By Arvind P Datar
In August 2009, the then-minister of state for finance SS Palanimanickam informed the Rajya Sabha that the top 100 defaulters owed Rs 1.41 trillion as income tax. Of this amount, the stud-farm owner, Hasan Ali, owed Rs 50,345 crore and the late Harshad Mehta owed Rs 12,000 crore. Four years later, the Union minister of finance P Chidambaram informed the Rajya Sabha that as on December 31, 2012, the total arrears of income tax were Rs 4.18 trillion, of which the dues of Hasan Ali amounted to about Rs 1.17 trillion and the dues of Harshad Mehta had risen to Rs 17,000 crore, per a report in Mint on March 12, 2013.
Just three years later, the Indian Express (April 8, 2016) reported that the Income Tax Appellate Tribunal delivered a ruling that the total amount due from Hasan Ali was just Rs 30 million as the income tax department had failed to establish its claim. Clearly, the amount stated by the then-finance minister was unsustainable by law. In 2012, the CAG Report on the 2G scam famously claimed that the loss to the public exchequer was Rs 1.76 trillion. The actual loss has never been established, and all the accused were eventually acquitted in the 2G scam, most spending several months in jail.
In the recent past, the Directorate-General of Goods and Service Tax Intelligence (DGGI) has reportedly issued show-cause notices to several gaming companies demanding GST of Rs 1.5 trillion for 2017-2022. The basis of these demands is that all the amounts pooled are for “betting and gambling” and every rupee is subject to a whopping 28% GST.
These claims are not only misleading but without legal foundation. Section 12 of the Public Gambling Act, 1867 expressly states that any game of mere skill will not amount to gambling. Thus, for over 150 years, it is settled law in India that any winning on a game of skill cannot be treated as amounting to betting or gambling. Even though dozens of 19th century laws were repealed as part of legal reforms, this vintage law continues to be binding.
In the case of online gaming, several high courts have repeatedly held that games of skill do not amount to betting and gambling even if winners are rewarded in cash. Therefore, if a game of rummy, poker, or bridge is played online and if there is a winner, it will not amount to betting and gambling. In State of Andhra Pradesh v. Satyanarayana, (1968), the Supreme Court held that rummy is preponderantly a game of skill, and in Junglee games, the Madras HC held that poker is a game of skill.
In its 276th Report, the Law Commission of India examined this issue in detail. Starting with a 1915 judgment of the Madras HC, the Commission considered not only other HC and SC decisions, but decisions from Canada and the US as well. The report concluded:
“Analysis of the aforementioned decisions brings out two principles. Firstly, prize competitions and contests, where the winner is determined by draw of the lots are in the nature of gambling and cannot be extended protection under Article 19(1)(g) of the Constitution. Secondly, games where preponderance of skill dominates cannot be considered gambling and are protected under the Constitution.”
Recently, a show cause notice issued to GamesKraft Technologies for over `20,000 crore was quashed by the Karnataka HC, although this was later stayed by the SC. It is indeed unfortunate that these staggering amounts are once again made without regard to earlier court rulings and contrary to a central law.
The other reason for these huge demands is the retrospective application of the law. From October 1, 2023, the GST Council decided to amend the law and treat winning on games of skill as also amounting to betting and gambling. But the claim of `1.5 trillion from the online gaming companies is for the period 2017-22, when such a law did not exist.
In the case of gaming companies, service tax was always paid at 18% on the platform fee. Thus, if 20 persons paid `500 each to play a game of skill, the total amount pooled is `10,000. The gaming companies typically collect 10% as their service charges and the balance sum of `9,000 is then to be shared amongst the winners. From 2017, the balance amounts have been paid to thousands of winners. These payments were perfectly legitimate in view of the central law and rulings of the HCs. It is difficult to understand how a GST demand of 28% can now be made on the entire amount which has been disbursed to thousands of winners over the last six years. Several gaming companies will close because of the retrograde levy of 28% on the gross amount; indeed, no country which permits online gaming has such a regressive tax.
What is worse is that the staggering amounts demanded do serious damage to India’s image as a safe investment destination. Several foreign companies had invested substantial amounts in gaming companies generating employment to thousands of people. It does no credit to a country if tax authorities can make demands contrary to their own laws and decisions of HCs and the SC.
If past experience is any indication, a few years down the line, the gaming industry will be almost dead with little or no recovery of GST. But the collateral damage to India’s reputation as a country which respects the rule of law will be even greater. It is time to rethink the widespread practice of making staggering demands which have very little hope of any recovery.
Arvind P Datar, the author is a senior advocate and has appeared for some of the gaming companies. Views are personal.