Karnataka High Court Blocks 'Gambling' GST For Online Skill Gaming

May 12, 2023
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Industry heavyweights are jubilant after the high court in India’s Karnataka state rejected a goods and services tax (GST) gambling classification for online companies offering skill gaming with stakes, annulling Gameskraft Technology's liability for $2.6bn in unpaid GST.

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Industry heavyweights are jubilant after the high court in India’s Karnataka state rejected a goods and services tax (GST) gambling classification for online companies offering skill gaming with stakes, annulling Gameskraft Technology's liability for $2.6bn in unpaid GST.

The Karnataka High Court ruled on Thursday (May 11) that the central government’s Directorate General of GST Intelligence (DGGI) could not demand almost 210bn rupees ($2.6bn) in GST on turnover, backdated to 2017, at a higher tax rate for gambling because Gameskraft offered games of skill. The text of the ruling has yet to be released.

Justice SR Krishna Kumar’s ruling came as the national GST Council prepares a long-awaited determination on the tax rate for online gaming businesses and whether it should apply to gross gaming revenue or turnover.

The latest high court judgment could obstruct any GST Council decision to impose an anticipated maximum 28 percent GST to online skill games with stakes instead of, for example, the 18 percent rate paid by Gameskraft on platform fees.

It was not immediately clear if the DGGI was considering an appeal to the Supreme Court of India. The apex court last week delayed by at least two months the further consideration of a separate case that would settle the nationwide legal status of online skill gaming with stakes.

If the Karnataka court’s decision holds, the industry’s tax liability will fall by billions of dollars and any exposure to a crippling turnover tax would be reduced.

Gameskraft general counsel Joyjyoti Misra said the Bengaluru-based company is “very pleased” with the outcome.

“It is a clear vindication of our business model. We had, and continue to have, full faith in the government and the judiciary.

“We are hopeful that this decision will pave the way for constructive dialogues with the GST authorities and will form the basis of progressive GST regulations for the industry,” Misra said.

Ranjana Adhikari, a Mumbai-based partner in the Media, Entertainment and Gaming practice of the IndusLaw firm, told VIXIO GamblingCompliance on Friday that the ruling is "undoubtedly a significant win for the online skill gaming industry in India".

Adhikari said the judgment is "vital" because it "rightly distinguishes between games of skill and games of chance and affirms the corresponding difference in the taxation regimes for them".

"Depending on the reasoning adopted in the judgment for quashing the tax notice, it is likely to have an impact on the GST Council decision," she said.

"Thirdly, this judgment will serve as yet another shot in the arm for the online skill gaming industry as it prepares for litigation against the new [prohibitive] online gaming law in Tamil Nadu [state]."

Gameskraft was supported in its litigation by industry peak bodies All India Gaming Federation (AIGF) and the E-Gaming Federation.

AIGF chief executive Roland Landers called the court’s ruling a “landmark decision”.

The decision “reiterates six decades of jurisprudence, clearly distinguishing constitutionally protected games of skill from gambling and betting activities”, he said.

“The judgment will greatly aid gaming start-ups across India to work towards building the industry and ensure its healthy growth.

“AIGF had intervened in the case on the limited question of law on behalf on the industry, and especially to safeguard the interest of our smaller members,” Landers said.

The Gameskraft complaint additionally alleged the DGGI ignored a Karnataka High Court stay on the show-cause notice last September, “illegally” issuing the notice on the same day as the stay.

The company complained that the DGGI fined CFO Ramesh Prabhu personally despite the stay and that the GST demand increased precipitously, up by a factor of 50, when the DGGI treated the Gameskraft business as gambling.

The DGGI told the court at the time that it was issuing show-cause notices to various online gaming companies over GST delinquency, anticipating the collection of some $12bn from the wider industry.

Thursday’s judgment appears to place much of this DGGI campaign in peril.

The Karnataka court’s finding is further indication that the judiciary has become something of a haven for the online gaming industry as legislatures grow more hostile to the rapid growth of skill gaming in the online space.

It is also notable for serving as a de facto reinforcement of a separate ruling by the same state high court that overturned a Karnataka government law banning all online gaming with stakes.

The latter ruling spawned the Karnataka government’s appeal to the Supreme Court, joined by the Tamil Nadu state government, that seeks to reimpose the blanket ban.

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