3 Supreme Court cases will decide the fate of the RMG industry

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The online real money gaming industry has been in a state of turmoil with the recent changes recommended by the Goods and Services Tax (GST) Council recommending 28% GST on every deposit, that has been implemented by the central government from 1st October, 2023, despite fervent pleas by the industry to defer or reconsider the levy.

Besides the massive hike in the tax rate prospectively, the industry is also grappling with the ghost of retrospective taxation, where the Directorate General of Goods and Services Tax Intelligence (DGGI) has either issued or is in the process of issuing showcause notices to over 35 gaming companies.

The notices sent by the taxman are claiming backdated GST dues from 2017 onwards from real money gaming and casino companies at the rate of 28%. It is estimated that the total quantum of all showcause notices issued to gaming companies will exceed Rs. 2.5 lakh crores. GST officials started sending notices to gaming companies after the Supreme Court by its order dated 6th September, 2023 stayed the favourable order of the single judge of the Karnataka High Court, which had quashed the Rs. 21,000 crore notice to online rummy platform Gameskraft.

Justice SR Krishna Kumar of the Karnataka High Court in his judgment dated 11th May, 2023 had stated that online rummy played for stakes does not amount to gambling and betting, and the showcause notice issued by the department was arbitrary, without jurisdiction and totally illegal.

However, hearing the department’s appeal against this judgment, a 3-judge bench of the Supreme Court in its order on 6th September, 2023, ordered ad-interim stay in the matter and issued notice in the matter, thereby enabling the department to issue showcause notice to similarly placed online gaming companies. The decision in the Gameskraft matter will perhaps be the most crucial decision that will decide the issue of survival of the industry.

Here are the 3 pending cases in the apex court that will be heard soon and decide the fate of the industry in the next few months:

1) Directorate General of Goods and Services Tax Intelligence HQ v. Gameskraft Technologies Private Limited

As discussed above, the outcome of the Supreme Court in the Gameskraft matter will decide whether online games offered for stakes amount to ‘gambling’ or ‘betting’ or not. A decision against Gameskraft and in favour of the revenue department will not just ensure that Gameskraft and all other companies will face tax dues several times more than their turnover, but also raise question marks on the legality of the platforms under state gaming laws, and further potentially lead to the foreign investments raised by companies being investigated. A bench led by Chief Justice of India Dr. DY Chandrachud is expected to hear the matter on 10th October, 2023.

2) State of Maharashtra v. Gurdeep Singh Sachar

The Bombay High Court had in 2019 dismissed a Public Interest Litigation (PIL) by one Gurdeep Singh Sachar seeking to hold fantasy sports platform Dream11 as offering gambling and betting services and make them pay 28% GST on the full value of contest entry fees.

Although the Bombay High Court dismissed the PIL and held Dream11 to be a game of skill, outside the ambit of gambling and betting, and the Supreme Court dismissed appeals by Sachar and Union of India against the order, on 6th March, 2020 a bench led by the then CJI SA Bobde in an appeal filed by the Maharashtra government stayed the Bombay High Court and issued notice to all parties. The Supreme Court in the matter will finally and conclusively decide the legality of fantasy sports and whether they should pay tax on the face value of entry fees paid by each user.

The arguments have not been heard in the matter since March 2020. As per the automatic computer-generated date given on the Supreme Court website and advance causelist of the court, the matter is next scheduled to be listed on 9th October, 2023.

3) State of Tamil Nadu v. Junglee Games India Private Limited & Others

The Tamil Nadu and Karnataka governments have filed appeals against judgments of their respective High Courts that struck down the respective state law amendments banning online games played for stakes. The online gaming companies in the High Court had contended that playing online skill-based games like rummy for stakes and organising such games was a fundamental right under the constitutional and a complete ban on such games was arbitrary, disproportional and unconstitutional. Both the Karnataka and Madras High Courts had found favour with these arguments and struck down the laws introduced by the two states as unconstitutional.

However, appeals filed by both Karnataka and Tamil Nadu governments were admitted by the Supreme Court on 22nd September, 2023 and the matters have been listed for final hearing on 7th December, 2023. The final outcome in these matters will decide whether state governments can impose a complete ban on online skill-based games played for stakes.

The outcome in all three pending matters before the Supreme Court is extremely crucial for the online gaming industry and will be eagerly watched by all stakeholders. Final hearings in all these matters are expected to take place over the next few months and a decision in these matters may potentially be delivered by 2024.