Online games and games of chance clash over GST

By Maulik Nanavati and Manvi Damle

The 47e The GST Council meeting was held in Chandigarh from 28th to 29th June 2022. One of the agenda items which has been postponed for decision is the bracketing of online games including games of skill, with casinos and horse racing currently taxed at 28%, as well as a proposal to levy a tax on the total amount of competition entry instead of platform fees, also known as gross revenue games (GGR). This intentional decision by the government was vigorously, but quietly, challenged by industry players, mainly due to an increased financial burden and possible commercial death of the industry. The CEO of the E-Gaming Federation was quoted as saying that such a move will “wipe out the dawn industry”.

Industry-driven resentment aside, there is a need to examine a deeper, underlying legal issue – can games of skill be associated with and treated the same as gambling and betting? when offered on online platforms.

Governments have relentlessly sought to ban or at least strictly regulate gambling and betting. Central and state legislations have been enacted to prohibit all activities involving gambling and betting. Historically, most gambling laws have provided an exception for games of skill and some states have recently attempted to include online games of skill in the definition of gambling, many courts annulling these laws. The Supreme Court, in the case of Chamarbaugwala, posed the preponderance of skill test to determine whether the proposed game falls within the category of prohibited or restricted games of chance or is a game of skill, forming an exception. Applying the said test, constitutional courts have over the years considered fantasy sports, bridge, rummy, carrom, chess, backgammon and horse racing as games of skill, and have maintained them outside the scope of gambling and betting laws. In the same case, the court also ruled that games of skill and games of chance are two separate categories and should be treated differently.

Laws prohibiting or regulating gambling were enacted and case law relating to the interpretation of these laws developed at a time when the concept of playing games in cyberspace was alien. But as they say, the law is not static; it evolves. Recognizing the advent of the Internet and the supply of games – be it casual games or games of skill or other games – on several online platforms, the Constitutional Courts have extended their judicial approval of games of skill even when offered and played on online platforms. Recently, the Kerala High Court in case of Head of Digital Works Private Limited and the High Court of Karnataka in case of Indian Fantasy Sports Federation held that games of skill, even if offered for play on online platforms and actually played online with an element of money, do not take on the color of gambling or betting and continue to be exempted from penal consequences by the Constitutional Courts. Some time earlier, the Supreme Court, in the event of Avinash Mehrotra considered a certain fantasy sports format, offered by a particular player, to be a game of skill and declared that such a game did not constitute gambling, betting or betting and was not otherwise vitiated by law.

Now, with the imprint of the legal inviolability of games of skill, even offered on online platforms, and their recognition as a legitimate commercial activity entitled to constitutional protection, the question which merits consideration is whether it is legally correct for the Group of Ministers (‘GoM’) to recommend to the GST Council to club the proposed online games of skill with other activities which are claimed to be acts and activities of definitive gambling, such as casinos, even for tax purposes.

Discussion among GoM members and emerging opinion, it appears that esteemed members felt that there is no need to make a distinction between games of chance and skill since “it shouldn’t be relevant for the GST system. The belief that “as long as there are monetary gains” seems to have weighed with them in concluding that it is acceptable to lump all activities together and tax them equally.

This building is legally flawed. First, the premise that the distinction between horse racing, casino and online gaming activities, including games of skill, is irrelevant for tax purposes is misleading. Second, it violates the fundamental principle that “equals shall be treated equally and unequals shall be treated unequally” and violates Article 14 of the Constitution of India. Needless to insist on the fact that section 14, which confers a fundamental right to equality, applies as much to a tax provision as to other laws. Undoubtedly, the government can select the persons and objects to be taxed; but if the law operates unevenly because of either the classification or lack thereof, the governmental statute of limitations would fall under the equality clause of Article 14. Online games of skill cannot be assimilated to casinos, which offer pure games of chance, and even more so in the light of court decisions distinguishing them and isolating them from the realm of gambling, even when played for money. The proposal, as it stands today, militates against judicial decisions; either turning a blind eye to them or blatantly dismissing them. In any case, the recommendation to deal with all online games, whether skill-based or chance-based, would be nothing less than legal oversight by the GoM.

Now that the GST Council has returned the report to the GoM for reconsideration, it is hoped that the GoM will reflect on the accuracy of the coverage of all online games, whether skill-based or pure games of chance. , under the same generic umbrella, as well as clubbing online games of skill with gambling and racing courses based on a well-established legal situation.

The authors are practicing lawyers and partners of Neetigya Legal Consultants LLP. The opinions expressed are personal.

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