11/04/2023, 23:06 Navigating the Intricacies of GST on Online Gaming | SCC Blog

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Navigating the Intricacies of GST

on Online Gaming
by Gautam Yadav†
Published on January 7, 2023 - By Bhumika Indulia

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Background
In May 2021, the GST Council had constituted a Group of Ministers (hereinafter “GoM”) to
recommend the base and rate at which GST should be levied on casinos, online gaming, and
racecourses.1

The GoM had earlier suggested that all activities under consideration should be taxed at
28% as casinos, online gaming, and horse betting all come under the category of betting or
gambling.2 The proposal was vetoed by the State of Goa. The GST Council asked the GoM to
submit a fresh proposal in this regard after reconsideration. The same is still awaited.3

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By way of this article, the author seeks to discuss the definition of “online gaming” and
“gambling” under the relevant legal provisions, whether online gaming can be categorised as
gambling under such provisions, and the larger social, economic, and legal implications of
such categorisation by the GoM.

Contours of online gaming — Casual versus real money

The regulatory regime for online gaming is still at a nascent stage and therefore there are
not many reliable sources to provide a concrete definition of online gaming. Guidance in this
regard may be taken from the recently proposed Online Gaming (Regulation) Bill, 2022.4 The
Bill seeks to establish an effective regime to regulate the online gaming industry to prevent
fraud and misuse. Section 2(e) of the Bill5 states:
“Online gaming” means games played on any electronics device including personal
computers, mobile phones, tablets, and other devices;

The Bill has been under criticism for its regressive nature and oversimplification of the
online gaming industry on multiple levels, but relevant to this article is a lack of distinction
between casual gaming and real money gaming.6

Casual gaming is where participants do not put money on the line, and therefore have no
risk/prospect of losing/gaining money. Since money does not change hands, there are no tax
implications in casual gaming.

Real money gaming on the other hand is where participants pay an entry fee to enter a
competition, which is pooled together by a platform, and prizes are given to the winners
from this pool, after deducting a certain percentage which becomes the profit of the
platform for providing its service. It is this kind of online gaming which the GoM proposal
aims to regulate via taxation. However, as explained in the next section of this article, it
would be unwise of the GoM to characterise all real money games as gambling.

What constitutes gambling? The skill versus chance jurisprudence

The GoM’s earlier recommendation suggests that online gaming should be taxed in the
same category as casinos and horse racing i.e. betting and gambling activities. The
discussion on what amounts to “gambling” in India is more nuanced and is informed by
almost six decades of settled legal jurisprudence.

Gambling in India is regulated by the Public Gambling Act, 1867.7 The Act does not define
what constitutes “gambling”, but Section 128 does define the activities that are outside of the
application of the Act i.e. the activities that do not constitute gambling. It states —
“Nothing in the foregoing provisions of this Act contained shall be held to apply to any
game of mere skill wherever played.”9

The Supreme Court, through the following judicial pronouncements, has defined the test to
determine what constitutes “mere skill” as provided in the above provision.
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The preponderance/dominant factor test

The roots of the preponderance test (also known as “the dominant factor test”) can be
traced back to State of Bombay v. R.M.D. Chamarbaugwala10 (hereinafter “Chamarbaugwala”).
The judgment authored by Sudhi Ranjan Das, C.J., while deliberating over the Bombay
Lotteries and Prize Competitions Control and Tax (Amendment) Act, 1952, made a reference
to the amended Section 2(1)(d)11 of the Act that dealt with the definition of “prize
competition”.12 It was noted that all three clauses of Section 2(1)(d) were of a gambling
nature, given that success in all of them depended on luck or chance and did not depend to
a substantial degree upon the exercise of skill.13 The Court noted the changing contours of
what amounted to gambling through the ages and laid down the current positions on the
issue as:
17. … a competition in order to avoid the stigma of gambling must depend to a
substantial degree upon the exercise of skill. Therefore, a competition success
wherein does not depend to a substantial degree upon the exercise of skill is now
recognised to be of a gambling nature.14

The Chamarbaugwala15 jurisprudence was further developed in State of A.P. v. K.

Satyanarayana16 (hereinafter “Satyanarayana”). In this case, the Bench was seized with the
responsibility of determining whether a certain establishment comes within the definition of
a “common gambling house” under Section 317 of the Public Gambling Act, 1867. The
judgment, authored by M. Hidayatullah, J., as he then was, did not deeply delve into the
difference between “game of skill” and “game of chance”. However, it did lay down that the
game of rummy was a game of skill and therefore did not come under the ambit of
gambling. It stated —
12. … The “three card” game which goes under different names such as “flush”, “brag”,
etc. is a game of pure chance. Rummy, on the other hand, requires a certain amount
of skill because the fall of the cards has to be memorised and the building up of
rummy requires considerable skill in holding and discarding cards. We cannot,
therefore, say that the game of rummy is a game of entire chance.18

Satyanarayana case19 was followed by the decision in M.J. Sivani v. State of Karnataka20
(hereinafter “M.J. Sivani”). The judgment, authored by K. Ramaswamy, J., while delineating the
categories of “game of skill” and “game of chance” stated that “No game can be a game of
skill alone. Even a skilled player in a game of mere skill may be lucky or unlucky so even in a
game of mere skill chance must play its part.””21 While technically accurate, this approach
does not help in skill versus chance jurisprudence from a practical perspective. Because by
that definition, every sport under the sun could be called a game of chance. Surely no one
can argue with the fact that football and basketball are games of skill, in that the skill of the
team dominates the outcome, compared to how lucky they were on any given day. However,
under the categorisation created by M.J. Sivani case22, football would lie in the category of
“games of mixed chance and skill”, the other two categories being “games of pure skill” and
“games of pure chance”. In the author’s opinion, the two original categories under the
preponderance test served their purpose much better than the three category system
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created by this case. However, M.J. Sivani case23 did lay down that in the end, all that matters
is whether the game in question has a preponderance of skill over chance or vice versa, and
the same is to be determined on the facts of every case.24

M.J. Sivani case25 was followed by K.R. Lakshmanan v. State of T.N.26 (hereinafter
“Lakshmanan”), where the Bench was seized with the question whether betting on a horse
race is a game of skill or a game of chance. Affirming the decisions in Chamarbaugwala case27
and Satyanarayana case28, and looking into the deep history and art of horse racing through
various American judgments, the Bench concluded that horse racing is preponderantly a
game of skill. The judgment, authored by Kuldip Singh, J., noted—
30. We have no hesitation in reaching the conclusion that horse racing is a sport which
primarily depends on the special ability acquired by training. It is the speed and
stamina of the horse, acquired by training, which matters. Jockeys are experts in the
art of riding. Between two equally fast horses, a better-trained jockey can touch the
winning post.29

It is abundantly clear from the six decades of jurisprudence above that whether a particular
activity amounts to gambling or not under the Public Gambling Act, 186730 depends on
whether the game has a preponderance of skill or chance. It is also clear that the same
cannot be determined by general rules and regulations and has to be determined in the
facts and circumstances of each case.

It is also interesting, and in line with the above jurisprudence, that recently various laws that
have sought to classify online gaming under the umbrella of gambling and hence prohibit
them have been struck down by the judiciary. In February 2022, the Karnataka High Court
struck down provisions of the Karnataka Police (Amendment) Act, 202131 insofar as they
prohibited betting on online games, including games of skill.32 The State preferred an appeal
which is ongoing in the Supreme Court.33 In August 2021, the Madras High Court struck
down Part II of the Tamil Nadu Gaming and Police Laws (Amendment) Act, 202134 which
banned betting or wagering in cyberspace, including games of skill if played for a wager, bet
or other stakes.35

In light of the above discussion, the proposal of the GoM to club all online gaming activities
with casinos and horse races seems all the more baffling. Both horse racing36 and rummy37
(an online game) have already been categorised as games of skill by the Supreme Court.
Laws prohibiting online gaming under the garb of gambling are being struck down by
various High Courts of the country.

It is therefore the argument of the author that it would be unwise of the GoM to put down
any general rules regarding the taxation of the online gaming sector. In fact, what the GoM
needs to do is to draft comprehensive definitions for the delineation of games of skill and
games of chance, and even lay detailed guidelines for the same if necessary. Whether a
game is a game of skill or a game of chance should be determined based on the facts and
circumstances of each case. As explained in the next section, in the absence of a thorough
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analysis and separate categorisation of games of skill for the purpose of taxation, the
Government would only be opening itself up to excessive litigation.

Classifying games of skill as gambling amounts to arbitrariness under Article

14
It is well understood that taxation laws enjoy wide latitude compared to other laws. Unless a
taxation law is manifestly arbitrary, the courts will leave it to the wisdom of the legislature to
determine what to tax, in what manner and at what rate.38 The excessiveness of a tax or the
mere fact that a tax reduces a person’s income from his trade, profession or business
cannot be the basis of a challenge in court.39 A tax can even operate retrospectively without
being struck down in certain cases.40

However, where objects, persons, or transactions essentially dissimilar are treated by the
imposition of a tax which is uniformly applied, it can result in discrimination for refusal to
make a rational classification.41 And the current case of online gaming fits exactly into this
category.

For a legislative classification to be valid under Article 1442, the twin conditions of intelligible
differentia and rational nexus need to be fulfilled i.e. the classification must be founded on
an intelligible differentia which distinguishes persons or things that are grouped together
from others left out of the group,43 and the differentia must have a rational relation to the
object sought to be achieved by the statute in question.44

The corollary being that things that are grouped together must have a commonality between
them, and such commonality must have a rational relation to the object sought to be
achieved by the statute in question.

As far as the GoM’s first proposal is concerned, online gaming and gambling were grouped
together based on the commonality that they are both gambling,45 an illogical presumption
rebutted by the author’s arguments above. The object of grouping them together was
taxation. However, excessive taxation of gambling and other activities like smoking and
drinking is to discourage the public from such activities. These taxes are used as an
instrument of social control46 and they are levied for public health purposes to discourage
consumption of harmful products by making them unaffordable.47 In the context of
gambling and betting laws in India, the Supreme Court in Chamarbaugwala case48 delved into
the history of gambling and extensively discussed how and why it is considered a vice in
Indian society49 and abroad50 and therefore, needs to be curbed, lest the public welfare and
social order be compromised.51

On the other hand, many online games being games of skill like football or basketball, and
not creating the devastating societal harm that gambling does, have no reason to be
classified as such and taxed at the same rate as sin goods and services.

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In light of the above arguments, it is the case of the author that if the GoM were to proceed
with this classification in their next proposal, the same would be open to challenge in court,
cause excessive litigation and will be liable to be struck down.

Concluding remarks
It is important to note that the excessive taxation of the online gaming industry is not only in
the best legal interest of the Government, but also not ideal from an economic perspective.
By excessive taxation, the Government will stunt the growth of the industry in its nascent
stage. Set to treble in value and reach $3.9 billion by 2025, India is expected to become one
of the world’s leading markets in the gaming industry.52 The rise of cryptocurrencies, Web3
technology and virtual reality will contribute greatly to the ease and enjoyment experience
of online gaming, further accelerating its growth. Over the long run, the Government would
only benefit from reasonably taxing the online gaming sector because it will lead to the
development of revenue, new technology and employment.

† Advocate, BA LLB (Hons.), NLUJ. Author can be reached at

yadavgautamind@[Link].
1. Kamalika Ghosh, “Online Gaming: Segregate Amount Collected by Portals for Taxation,
Suggests New Proposal”, Outlook India(12-10-2022), available
at<[Link]
by-portals-for-taxation-suggests-new-proposal-news-229290> (hereinafter Ghosh,
“Online Gaming”).
2. Vainavi Mahendra, “GST on Online Gaming: GoM to Tax Casinos, Gaming and Horse
Racing Separately”, The Financial Express(6-9-2022), available at
<[Link]
casinos-gaming-and-horse-racing-separately/2655419/>.
3. Kamalika Ghosh, “Online Gaming: Segregate Amount Collected by Portals for Taxation,
Suggests New Proposal”, Outlook India(12-10-2022), available
at<[Link]
by-portals-for-taxation-suggests-new-proposal-news-229290>.
4. Online Gaming (Regulation) Bill, 2022 (No. 78 of 2022).
5. Online Gaming (Regulation) Bill, 2022 (No. 78 of 2022), S. 2(e).
6. Nishka Kapoor, “India’s Online Gaming Bill: Regressive Regulation”, Jurist — Student
Commentary (23-5-2022), available at
<[Link]
7. Public Gambling Act, 1867.
8. Public Gambling Act, 1867, S.12.
9. Public Gambling Act, 1867, S.12.
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10. AIR 1957 SC 699.

11. Bombay Lotteries (Control and Tax) and Prize Competitions (Tax) Act, 1958, S. 2(1)(d).
12. Bombay Lotteries (Control and Tax) and Prize Competitions (Tax) Act, 1958.
13. State of Bombay v. R.M.D. Chamarbaugwala, AIR 1957 SC 699, para 17.
14. State of Bombay v. R.M.D. Chamarbaugwala, AIR 1957 SC 699.
15. AIR 1957 SC 699.
16. State of A.P. v. K. Satyanarayana, AIR 1968 SC 825.
17. Public Gambling Act, 1867, S. 3.
18. State of A.P. v. K. Satyanarayana, AIR 1968 SC 825.
19. AIR 1968 SC 825.
20. M.J. Sivani v. State of Karnataka, (1995) 6 SCC 289.
21. M.J. Sivani v. State of Karnataka, (1995) 6 SCC 289, 299, para 1.
22. (1995) 6 SCC 289.
23. (1995) 6 SCC 289.
24. M.J. Sivani v. State of Karnataka, (1995) 6 SCC 289, para 11.
25. (1995) 6 SCC 289.
26. K.R. Lakshmanan v. State of T.N., (1996) 2 SCC 226.
27. AIR 1957 SC 699.
28. AIR 1968 SC 825.
29. K.R. Lakshmanan v. State of T.N., (1996) 2 SCC 226, 249.
30. Public Gambling Act, 1867.
31. Karnataka Police (Amendment) Act, 2021 (No. 28 of 2021).
32. All India Gaming Federation v. State of Karnataka, 2022 SCC OnLine Kar 435.
33. Debayan Roy, “Karnataka Moves Supreme Court Challenging High Court Verdict Striking
Down Law against Online Gaming”, Bar and Bench (28-3-2022),
<[Link]
challenging-high-court-verdict-striking-down-law-against-online-gaming>.
34. Tamil Nadu Gaming and Police Laws (Amendment) Act, 2021 (No. 1 of 2021).
35. Junglee Games India (P) Ltd. v. State of T.N., 2021 SCC OnLine Mad 2762.
36. K.R. Lakshmanan v. State of T.N., (1996) 2 SCC 226.
37. State of A.P. v. K. Satyanarayana, AIR 1968 SC 825.
38. Khyerbari Tea Co. Ltd. v. State of Assam, AIR 1964 SC 925.
39. V.N. Shukla, Constitution of India, (13th Edn., 2017) p. 183 (hereinafter V.N. Shukla,
“Constitution”).

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40. Empire Industries Ltd. v. Union of India, (1985) 3 SCC 314.

41. V.N. Shukla, Constitution of India, (13th Edn., 2017) p. 78.
42. Constitution of India, Art. 14.
43. V.N. Shukla, Constitution of India, (13th Edn., 2017) p. 52.
44. V.N. Shukla, Constitution of India, (13th Edn., 2017) p. 52.
45. Dhwani Gada, “Gaming and GST”, The Hindu Business Line (5-10-2022),
<[Link]
46. Clarence Heer, “Taxation as an Instrument of Social Control”, (1937) 42(1) American
Journal of Sociology 484, 485.
47. Krishna Veera Vanamali, “What is Sin Tax? What is it Imposed on?”, Business Standard(14-
2-2022), <[Link]
they-imposed-on-122021400044_1.html>.
48. AIR 1957 SC 699.
49. State of Bombay v. R.M.D. Chamarbaugwala, AIR 1957 SC 699, para 37.
50. State of Bombay v. R.M.D. Chamarbaugwala, AIR 1957 SC 699, paras 38, 39 and 40.
51. State of Bombay v. R.M.D. Chamarbaugwala, AIR 1957 SC 699, para 36.
52. “Big Bang Growth of India’s Gaming Industry”, The Economic Times (7-6-2022),
<[Link]
of-indias-gaming-industry/articleshow/[Link]?from=mdr>.
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