Supreme Court to Examine Legal Challenge Against 28% GST on Online Gaming Firms

The Supreme Court based in New Delhi is set to listen to consolidated pleas challenging the 28% Goods and Services Tax (GST) on companies involved in online gaming. The court has decided to combine and hear simultaneously 27 pleas that have been discussed in 11 high courts across the country.

Among these pleas is a petition filed by Gameskraft and lawsuits by EGF and Play Games24x7. The central government has also been summoned by the Supreme Court to submit counter-affidavits in all the pleas within three weeks. The collective hearing is scheduled for the end of April.

The main hearing in this case aims to address the prolonged tax issue in the online gaming sector. It will also serve as an opportunity to definitively determine whether these are skill-based games or games of chance, and whether they fall under the purview of betting and gambling.

Several online gaming companies such as Dream 11, Games 24×7, and Head Digital Works have lodged complaints with the Supreme Court challenging the imposition of GST. Previously, the Supreme Court had denied these companies a temporary suspension of the tax notifications.

This issue also pertains to the Gameskraft case where the Supreme Court extended the Karnataka High Court’s judgment invalidating a tax notification amounting to 21,000 crore rupees.

The matter arose in August when the GST Council amended the law to levy a 28% tax on the “full face value” of bets or entry amounts in online games. This was supposed to come into effect from October 2023.

Companies in the gaming industry argue that the 28% tax should only apply from October 1, but the government contends that the clarificatory amendment to existing laws was not retrospective, therefore, the tax demand is not retroactive.

They also insist that recurrent gaming amounts should not be subject to taxation.

In one of the previous hearings on the issue, lawyer Harish Salve, representing the gaming industry, opposed categorizing prize pools, i.e., the total operational value of online games, as “executable demands.” Salve argued that the game occurs among players, and companies merely charge a fee for the platform, hence the tax demands should not include any executable demands because platforms and services only act as intermediaries.

Salve emphasized that tax demands on online gaming startups are many times greater than the net revenues reported by these companies over the past five fiscal years, putting the sector in serious financial trouble.

The tax demand against gaming companies can be presented as a claim against the amount of money owed by one party to another. In the case of online games, prize pools and winnings held in operators’ deposit accounts become an executable claim under the law.

While until September execution claims were not applied to online games, they have been included in the amended GST tax laws starting October 1.

According to experts, the absence of a suspension order from the tax authority means that the tax must be paid.

The online gaming industry has long grappled with issues related to the 28% GST on companies operating in the sector. Many firms, such as Dream 11, Games 24×7, and Head Digital Works, have filed complaints with the Supreme Court challenging the introduction of this tax. Previously, the court denied companies a suspension of tax notifications. Now, the Supreme Court in New Delhi will hear 27 pleas concerning this tax, which have been deliberated in various high courts across the country. The consolidated hearing is set for the end of April.

Among these pleas are applications filed by Gameskraft and lawsuits by EGF and Play Games24x7. The Indian central government has been called upon by the Supreme Court to file counter-affidavits in all the pleas within three weeks. The primary hearing aims to resolve the tax issue persisting in the online gaming sector. It will also provide an opportunity to definitively ascertain whether these games are skill-based or games of chance, and whether they are subject to betting and gambling.

The case regarding the GST on companies involved in online gaming has been escalating since August when the GST Council amended regulations to impose a 28% tax on the “full face value” of bets or entry amounts in online games. Originally, this was slated to be effective from October 2023. Industry players argue that the tax was imposed too early and should only be enforced from October 1. However, the government contends that the new regulations are not retrospective, thereby the tax is not retroactive.

One of the key arguments put forth by companies is that recurring gaming payments should not be taxed. Harish Salve, the lawyer representing the gaming industry, underscored that games take place between players, with companies merely charging fees for the platform. Therefore, the tax demand should not cover executions because companies only act as intermediaries.

Companies also note that tax demands are significantly larger than their reported net revenues over the past five fiscal years. Should the tax demands be upheld, the online gaming sector could face serious financial difficulties.

With no tax suspension order from the tax authority currently in place, companies are required to pay the tax regardless of the outcome of the hearings before the Supreme Court. Such issues could have profound implications for the online gaming industry in India.