Karnataka HC Quashes Rs 21,000 Crore Show Cause Notice Against Gameskraft

Karnataka High Court (HC) on Thursday quashed the Rs 20,989-crore show-cause notice against Bengaluru-based online gaming company Gameskraft Technologies (Gameskraft) for alleged goods and services tax (GST) evasion. This was the biggest such claim in the history of indirect taxation.

The notice, issued by the Directorate General of GST Intelligence in September last year, was from August 2017 through June 2022. It alleged that Gameskraft allowed its clients to place money bets on games played online, saying the company was promoting online betting through card, casual, and fantasy games like Rummyculture, Gamezy, and Rummytime.

Authorities had, therefore, slapped a 28 per cent tax — which is applicable on games of chance/betting and gambling — on the firm on a betting amount of about Rs 77,000 crore.

Gameskraft, said officials, was pushing customers to continue betting because there was no way of going back once the money was added to its wallet.

Officials alleged that the company was not issuing invoices to its customers. Back-dated invoices, they alleged, were uncovered during forensic examinations of documents, which “directly violate Section 15(3) of the Central Goods and Services Act, 2017”.

The company had said that the issue of taxability of online gaming has been pending before the GST Council for over three years. It alleged that the authorities had erred and placed gameplay under the 28 per cent tax bracket.

The issue first came to light when GST authorities raided the office of Gamekraft in November 2021. The quantum of alleged evasion was first marked at Rs 419 crore. This rose to Rs 5,000 crore and ultimately to Rs 21,000 crore in 2022.

According to a report by EY-Loco, transaction-based game revenues for the gaming industry in 2022 stood at Rs 10,400 crore, less than the GST demand from Gameskraft.

The gaming industry welcomed the move, which offers additional clarity on the ongoing GST debate in the sector, with open arms.

“This landmark decision by the Karnataka HC, which reiterates six decades of jurisprudence, will greatly aid gaming start-ups across India to work towards building the industry and ensure its healthy growth,” says Roland Lander, chief executive officer, All India Gaming Federation (AIGF).

One of the oldest and largest industry bodies in the gaming sphere, AIGF was also one of the intervenors in the case.

“We had and continue to have full faith in the government and the judiciary and are hopeful that this progressive decision will pave the way towards clarity and certainty from the GST Council in the GST policy for this sunrise sector,” adds Landers.

“It is heartening to note that a position of law which has been settled for more than 60 years, that games of skill cannot fall within the ambit of ‘betting and gambling’ even if played for stakes, has not been deviated from,” he adds.

Sameer Chugh, chief legal officer, Games24x7, a gaming unicorn (a company with a valuation of over $1 billion), believes that the decision will guide future discussions on economic and taxation policies about the skill-gaming industry.

“Thursday’s pronouncement, along with the recent progressive regulations in the online gaming sector, including the notification of rules for online gaming by the Ministry of Electronics and Information Technology and the amendments to the Income-Tax Act made through the Finance Bill 2023, helps reinstate the demarcation between online gaming from games of chance involving betting and gambling,” he says.

The decision, observe industry watchers, may offer additional clarity on the imminent decision by the GST Council on taxation in the industry.

“The sector awaits GST clarity, which stands as the biggest survival threat to the entire sector,” says Saumya Singh Rathore, co-founder, WinZO Games — India’s largest vernacular social gaming platform with over 100 million registered users.