Supreme Court Upholds 28% GST On Online Money Gaming, Fantasy Sports; 2023 Amendments Retrospective

The Supreme Court on Wednesday upheld the constitutional validity of the GST framework taxing online gaming, fantasy sports, and casino transactions involving staking on uncertain outcomes, affirming the 28% levy applicable to such taxable actionable claims.

It also held that the 2023 GST amendments, which specifically brought online money gaming, casinos, and horse racing within the revised tax framework, are merely clarificatory and therefore apply retrospectively.

A bench of Justices J.B. Pardiwala and R. Mahadevan held that “The essential element of betting and gambling lies in staking money or money's worth upon uncertain outcomes. The character of betting and gambling does not depend exclusively upon whether the underlying activity is a game of skill or a game of chance, but upon the existence of stakes placed upon uncertain future contingencies.”

The verdict came in a batch of petitions challenging GST show cause notices issued to online gaming companies, including Gameskraft Technologies Pvt. Ltd., as well as constitutional challenges to provisions of the Central Goods and Services Tax Act and Rules governing taxation of online gaming, casinos, and related actionable claims.

“Accordingly, online gaming activities, including fantasy sports and other games played on digital platforms, involving staking upon uncertain outcomes, constitute betting and gambling for the purpose of the GST framework,” the Court held.

The dispute centred on whether online games such as rummy and fantasy sports, when played with stakes, could be treated as betting and gambling / taxable actionable claims under the GST regime. Gameskraft had argued that it merely facilitated games between players as an intermediary and paid GST only on its platform fee, while the tax department contended that the company itself supplied actionable claims in the nature of betting and gambling.

Rejecting the intermediary argument, the bench held: “The online gaming operators are not mere intermediaries facilitating transactions inter se between participants, but themselves constitute suppliers of such actionable claims within the framework of CGST legislation.”

Clarifying the nature of the levy, the court held: “The levy is upon a taxable supply of actionable claims and not upon the activity of betting or gambling simpliciter.”

The Supreme Court set aside the Karnataka High Court's May 11, 2023 judgment, which had quashed GST show cause notices issued to Gameskraft and held that games of skill such as rummy did not amount to betting or gambling merely because stakes were involved.

Rejecting constitutional challenges under Articles 14, 19(1)(g), 21 and 265, the Court observed: “Mere commercial hardship, reduction in profitability, or increased tax incidence cannot by itself render a fiscal measure unconstitutional.”

The bench also upheld the valuation machinery under the GST Rules, holding: “Rule 31A of the CGST Rules is intra vires the provisions of the CGST Act and constitutes a valid machinery provision enacted to operationalise the valuation framework.”

On casino transactions, the Court upheld the department's power to resort to best judgment assessment where complete records are unavailable, while clarifying that the ultimate computation must align with the statutory valuation rules.

In relation to the 2023 amendments, the Court held, "The amendments introduced by the Central Goods and Services Tax Amendment Act, 2023, including the amendments to Entry 6 of Schedule III and insertion of Rule 31C, are clarificatory and explanatory in nature and shall operate retrospectively.”

Setting aside the Karnataka High Court ruling, the bench held, "The common judgment and order dated 11.05.2023 passed by the High Court of Karnataka is set aside. Consequently, the show cause notices dated 23.09.2022 issued under Section 74(1) of the CGST Act stand restored.”

The Court permitted assessees to file replies and raise all factual and legal contentions before the adjudicating authority, which will decide the proceedings in light of the judgment