of Chance

The court reaffirmed the long-standing judicial distinction between games of skill and games of chance, applying the predominance test established in RMD Chamarbaugwala I & II ^[7]and K.R. Lakshmanan. It held that rummy, whether played online or offline, with or without stakes, is substantially and preponderantly a game of skill, as it requires memory, strategy, and skill in holding and discarding cards. The court rejected the respondents’ contention that rummy on GTPL’s platform is a game of chance, noting that the platform’s matching of players based on stakes does not negate the skill involved in gameplay.

2. Constitutional Protection of Games of Skill

The court emphasized that games of skill are protected under Article 19(1)(g) as legitimate business activities, as established in RMD Chamarbaugwala II and All India Gaming Federation. It held that GTPL’s business of facilitating skill-based games is a constitutionally protected activity, and the SCN’s attempt to classify it as betting and gambling was misconceived.

3. GST Applicability and Actionable Claims

The court clarified that Entry 6 of Schedule III of the CGST Act excludes actionable claims from the definition of supply, except for lottery, betting, and gambling. Since rummy and similar games on GTPL’s platform are games of skill, they do not fall under these exceptions. The court held that GTPL’s platform fees are correctly taxed as services under SAC 998439, and the respondents’ attempt to tax the entire buy-in amount as actionable claims was legally untenable.

4. Nomen Juris Principle

Applying the principle of nomen juris (legal terminology with established judicial meaning), the court held that the terms “betting” and “gambling” in Entry 6 of Schedule III of the CGST Act must be interpreted in their legal sense, as defined in Chamarbaugwala and subsequent cases. These terms do not encompass games of skill, and thus, GTPL’s activities are not taxable as betting or gambling.

5. Procedural Fairness and Malice

The court found the SCN to be arbitrary and lacking jurisdiction, as it ignored the stay on the Intimation Notice and relied on selective interpretations of judicial precedents. It criticized the respondents for cherry-picking sentences to build a non-existent case, describing their approach as “splitting hairs and clutching at straws.”

6. Invalidation of Karnataka Police (Amendment) Act, 2021

The court declared Sections 2, 3, 6, 8, and 9 of the Karnataka Police (Amendment) Act, 2021, ultra vires the Constitution, as they failed to distinguish between games of skill and games of chance, violating Article 14 (equality) and Article 19(1)(g). The court held that the Act’s blanket prohibition on online games, including skill-based ones, was disproportionate and lacked a rational nexus with the objective of curbing gambling.

Rationale and Reliance on Precedents

The court’s rationale was deeply rooted in established judicial precedents, particularly:

• Chamarbaugwala I & II (1957): These cases established that games of skill are distinct from games of chance, with the predominance test determining their classification. The court held that games of skill, even when played with stakes, are not gambling and are protected under Article 19(1)(g).
• Satyanarayana (1968): This case confirmed that rummy is a game of skill, requiring memory and strategic decision-making, and does not become gambling when played with stakes.
• R. Lakshmanan (1996): The Supreme Court’s ruling that wagering on games of skill (e.g., horse racing) does not constitute gambling was pivotal in affirming that skill-based activities are outside the scope of Entry 34 (betting and gambling) in the State List.
• All India Gaming Federation (2022): The Karnataka High Court’s own Division Bench decision invalidated amendments that treated games of skill and chance alike, reinforcing that rummy and similar games are skill-based and not gambling.
• Junglee Games (2021) and Head Digital Works (2021): These Madras and Kerala High Court decisions quashed similar legislative attempts to proscribe online rummy, affirming its status as a game of skill.
• State of Karnataka v. State of Meghalaya (2022): This case supported the court’s interpretation that the terms “betting” and “gambling” in the CGST Act must be construed consistently with their meaning under Entry 34 of the State List.

The 2023 GST Amendments: A Game-Changer?

In response to the ongoing dispute, the GST Council recommended and Parliament enacted significant amendments to the GST laws, which came into effect on October 1, 2023. These amendments introduced the concept of “online money gaming” as a distinct category of supply, defined under Section 2(80-B) of the CGST Act as:

“Online gaming in which players pay or deposit money or money’s worth, including virtual digital assets, in the expectation of winning money or money’s worth, including virtual digital assets, in any event including game, scheme, competition or any other activity or process, whether or not its outcome or performance is based on skill, chance or both.”

Key changes include:

1. Introduction of “Specified Actionable Claim”: The amendments created a new category of “specified actionable claims,” including online money gaming, lottery, betting, gambling, and casinos. Unlike other actionable claims, these are taxable under GST.
2. Deeming Fiction for Platforms: Online gaming platforms are deemed suppliers of specified actionable claims, liable to pay GST on the full value of deposits or stakes.
3. New Valuation Mechanism (Rule 31-B): The taxable value includes all amounts paid or deposited by players, with no deductions for refunds or winnings distributed.

These amendments have been challenged on multiple grounds:

• Prospective vs. Retrospective Application: The industry argues that the amendments should apply only prospectively, as there is no explicit legislative intent for retrospectivity. The Supreme Court’s ruling in CIT v. Vatika Township supports the principle that tax laws are prospective unless expressly stated otherwise.
• Manifest Arbitrariness: By classifying all online games, regardless of skill level, as akin to betting and gambling, the amendments may violate the doctrine of manifest arbitrariness, as seen in cases like Shayara Bano v. Union of India (2017).
• Article 14 Violation: Treating skill-based online gaming the same as pernicious activities like lottery and gambling may breach the equality clause under Article 14 of the Constitution, which prohibits unequal treatment of equals.
• Goods vs. Services Conundrum: Reclassifying online gaming as “specified actionable claims” (goods) rather than services creates conceptual inconsistencies, as online gaming inherently involves service provision, not the transfer of movable property.

The Supreme Court’s upcoming hearings will address both the pre-2023 and post-2023 GST regimes. Key issues include:

1. Classification of Online Gaming: Whether online games like rummy are games of skill or chance, and whether they fall under “betting and gambling” or are exempt as actionable claims under Schedule III.
2. Validity of the 2023 Amendments: Whether the amendments are constitutionally valid, particularly regarding their classification of online gaming as specified actionable claims and their prospective application.
3. Valuation Mechanism: Whether taxing the full face value of bets, including winnings and refunds, is reasonable and aligned with the principles of GST as a consumption-based tax.
4. Retrospectivity: Whether the GST authorities can apply the 2023 amendments or Rule 31-A(3) to past transactions, given the presumption of prospectivity in tax laws.

The Supreme Court’s decision will not only resolve the immediate tax dispute but also set a precedent for the taxation of digital and emerging industries. A ruling in favor of the industry could affirm the distinction between skill and chance, protect the sector’s growth, and ensure fair taxation. Conversely, upholding the GST authorities’ stance could impose a crippling tax burden, potentially driving the industry underground or offshore.

Author:–Ashwasti Shravani, in case of any queries please contact/write back to us at support@ipandlegalfilings.com or   IP & Legal Filing.

^[1] Directorate General of Goods & Services Tax Intelligence v. Gameskraft Technologies (P) Ltd., 2025 SCC OnLine SC 1003

^[2] Gameskraft Technologies v. DGGST, (2023) 116 GSTR 53

^[3] (AIR 1968 SC 825)

^[4] (1996) 2 SCC 226

^[5] (AIR 1957 SC 628)

^[6]  (1995) 6 SCC 289

^[7] (AIR 1957 SC 699 and 628)