Online real-money gaming companies on Tuesday opposed the imposition of 28 per cent goods and services tax (GST) on their services citing that the levy was fundamentally flawed and contrary to the legal framework.
According to Senior Advocate V Sridharan, who was representing the online gaming companies at the Supreme Court, there was an absence of clear provisions under the GST before October 2023 to enforce the 28 per cent tax on the gaming operators. In addition, the petitioners also challenged the government’s reliance on Rule 31A of the GST Rules (value of supply in case of lottery, betting, gambling and horse racing), arguing that it lacked statutory authority under the Central GST (CGST) Act.
The advocate further stated that Rule 31A specified the valuation method for betting and gambling, but it did not comply with the mandatory two-step process under Section 15(5) of the CGST Act. The rule was however issued without first notifying “actionable” claims as taxable supplies, thereby making it ineffective and invalid, he added.
What’s Wrong with Rule 31A’s GST Valuation Method?
The valuation method under Rule 31A essentially refers to the way the government decides how much value to assign to a betting or gambling transaction so that the GST on it can be calculated. To understand it better: Rule 31A mainly gives the method for calculating this value but it does not adhere to the two-step process under Section 15(5), which specifies that only certain types of supplies (i.e. goods or services) like gambling, insurance, etc. can have special valuation rules.
However, before applying these rules the government has to officially notify that the particular supply, which in this case is actionable claims like betting or gambling, is taxable. Once that notification is given, only then can a separate rule on how to calculate the value for GST be made.
In this situation, as per the Senior Advocate’s argument, the government did not notify that the actionable claims like gambling are taxable supplies and instead went ahead with issuing Rule 31A, that specifies the GST calculation. Thereby, he argues that since the notification wasn’t given, Rule 31A stands legally ineffective here.
What Else is Flawed?
Sridharan also contended that attempts to tax actionable claims like betting and gambling as “goods” by amending the Goods Rate Notification were also flawed. This is because as of October 1, 2023, actionable claims like betting or gambling was not even listed in the official list of goods or the Customs Tariff Schedule, thus making their classification as goods under GST does not make sense.
Further, while pointing out that gambling and online gaming was consistently treated as “services” under various GST notifications and the Integrated GST Act, the senior advocate stated that this abrupt reclassification lacked legislative coherence.
The petitioners also clarified that in online games, the operators just provide platform services and that the platform operator, as the supplier of platform services has already discharged GST at a particular rate during the relevant period.
Further, the difference between platform fees - the one on which GST is already paid, and the prize pool contributions that are made by players - was also explained at the apex court. The gaming operators further mentioned that prize pool contributions does not constitute consideration and thus cannot be taxed under GST.
“The operator does not make any other supplies and only holds the Prize Pool as a deposit to be settled in favour of the winner, which is decided between the players. Thus, the operator cannot be made liable for supplies made inter se (between the players),” Sridharan noted.
While hearing the case, bench of Justices J B Pardiwala and R Mahadevan enquired if the game will be treated as a transaction or not. Replying to this the advocate stated that GST is a contract-based tax.
As per the petitioners, attempts to retroactively impose GST without statutory backing are against fundamental tax principles and should thereby be struck down as ultra vires, i.e. acting or done beyond one's legal power or authority.
The final hearing date for the case has now been scheduled on July 25. With an estimated financial impact of Rs 2.5 trillion, the case is being considered as one of the biggest tax battles in India’s history.
