The Supreme Court of India has agreed to hear petitions by online gaming companies seeking a stay on (GST) demands and related proceedings. The top court is set to hear the gaming companies’ plea on January 10 (Friday).

The gaming firms have contested the government’s decision to retrospectively impose a 28% GST on the full value of bets placed, rather than on gross gaming revenue. A bench led by Justice JB Paridawala agreed to take up the case to consider granting a stay on the show-cause notices issued by the Directorate General of GST Intelligence (DGGI) since 2023.

The gaming companies sought an urgent hearing from the court to prevent adverse actions by the GST department including tax recoveries, freezing of bank accounts and the issuance of summons, while a resolution is pending.

Multiple petitions transferred to SC

In April 2023, the consolidated 27 petitions challenging the imposition of 28% GST on online gaming companies. These petitions, originally filed in nine different high courts, were tagged with the pending GamesKraft case and other appeals filed by the E-Gaming Federation, Play Games24x7 and others.

The controversy escalated in September 2023 when the Supreme Court stayed a Karnataka High Court judgment that overturned the DGGI’s Rs 21,000 crore (USD 2.52 billion) GST demand on Bengaluru-based gaming platform GamesKraft. As per the government, the cumulative tax effect of these show-cause notices amounts to Rs 91,684.81 crore (USD 11 billion) for online gaming companies and Rs 1,08,505 crore (USD 13 billion), including casinos.

Government’s stand on GST classification

The government clarified that from October 1, 2023, all online games involving betting or gambling, irrespective of skill or chance, would attract a 28% GST on the full-face value of bets. Previously, skill-based games were subject to an 18% GST rate. The government amended the GST law to require overseas online gaming companies to register in India from October 1, 2023. Officials argue that many firms exploited ambiguities in the tax regime before the new rules took effect.

Gaming companies’ argument

The online gaming companies argue that taxing the full value of bets placed—instead of their gross gaming revenue—is unsustainable and could drive them out of business. The notices issued by the DGGI define the staking of money in online games, whether of skill or chance, as betting and gambling. Companies have countered that the ‘buy-in’ amount for each game constitutes a transfer of goods as actionable claims and does not involve the supply of actionable claims by operators to players.

Abhishek Rastogi, founder of Rastogi Chambers and legal counsel for several gaming companies, said, “Applying GST on the total pool amount, rather than their actual earnings, would lead to disproportionate taxation, thereby stifling growth and innovation in the sector.”

Financial implications for the industry

The industry’s financial viability is at stake due to the dual-layered dispute over the classification and valuation of gaming services. Tax lawyer Rastogi highlighted that taxing the entire pool amount, instead of platform fees or commissions, would impose an unsustainable burden on gaming companies.

In December 2023, the Rajya Sabha revealed that online gaming companies had received 71 show-cause notices for GST evasion totaling Rs 1.12 trillion (USD 13.7 billion) for FY 2022-23 and the first seven months of FY 2023-24. This followed the GST Council’s decision in July 2023 to classify both skill-based and chance-based games under the 28% GST slab.

Industry seeks urgent relief

Gaming companies have approached the Supreme Court for interim relief, requesting protection from adverse actions by the GST department. Rastogi stated, “Online gaming companies are hopeful that the court will grant interim relief to help ensure that their operations remain uninterrupted… while awaiting a final resolution.”

The ongoing classification debate over whether the GST rate should be 18% or 28% directly impacts the industry’s tax liability. The Supreme Court’s upcoming decision is crucial for determining the future of the online gaming sector.

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