Govt Misled SC, Altered GST Notice Grounds: Gaming Firms

In the ongoing legal battle over the taxability of online gaming, senior advocate Harish Salve, appearing for the E-Gaming Federation, has reportedly accused the union government of misleading the top court by significantly altering the legal foundation on which it issued show cause notices (SCNs) to the gaming companies.

The notices were initially issued on the premise that online gaming operators created a “chance to win,” constituting a taxable supply of goods or services under GST. Salve argued this does not qualify as a supply under the GST law.

Salve made these submissions before a division bench of the SC comprising Justices J.B. Pardiwala and R. Mahadevan, Storyboard18 reported.

The apex court is nearing the final hearing date in a significant Goods and Services Tax (GST) case against online gaming operators, with the potential tax dispute reaching INR 2.5 Lakh Cr.

For context, the 28% levy on the full value of the bets placed in online gaming came into effect in October 2023. Following the new GST regime, gaming companies have received tax demand notices of about INR 1.12 Lakh Cr for the period between 2017 and 2023. The authorities are also levying 28% GST retrospectively.

Salve highlighted the notice issued to Play Games 24×7, which admitted that player funds remain the property of the players, wallet money additions aren’t taxable supplies, and operators act merely as custodians managing pooled funds until winnings are distributed.

He accused the government, in later submissions, of shifting its stance, claiming that players gain a “conditional right” to winnings, which are movable property and that operators create this actionable claim, thus constituting a taxable supply. 

Salve called this claim “plainly wrong,” stating no legal precedent grants property rights over potential winnings before a game ends. He also differentiated this case from a Supreme Court ruling on state-run lotteries, where prizes are funded. 

“The petitioners would first like to point out that the Government has significantly altered the legal basis on which it seeks to sustain the Show Cause Notices (‘SCN’) issued to the Online Gaming Operators. Reliance is placed on an illustrative SCN dated 27 September 2023 issued to Play Games 24*7 Private Limited,” salve added. 

Salve argued that online gaming operators only hold players’ funds in a custodial capacity, with winnings arising only after a game ends. He said merely creating a “chance to win” is not a taxable supply under GST, and extending the definition of “supply” to such situations would lead to absurd outcomes, like taxing banks for lending or companies for issuing shares. 

He pointed out that the GST rule cited by the government, Rule 31A(3), (which deals with taxing actionable claims from betting, gambling), speaks of the “supply of actionable claim in the form of chance to win,” but does not equate the creation of such a chance with a supply.

Salve stated, “It is absurd and without any merit to canvas the proposition that the creation of an actionable claim without a transfer (albeit of some form) would still amount to supply and attract the levy of GST.”

Earlier this year, the SC gave a breather to the industry by granting a stay on GST proceedings and show-cause notices sent to 49 online gaming companies.