In Writ Petition No. 19570 of 2022 – KARN HC - Karnataka High Court rules online Rummy not taxable as 'Betting' and 'Gambling', quashes GST notice issued to Gameskraft
Justice S.R. Krishna Kumar [11-05-2023]

Read Order: Gameskraft Technologies Private Limited V. Directorate General of Goods

Chahat Varma

New Delhi, May 19, 2023: The High Court of Karnataka has come to the aid of Gameskraft Technologies Private Limited (petitioner), ruling that Online/Electronic/Digital Rummy game and other Online/Electronic/Digital games played on petitioner’s platforms are not taxable as ‘Betting’ and ‘Gambling’ and has quashed the show cause notice that demanded the petitioner to deposit a sum of Rs. 2,09,89,31,31,501/- along with interest and penalty, holding it to be illegal, arbitrary and without jurisdiction.

The main issue that arose for consideration was whether offline/online games such as Rummy which are primarily based on skill and not on chance, whether played with/without stakes tantamount to ‘gambling or betting’ as contemplated in Entry 6 of Schedule III of the Central Goods and Services Tax Act, 2017 (CGST Act).

M/s. Gameskraft Technologies Pvt. Ltd. (GTPL), headquartered in Bangalore, is an online intermediary company incorporated in June 2017. They operate technology platforms that enable users to participate in skill-based online games against each other. The respondents had issued a Show Cause Notice under section 74(1) of the CGST Act to GTPL as well as its Founders.

The single-bench of Justice S.R. Krishna Kumar noted that there is a distinct difference between games of skill and games of chance and games such as rummy, etc., whether played online or physical, with or without stakes, would be games of skill and test of predominance would apply. In the said context, the court examined the decision rendered by the Supreme Court in All India Gaming Federation v State of Karnataka & Ors [LQ/KarHC/2022/504], wherein it was observed that a game that involves substantial amount of skill is not gambling and further conclusively held that a game of skill does not cease to be one even when played with stakes.

The court also observed that in the case of RMD Chamarbaugwalla v. Union of India [LQ/SC/1957/38], the Supreme Court has examined the scope of ‘betting and gambling’. In the said case, Supreme Court referred to its earlier decision in State of Bombay v. RMD Chamarbaugwala [LQ/SC/1957/39] and acknowledged the distinction between gambling activities and games that involve a significant degree of skill. It recognized that games of substantial skill, where success primarily depends on skill rather than chance, should be excluded from the purview of gambling.

In State of Bombay v. RMD Chamarbaugwala, it was held by the Apex Court that any game/competition that relies substantially upon exercise of skill cannot be classified as ‘gambling’; it was also held that gambling or conducting the business of gambling is extra-commercium and hence not included within the meaning of ‘trade, commerce or intercourse’.

The court further observed that while section 2(17) of the CGST Act recognizes wagering contracts as a part of the definition of business, it does not imply that lottery, betting, and gambling are equivalent to games of skill.

Applying the principle of nomen-juris, the court said that while ‘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. The element of chance cannot be completely overruled in any case but what is to be seen is the predominant element. In a game of rummy, certain amount of skill is required because the fall of the cards has to be memorised and the building up of rummy requires considerable skill in holding and discarding cards. Therefore, a game of rummy is a game of skill.

The court further held that ‘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.

Holding that rummy is primarily a game of skill rather than chance, the court said that a game of chance whether played with stakes is gambling, whereas, a game of skill, whether played with or without stakes is not gambling.

It was further observed by the court that there is no difference between offline/physical rummy and online/electronic/digital rummy and both are substantially and preponderantly games of skill.