Karnataka HC holds hosting the game of rummy on online platform is not in the nature of betting or gambling

This tax alert summarizes the recent ruling of the Karnataka High Court (HC) on whether online games, such as rummy, played with or without stakes, tantamount to “betting” or “gambling”.

Petitioner in the present case is an online intermediary company, operating technology platforms that allow users to play online games, such as rummy, against each other, and charges a certain percentage of buy-in amount as its platform fee.

Revenue issued show cause notice (SCN) on the petitioner alleging that it is involved in betting/ gambling and is misclassifying its supplies to its customer as services instead of actionable claims (i.e., goods). Further, the taxable value declared by it is also incorrect. Aggrieved, petitioner filed writ petitions before the Karnataka HC.

The key observations of the HC are summarized below:

• Entry 6 of Schedule III to the Central Goods and Services Tax Act, 2017 (CGST Act), taking actionable claims out of the purview of supply, would clearly apply to games of skill and only games of chance such as lottery, betting and gambling would be taxable.
  
• A game of mixed chance and skill is not gambling, if it is substantially and preponderantly a game of skill and not of chance.
  
• The game of rummy is not one where the outcome of an event is being predicted. It is a game where predominantly skill is exercised to control the outcome of the game. Further, there is no difference between offline and online rummy. 
  
• The expressions “Betting” and “Gambling” having become nomen juris, are applicable for the purpose of GST also and consequently, the said words are not applicable to online rummy, whether played with stakes or without stakes.
  

Accordingly, HC allowed the writ petitions and quashed the SCN issued by Revenue considering the same as illegal, arbitrary and without jurisdiction or authority of law.  

Comments

• HC has re-iterated the principles differentiating the “game of chance” from “game of skill” as laid down by various judgements of SC and other HCs. Considering the stakes involved, Revenue may prefer further appeal before the SC.
  
• Basis the observations of the HC, online platforms hosting various games involving stakes, may need to analyze whether such games qualify as game of chance or game of skill and pay tax accordingly.
  
• Taxpayers who have paid tax on the entire buy-in amount considering the game of skill as betting or gambling, may evaluate the possibility of refund basis this judgement.