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Business News/ Industry / SC to hear landmark online gaming tax case within two months

SC to hear landmark online gaming tax case within two months

Gaming companies have filed a petition before the court on what they say are retrospective tax demands, adding up to ₹1.5 lakh crore

The GST Council in August amended the law to enforce 28% tax on the “full face value” of bets or entry amounts in online games. (Mint)Premium
The GST Council in August amended the law to enforce 28% tax on the “full face value” of bets or entry amounts in online games. (Mint)

NEW DELHI : The Supreme Court will shortly commence the final hearing of multiple cases between tax authorities and the online gaming industry over tax demands adding up to nearly 1.5 lakh crore.

The court on Monday issued a notice to the Directorate General of GST Intelligence in response to petitions filed by the E-Gaming Federation and gaming startups Games24x7 and Head Digital Works challenging the tax demands, which they say are retrospective.

The Supreme Court has asked the government’s goods and services tax enforcement body to submit written responses to the petitions within two weeks. The court, however, did not issue a stay on the tax notices.

Its final hearing will include pending appeals at the Supreme Court as well as all similar cases pending at various high courts.

The hearing is now likely to begin by the end of February or in March. It is expected to draw to an end the prolonged tax overhang on online gaming, and clarify conclusively if these are games of skill or chance, and if they would come under the ambit of betting and gambling.

After the Supreme Court completes a three-day hearing on the matter, a window of at least three more months is expected before it issues its judgement.

The DGGI has informed the court that it will file a petition seeking the transfer of all cases related to the same legal issue from various high courts to the Supreme Court.

An ongoing appeal on a notice issued to Bengaluru-based Gameskraft Technology for alleged tax evasion amounting to 21,000 crore is also set to be included under the same ambit.

The issue originated in August when the GST Council amended the law to enforce 28% tax on the “full face value" of bets or entry amounts in online games. This was to become effective from October.

Gaming companies argue that the 28% tax should be applicable only from 1 October, but the government contends that the revision clarified an existing law, and, thus, its demand for tax dues was not retrospective.

The companies are also insisting that recurring playing amounts would not come under actionable claims of tax.

Mint reported on 27 September that the Directorate General of GST Intelligence was in the process of issuing notices to online gaming companies regarding retrospective GST claims for the previous five fiscal years, amounting to nearly 1.5 trillion.

Senior advocate Harish Salve, arguing the matter on behalf of the gaming industry, objected to categorising the prize pools, or the total operating value of an online game, as an ‘actionable claim’.

He added that since the games are played between players, with the companies solely drawing a platform fee, even actionable claims should not factor into the GST demand since the platforms and the services only function as intermediaries.

Reiterating his earlier argument, Salve underlined that the tax claims on online gaming startups were multiple times that of the companies’ reported net revenues in the previous five financial years–and would push the nascent sector towards bankruptcy.

An actionable claim, to put it simply, is a claim made in a court against a sum of money that one party owes another. In online gaming, since prize pools and winnings are held in escrow accounts of gaming operators, the claim that a winner of a particular game has on the money held in escrow becomes an actionable claim under law.

While actionable claims were not applicable to online gaming until September, they were brought under the amended GST laws from 1 October.

A spokesperson for the E-Gaming Federation could not be reached until press time. Games24x7 declined to comment, since hearings on the matter are subjudice.

Technology and gaming lawyer Jay Sayta said that the argument put forth by additional solicitor general N Venkatraman in the matter was based on precedent of gambling hearings at the Supreme Court of Sunrise Associates and Skill Lotto Solutions.

“It is now up to the Supreme Court to rule on whether these online gaming titles qualify as games of skill or chance, and if they would come under the ambit of betting and gambling," he said.

Venkatraman said during the hearing that the DGGI had issued tax notices to 99 online gaming startups so far.

Sayta said the lack of a stay order against the GST body means tax authorities can continue to issue demands on the online gaming sector.

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Published: 08 Jan 2024, 03:02 PM IST
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