Online Money Gaming - CGST, Industry Fallout And The Stretch Of Statutory Limits In Gameskraft

The author is Aditi Singh, a Fourth Year Student from National Law University, Nagpur.

Abstract:

The robust growth of India’s online gaming industry has triggered a wave of legal uncertainties and skepticism in recent times, especially in the realm of taxing statutes. The online gaming sector has seen unprecedented rise and attracted substantial domestic and international capital investments, driving tax Revenue Department, employment and expansion of ancillary industries. However, the sector remains to be ensnared in complex web of regulatory regimes in India, despite global recognition of these games and scope for expansion.

The Gameskraft case is currently at the heart of this storm, the high-stake legal battle between online gaming platform providers and the Revenue Department  department has opened a Pandora’s box of ambiguity and has reignited the long-standing debate between games of skill and games of chance, unsettled previously established legal interpretations, prompting the Supreme Court to consider a range of complex legal questions related to the nature of online gaming, its taxability and regulation.

The case hinges on the interpretations of “actionable claims,” “gambling,” “betting,” and the special valuation mechanism brought in by the 2023 CGST Amendment. The primary question which is raised before the court is whether adding stakes to a game of skill transforms it into gambling thereby making these platform providers suppliers of actionable claims, rendering the activity taxable under the CGST regime. The controversy before the apex court has not restricted itself to mere interpretation of the rules under GST statutes but evolved to include deeper constitutional questions, including questions about delegated legislation, legislative competence, and the limits of taxation powers under the Constitution.

This paper undertakes a critical analysis of the dispute, focussing on the legality of the ₹21,000 Crore show cause notices issued to the Respondents in 2022 and the broader implications of the 2023 CGST Amendment, with special emphasis on the fiscal overreach, overregulation of the digital space and the impending fallout of the growing industry and market retraction. It is argued that the Revenue Department  Department’s position in the Gameskraft dispute is doctrinally inconsistent with the long-standing jurisprudence on games of skill and interpretation of actionable claims, reflecting an arbitrary expansion of taxing power.

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History Of The Dispute

The online gaming platform providers (“respondents”), from 2017 to 2022, were taxed at 18%  as suppliers of services, on the gross Revenue Department  collected from players and were compliant taxpayers. In September 2022 they received show cause notices from the Revenue Department  under section 74 (1) of the Central Goods and Services Tax Act (“CGST Act), alleging wilful tax evasion and failure to pay required tax under the “gambling” category, supplying actionable claims, misclassifying their services, and evading Goods and Services Tax (“GST”). It demanded a staggering ₹2,09,89,31,31,501, along with interest and penalties from Gameskraft Technologies. By treating e-games, including rummy and fantasy sports, as games of chance, the show cause increased tax rate to 28% without any change in the activity, its character or the law.

The notices were challenged before the Karnataka High Court and in May 2023, the court ruled in favour of the assessees and held the notices to be arbitrary and illegal.^[1] 

To bypass the decision of the High Court, in October 2023, center amended the CGST Act to introduce online money gaming  as a specified actionable claim in the statute and treat them at par with betting and gambling, thereby bringing the same under the 28% tax slab. Further, this tax is now to be paid on the face value of the total amount submitted by the players instead of the actual commission taken by the platform.

The dispute before the Supreme Court challenges the constitutional validity of both the pre-amendment regime, in context of the show cause notice and, the post-amendment regime including the arbitrary treatment of the online games of skill as betting and gambling and the retrospective imposition of tax and penalties on the online gaming industry.

Pre-Amendment Regime

Games of Skill and Games of Chance

The primary issue before the court, for the period before October 2023, is the distinction between games of skill and games of chance, and whether online money gaming can be considered betting and gambling under CGST Rules^{. [2]}  The question is whether the game of rummy, or those of fantasy sports, transforms into a game of chance by the virtue of players staking on the outcome.

Such interpretation is erroneous and highly unsustainable. Mere addition of stakes does not change the nature; a game of skill remains to be a game of skill even when the players decide to add stakes to the game. The State has ignored 75 years of Indian jurisprudence on the issue, once it is established that the game concerned is one of skill, nothing which is leviable on gambling or betting can be levied on it. In Lakshmanan,^[3] the Court unequivocally held that rummy is a game of substantial skill and is not to be treated as gambling under the law.

Another fallacy with the line of argument of the State is to assume that where there is skill, there is no place for chance. It is trite law that no game is completely devoid of chance, there is always an element of chance involved, it is the predominance, and not the mere presence, of chance which can change the character of the same and transform it into gambling.^[4] The two RMDC cases^[5], concerned with price competition and crossword puzzle, have made it abundantly clear that games of skill are a distinct category, separate from games of chance. The point of this distinction is the overwhelming predominance of “skill.”

The essential uniting characteristic of all activities comprising  wagering, betting, gambling or gaming is the predominance of chance. This is a mutually exclusive category from other activities where the predominant characteristic is skill. Mere use of  money in the latter can never alter its genus, transforming it into the former. Skill is antithetical to chance. Hidayatullah J. in Satyanarayana ^[6] had conclusively held that money does not change the nature of a game. The game of rummy does not cease to be a game of skill on addition of stakes.

Further, the argument of the Revenue Department regarding involvement of “third parties” in online gaming is clearly misleading and lacks any merit. There are no third-parties or outsiders betting on these games, nor are the platform operators in any way involved in such side-betting. There is no profit being made off of the games by anyone other than the players themselves. The operators receive only a certain commission or entry fee, and are not concerned, at all, with the games. They are mere service providers, not participants in the game.

Given this settled framework, Revenue Department’s’s attempt to reclassify rummy as gambling is driven by Revenue Department’s considerations, rather than correct interpretation of law, with the motive to bring the platform providers under the 28% tax bracket.  For the period before 2023, the case of the State fails once it is established that online money gaming does not involve betting and gambling as is it by virtue of being the same, that the activities of the platform providers are being taxed at 28%. However, this position changes post the GST amendments of October 2023, where the department finally introduces online money gaming directly in the act.

Subsequent Insertion of Provision is Proof that it Did Not Exist Earlier

In the case of Indian National Shipowners’ Association v. Union of India,^[7]  the Bombay High Court held that the insertion of a new entry of a service in a tax statute presupposes that there was no earlier provision covering those services and therefore prior to such introduction those services would not be taxable. The 2023 amendment introduced the term “online money gaming” in the CGST Act for the first time,^[8] the new provision are not merely carved out of the old ones and are not in the form of a clarification or aid to interpretation; it is the addition of a new category all together, which was absent from the earlier act. Any tax under the said category prior to such addition, cannot be permissible or good in law.

Under well recognised principles of tax law, any uncertainty or vagueness in the legislative scheme defining any of the components of the levy are fatal to its validity.^[9] Any ambiguity in taxing statute including computation and charging provisions must be necessarily decided in favour of the assessee law.^[10] The person liable to pay, subject of tax and rate of tax have to be strictly construed.^[11]

The 2023 Amendment

Architecture of the Tax Post Amendment

The amended statute treats goods to be actionable claims;^[12] it then categorically defines and includes all online money gaming to give rise to supply of specified actionable claims which are exempted under schedule III of the CGST Act.^[13] These specific actionable claims are then taxed as per Rule 31B of the CGST Rules, also added vide notification in 2023.

It presumes that online gaming platforms are suppliers of actionable claims and that there exists a transfer of actionable claims from the platform provider to the players. It is this “transfer or supply” of actionable claim that the department seeks to bring under its taxable net.^[14]

The state had found a roundabout method of taxation pre 2023 amendments, equating online money gaming with gambling and betting under Rule 31A but after the Karnataka High Court rejected such interpretation, they brought in the abovementioned amendments to explicitly add online money gaming within its ambit.

The constitutionality of these amendments is also challenged before the court. The argument of state is primarily that there is a supply of actionable claims from the operators to the players, and this supply is now explicitly taxed under the rules. The Respondents argue that this classification is unsustainable and there is no transfer of actionable claims. Further, that categorising online gaming along with lottery, betting and gambling is manifestly arbitrary and in violation of Article 14 and that even if such categorisation is allowed, the amendments cannot be applied to past transactions retrospectively.

Revisiting “Actionable Claims”

The definition of actionable claims has been defined under the GST regime as having the same meaning assigned to it under the Transfer of Property Act (“TOPA”). Under TOPA, an actionable claim is a legal right to an unsecured debt or any beneficial interest in property. For there to be a transfer of actionable claims, there must be a transfer of all rights of the transferor in the property and the title therein.^[15]

The tax statue, prior to 2023, stipulates that when the chance to win leads to money then it becomes an actionable claim. With regards to the moveable property, this will be this gambling debt, which is again, not an enforceable right as there cannot be a wagering debt.^[16] 

Without enforceability, there is no actionable claim. If you consider the activity in the nature of gambling, it falls within section 30 of the Indian Contract Act, and cannot be actionable in court. The two arguments cannot co-exist.  Even when 31A is taken literally, the show cause must be dropped as the “value of actionable claims in the form of chance to win” is taxed, not skill.

If at all, any actionable claim comes into existence, it is always discharged, never transferred. In online money gaming, when the players deposit their money before entering any game, the money is deposited to the operator but kept in the players’ own e-wallets. This amount is then returned back to the players as and when the players wish, apart from once it is put in a pool in a game by the players themselves, in which case the money goes to the winner. Anyhow, this return of money from the operator to the players can only be considered discharge of debts and in no sense transfer of actionable claims.

When money is deposited or returned, no transfer of actionable claim takes place. While depositing money, that money is owed to the person depositing, that is not a transfer of an actionable claim, it is the creation of an actionable claim. When the money is returned back, this debt is discharged, there cannot be any transfer as the money goes directly from the wallet to the player’s account, and cannot be transferred to any third party.

What the Revenue Department wants to tax is the transaction, the movement of the money from one place to another. There is no actual transfer of an actionable claim. Once the system distributes the money into the digital wallets, the value of the wallet becomes an actionable claim as the operator owes that amount to the player. That is always discharged, never transferred[3] .

Further, the loan to a borrower for a specific purpose, not allowed to be used in any other manner is a kind of trust, also known as a quistclose trust.^[17] There is a prevention on the borrower from obtaining any beneficial interest in the money. Therefore, there is no question of an actionable claim as there is no beneficial interest and there is also no moveable property. There is a fiduciary obligation on the borrower, in the present case, the operators.

Manifest Arbitrariness in Classification of Online Money Gaming as Specified Actionable Claims

The amended provision of “specified actionable claims” treats unequal categories equally, violating Article 14.^[18] When there is a clear-cut classification between games of skill and games of chance, as a rule making authority, the Revenue Department cannot put both into one single head and treat them equally[4] . These are two distinct categories, cannot be put in the same bucket.

“Online money gaming” cannot be equated with lottery, betting and gambling once it is proved that it includes games of skill and not chance. In RMDC I,^[19] the bench clearly held that it could not have been the intention of the constitution makers to elevate betting and gambling on the level of the country’s trade or business. The new provision does precisely that by putting games of skill, protected under right to commerce, on the same level as gambling.

These amendments cannot be held constitutional as they erase the distinction between different classes of activities. Online money games, even those which do not include betting or gambling will remain a specified actionable claim under the new provisions. Rule 31B mentions only online money gaming, without involving any classification of skill, chance, or legitimacy. Everything under online money gaming is taxed at 28%.

At this point, it is also pertinent to mention that had the scheme of the tax prior to 2023 been competent to tax online money gaming, there would have been no need to bring the amendments. Definition of online money gaming is provided for the first time in 2023 and was absent prior to the same. In absence of a machinery provision, the tax cannot be levied on the basis of substantive provision under tax statutes.

Had rule 31A included e-gaming, the parliament would have explicitly provided for the same. It is unsustainable to say that online gaming is covered under 31A for the period prior to 2023 but for the period after 2023, the same category is covered under 31B, without any changes made to 31A.

Valuation Mechanism: Taxing Hypothetical Income

Lottery, betting and gambling are taxed on their face value under the GST regime, the amendment seeks to tax online money gaming in the same manner. The erstwhile regime followed the Gross Gaming Revenue  (GGR) model, taxing the actual revenue  generated by the platforms but under the new specific valuation mechanism, value of supply is to be the face value of the total bet, meaning that the tax is on the entire pool of the bet or total amount paid or deposited by the players, even though the actual transaction value or Revenue  of the Respondents’ is merely the commission or entry fee. This imposes an unreasonable restriction on the Respondents’ right to trade and commerce as they are being classified in the same category as betting and gambling, despite being games of skill, and further asked to pay tax correspondingly.

Borrowing from the principle of “real income” from Income tax jurisprudence, the value to be taxed needs to be the real income^[20] of the supplier and not the hypothetical income, which does not materialise.^[21] It is well settled that if income does not actually accrue to the assessee, there cannot be a tax.^[22] In this case, the Revenue Department  seeks to tax the hypothetical income of the Respondent platform providers notwithstanding the fact that title over this amount is never transferred to the platform provider, they merely keep it in form of a trust, to be returned as per the wishes of the player. The constructive possession of this amount remains with the players.

Globally, online money gaming is generally taxed using the GGR model, the following chart provides an overview of global taxation landscape in case of online real money gaming:

Taxing the entire money deposited by the players is highly detrimental to the gaming industry. After the 2023 amendment, tax has jumped from 50% to 100% of the total revenue  made by the Respondents, making the industry unprofitable and unsustainable.

Retrospective show cause notice

For the period prior to 2023, the respondents are being asked to pay this increased tax on the face value of the bet. This is retrospective imposition of tax as they were never included in the “betting and gambling” category prior to this notice and were taxed at 18% for the preceding period without any objections from the Department.

Since along with the nature of the tax  the valuation of supply also changes with this show cause, the tax amount asked for is, essentially, more than the profits actually made by the platform providers as they used to pay taxes on the commission or entry amount collected, being the actual income, and not the total amount deposited by the players.

Industry Implications and the Collapse of Investor Confidence

Online gaming industry is one of the fastest growing industries at the moment, with global growth expected to raise to US$276 billion by 2033. With over 700 million internet users, India is a key player in the sector globally. Over the past five years, gaming companies in India have raised approximately US$2.8 billion from domestic and international investors, accounting for nearly 3% of the total startup funding in the country,^[23] with more than 1400 new startups post-pandemic, driving tax revenue, employment and expansion of other ancillary industries including fintech, cybersecurity, and augmented reality. The industry employs a huge number of people, generating an estimated 50,000 to 80,000 jobs to date, with projections indicating the creation of over 250,000 additional direct and indirect roles over the next decade,^[24] and as soon as a notice of such nature is issued, or such amendments are brought, the industry faces huge losses, there are no new investments, especially foreign.

In a Report by EY on gaming industry,^[25] inimical implications of the 2023 Amendments are highlighted. The report, while surveying twelve leading Indian companies in the industry, reveals that most of them have turned completely unprofitable, loss-making or stagnant entities and remaining in business has become unsustainable without moving to other tax jurisdiction. These implications also include huge layoffs and reduced hiring. Out of the twelve companies, only five recorded revenue s after 2023, this is in contrast with the continued exponential global growth in the industry. The notable drop in foreign investments is also perceptible from the drop in the total number of deals in the online gaming industry in fiscal year 2024, as compared to 2022, as can be seen in the following chart:

Given the potential of growth of the sector, tax related uncertainties become significant and a reason for concern with companies willing to move to other tax jurisdictions to remain sustainable. The Supreme Court must give due consideration to the economic impact of the amendment and the show cause notice.

Conclusion

The dispute and the surrounding legal developments mark a pivotal moment for the e-gaming industry in India. While the arguments of the Revenue Department  department raise constitutional concerns, particularly those with respect to nature of games, supply of actionable claims, mechanism for valuation of supply and retrospective imposition of taxes, the wider implication on the otherwise growing, employment and revenue  generating industry, cannot be ignored. The 2023 amendments seek to do what was already challenged and rejected by the Karnataka HC, triggering a collapse in investor confidence and rendering these companies non-profitable and their business in India unsustainable. As the apex court deliberates on the legitimacy of the impugned show cause and 2023 amendments, it must also remain cognizant of the disproportionate economic fallout. The new tax regime does not merely impose arbitrary burdens on the industry but also risks undermining innovation, investment and employment in the digital economy. A nuanced and constitutionally restrained interpretation is not only legally warranted—it is economically imperative.

References

[1] Gameskraft Technologies v. DGGST, (2023) 116 GSTR 53

[2] Central Goods and Services Tax (CGST) Act 2017, rule 31A

[3] K.R. Lakshmanan (Dr) v. State of T.N., (1996) 2 SCC 226

[4] State of A.P. v. K. Satyanarayana, 1967 SCC OnLine SC 333 p.12

[5] State of Bombay v. R.M.D. Chamarbaugwala, 1957 SCC OnLine SC 12; R.M.D. Chamarbaugwalla v. Union of India, 1957 SCC OnLine SC 11

[6] State of A.P. v. K. Satyanarayana, 1967 SCC OnLine SC 333

[7] Indian National Shipowners’ Association v. UOI, 2009 SCC OnLine Bom 454

[8] Central Goods and Services Tax (CGST) Act 2017, s 2

[9] Govind Saran Ganga Saran vs. CST reported in (1985) Supp SCC

[10] Commr. (CGST) v. Safari Retreats (P) Ltd., (2025) 2 SCC 523

[11] State of Maharashtra v. Shri Vile Parle Kelvani Mandal, (2022) 2 SCC 725

[12] Central Goods and Services Tax (CGST) Act 2017, s 2(52)

[13] Schedule III Entry 6, Rule 31A 

[14] Central Goods and Services Tax (CGST) Rules 2017, rule 31B

[15] Transfer of Property Act 1882, s 8

[16] Indian Contract Act 1972, s 30

[17] Twinsectra Ltd v. Yardley and others, [2002] 2 A.C. 164

[18] The Constitution of India 1950, art 14

[19] State of Bombay v. R.M.D. Chamarbaugwala, 1957 SCC OnLine SC 12

[20] Poona Electric Supply Co. Ltd. v. CIT, (1965) 57 ITR 521

[21] CIT v. Shoorji Vallabhdas and Co., (1962) 46 ITR 144

[22] Godhra Electricity Co. Ltd. v. CIT, (1997) 4 SCC 530

[23] Vishal Agarwal, Priyanka Duggal, and Karan Kakkar, “Online Gaming - Navigating the Deal Through Tax and Regulatory Quandaries,” (Grant Thornton, 24 January 2024 <https://www.grantthornton.in/insights/blogs/online-gaming-navigating-the-deal-through-tax-and-regulatory-quandaries/> accessed on 5 August 2025

[24] TeamLease Digital, Gaming Tomorrow’s Blockbusters, 2022, <https://s3.amazonaws.com/static.myteamlease.com/teamleasedigital-content/2022/11/17/PremiumReport_1668684156-1668684159-24812.pdf>

[25] Ernst & Young, New Frontier: Online Gaming Report, India, Ernst & Young, 2023, <https://assets.ey.com/content/dam/ey-sites/ey-com/en_in/news/2023/12/ey-new-frontier-online-gaming-report.pdf>