[CGST Act] Terms ‘Betting’ And ‘Gambling’ In Entry 6 Of Schedule III Does Not Include Games Of Skill Within Its Ambit: Karnataka HC

While dealing with an issue as to whether offline/online games such as Rummy, which are based substantially on skill & not chance & whether played with or without stakes tantamount to gambling or betting as contemplated in Entry 6 of Schedule III of CGST Act, the Karnataka High Court held that the show cause notices issued by the Revenue Department are an outcome of a vain and futile attempt to cherry pick stray sentences from the judgments and try to build up a non-existent case out of nothing which clearly amounts to splitting hairs and clutching at straws which cannot be countenanced and is impermissible in law.

The High Court has also quashed Rs. 21,000 Crore show cause notice issued by the Director General of GST Intelligence (DGGI) to Gameskraft Technology Pvt. Ltd. (GTPL).

A Single Judge Bench of Justice S.R Krishna Kumar observed that “The expressions, ‘Betting’ and ‘Gambling’ having become nomen juris, the same are applicable for the purpose of GST also and consequently, the said words, ‘Betting’ and ‘Gambling’ contained in Entry 6 of Schedule III to the CGST Act are not applicable to Online/Electronic/Digital Rummy, whether played with stakes or without stakes as well as to any other Online/Electronic/Digital games which are also substantially and preponderantly games of skill”.

Senior Advocate Dr. Abhishek Manu Singhvi appeared for the Petitioner, whereas, ASG N. Venkataraman, and Senior Advocates Mukul Rohatgi as well as Arvind Datar appeared for the Respondent.

Going by the background of the case, the Petitioner (Gameskraft Technologies) runs technology platforms that allow users to play skill based online games against each other. During the period between Nov 11 to 13, 2021, the Respondents (Revenue Department) undertook search and seizure operations of the premises of Petitioner and passed Provisional Attachment Orders attaching its Bank accounts under Section 83 of the CGST Act. In the meanwhile, when the Petitioner was permitted to operate the bank accounts for limited purpose by way of an interim order passed by this Court, the officials / founders / employees of Petitioner were summoned by the Respondents and an Intimation notice was issued under Section 74(5) of the CGST Act, calling upon Petitioner to deposit a sum of Rs.2,09,89,31,31,501/- along with interest and penalty. When this order was stayed by this Court by way of an interim order, the Respondents issued Show Cause Notice under Section 74(1) of the CGST Act to the Petitioner as well as its Founders, CEOs, and CFOs. Hence, present petition.

While culling out the dichotomy between games of skill and games of chance, the High Court referred to the decision of Division Bench decision of this Court in All India Gaming Federation vs. State of Karnataka & Ors. [2022 SCC Online Kar 435 (DB)], wherein it was held that whether played online or physical, with or without stakes would be games of skill and test of predominance would apply.

The High Court elucidated that tough Section 2(17) of the CGST Act recognizes even wagering contracts as included in the term business, but that would not mean that lottery, betting, and gambling are the same as games of skill.

The High Court went on to elaborate that while on one hand, “gambling” or “game of chance” have been held to involve chance as a predominant element, on the other hand “game of skill” has an exercise of skill which can control the chance, and therefore, the element of chance cannot be completely overruled in any case but what is to be seen is the predominant element.

The Bench then elucidated that in a game of rummy, certain amount of skill is required because the fall of the cards must be memorized and the building up of rummy requires considerable skill in holding and discarding cards.

While clarifying that the meaning of the terms “lottery, betting and gambling” as contemplated in Entry 6 of Schedule III of the CGST Act should be construed nomen juris, the Bench said that Entry 6 in Schedule III to the CGST Act taking actionable claims out of the purview of supply of goods or services would clearly apply to games of skill and only games of chance such as lottery, betting and gambling would be taxable.

The Bench further elucidated that taxation of games of skill is outside the scope of the term “supply” in view of Section 7(2) of the CGST Act, 2017 read with Schedule III of the Act, and made it clear that “A game of chance whether played with stakes is gambling; And a game of skill whether played with stakes or without stakes is not gambling”.

“A game of mixed chance and skill is gambling, if it is substantially and preponderantly a game of chance and not of skill; A game of mixed chance and skill is not gambling, if it is substantially and preponderantly a game of skill and not of chance; Rummy is substantially and preponderantly a game of skill and not of chance; Rummy whether played with stakes or without stakes is not gambling; There is no difference between offline/ physical Rummy and Online/ Electronic/ Digital Rummy and both are substantially and preponderantly games of skill and not of chance; Online/ Electronic/ Digital Rummy whether played with stakes or without stakes is not gambling; Other Online/Electronic/Digital games which are also substantially and preponderantly games of skill and not of chance are also not gambling”, added the Bench.

Consequently, the High Court quashed the show cause notices issued by the Respondents, being illegal, arbitrary, and without jurisdiction or authority of law.

Cause title: Gameskraft Technologies Pvt Ltd and Ors. v. Directorate General of GST and Ors.

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