Summary: Why GST Authorities Want the Supreme Court to Examine the Rs. 21,000 Cr Gameskraft Verdict

Aarathi Ganesanon 10 minute read
10 minute read
Supreme Court

The Karnataka High Court’s Gameksraft judgment holding that rummy played for stakes doesn’t amount to wagering “goes to the root of 70 years of jurisprudence and places the same in jeopardy”, GST Authorities argued in a Supreme Court challenge against the verdict.

The GST Authorities’ Supreme Court petition was shared with MediaNama by multiple sources. This story covers the Authorities’ concerns with how the Karnataka High Court interpreted ‘gambling’ in its verdict. Stay tuned for more on how Gameskraft allegedly fell afoul of GST law, and more.

Delivered in May, the Gameskraft verdict quashed a Rs. 21,000 crore tax evasion order against the gaming major. GST Authorities alleged that Gameskraft—which offers online real money versions of skill games like rummy—was indulging in gambling activities, and should be taxed accordingly. The Karnataka High Court thought otherwise, holding that a game of skill like rummy cannot amount to gambling, irrespective of whether it was played for stakes or not, or online. 

The Supreme Court issued notice in the case a few weeks ago. It will be heard after at least two weeks. 

The challenge also comes after the GST Council’s recent decision to hike the GST rate for online games played for stakes from 18% to 28%, taxing them at par with gambling. This may complicate the Karnataka High Court’s ruling that games of skill played for stakes are distinct from gambling, and should be taxed differently. 

The GST Authorities’ main arguments: The GST Authorities case centres around landmark Supreme Court judgements laying down distinctions between games of skill and gambling, which may have been misread in the Gameskraft case. More on that below, but the main judgments they’re talking about are:

While agreeing with the Court’s verdicts that rummy is indisputably a game of skill, the Authorities added that this characterisation matters very little when games of skill are played for stakes. When that happens, the play amounts to gambling, something that the Supreme Court verdicts declared as well, the Authorities argued. 

Why do the GST Authorities think Gameskraft is engaging in gambling?: The GST Authorities had four core arguments against the gaming platform:

  • Placing stakes on the outcome of a game amounts to betting, irrespective of whether it’s a game of skill or chance: In both game types, the player is staking money on an unknown outcome, and no player can be certain that they’ll win. Section 30 of the Contract Act also prohibits wager agreements based on the result of any game. Crucially, the Act doesn’t distinguish between games of skill and chance to determine whether staking money amounts to betting. The GST Authorities described this distinction as “purely academic”, adding that the Karnataka High Court erred in basing its verdict on this plank.
  • Gameskraft is “squarely” offering gambling services: Players stake sums on the unknown outcome of a rummy game in the hope of winning a large sum. This model involves all three elements of gambling, the Authorities argued. That is, a stake, an element of uncertainty, and a reward higher than the amount pledged.
  • The outcome of a game can never truly be controlled: Gameskraft argued in its submissions before the Karnataka High Court that regardless of the stake, the outcome of rummy is ultimately controlled by the player’s skill, the affidavit claimed. Translation: the outcome isn’t random. The GST Authorities argued that no amount of skill can certainly reveal the outcome of a game. “The greatest upsets in sporting history stand testimony to this averment,” they added.
  • Side betting is only one type of gambling taking place: The filing added that Gameskraft argued that only making side bets on a game of skill would amount to gambling. The GST Authorities rebutted by arguing that for both the player, and the spectator, the game’s outcome remains unknown. So, in both cases, staking cash on these unknown outcomes amounts to betting. Gameskraft can’t just carve out these exceptions to protect the players ‘betting’ on their platform, the Authorities added.

Authorities request Karnataka High Court’s ‘strictures’ to be deleted from the record: The Karnataka High Court’s verdict came down rather severely on the GST Authorities the filing recalled, describing the tax notice as the “outcome of a vain and futile attempt to cherry pick stray sentences” of judgments and to build a “non-existent case out of nothing which clearly amounts to splitting hairs and clutching straws, which cannot be countenanced and is impermissible in law”. 

Describing these “strictures” as “uncalled for”, the GST Authorities argued that their arguments were based on 70 years of settled jurisprudence and “sound principles”, and requested the Supreme Court to permanently delete the reprimands from the record. 

The Supreme Court verdicts at the heart of the case

State of Andhra Pradesh v K. Satyanarayana (1968)

What the case was about: The Supreme Court had to decide whether the patrons of Crescent Recreation Club were gambling, and whether the club constituted a ‘gambling house’ under the Hyderabad Gambling Act. The petitioners alleged that rummy was being played for stakes in the club—and that its owners were profiting from these games.

The GST Authorities recall the Supreme Court’s verdict: The prosecution couldn’t actually prove that rummy was being played for stakes at the Crescent Recreation Club—so, the Supreme Court didn’t deem it to be a gambling house. However, the judgment went on to describe which games could be charged under the Hyderabad Gambling Act. For example, it declared rummy to be a game of skill—merely playing it wouldn’t be qn offence. However, it held that if there is any evidence of the owner of the club profiting from the game of rummy, or any other game played for stakes, or gambling in any other way, then “the offence can be brought home”.

Why do the GST Authorities think the Karnataka HC misread the verdict?: The Supreme Court judgment affirms that games of skill played for stakes amount to betting, the GST Authorities argued.

  • “Gambling in some other way” actually refers to side-betting, not playing skill games for stakes: The Supreme Court did not restrict the term “some other way” to side-betting, the GST Authorities rebutted. The Karnataka High Court shouldn’t have carved this distinction in its verdict. To uphold Satyanarayana, a distinction should only be made between skill games, and skill games played for stakes.
  • The Supreme Court specifically excluded skill games played for stakes from the purview of gambling. Since rummy is a protected activity, profits derived from it would not make the organisation a “common gambling house”: The Supreme Court did not extend protections to rummy being played for stakes, the GST Authorities argued. The High Court “dearly erred” in recording a “fact” which was not proven in the case. Further, the judgment was clear that any club making profits from rummy played for stakes could be charged—the High Court’s order runs contrary to this interpretation.

K.R. Lakshmanan v State of Tamil Nadu (1996)

What the case was about: The term ‘gaming’ in the Madras City Police and Gaming (Amendment Act), 1949, included wagering and betting on a horse race, except if it took place on the date of the race, and in an enclosure where the authority controlling the race has been sanctioned by the state government. A 1974 law omitted this exception. The Supreme Court had to decide on the legitimacy of the exception. 

The GST Authorities recall the Supreme Court’s verdict: The Supreme Court declared horse racing as a game of skill. Wagering and betting on it were protected only on two specified grounds. The betting should be on the date of the race, and at the place set apart for the purpose. 

Why do the GST Authorities think the Karnataka HC misread the verdict?: The Karnataka High Court’s order cannot stand in light of the Supreme Court’s observations, the GST Authorities argued: 

  • The Supreme Court held that games of skill played for skill don’t amount to gambling: Horse riding is only a ‘game of skill’ for the jockey and the horse, which is why the Supreme Court deemed it so, the GST Authorities rebutted. For the spectators, they are staking money on an unknown outcome, which makes it gambling, even if the game is a game of skill. The Karnataka High Court was wrong to consider ‘staking on horse racing’ as a game of skill in and of itself. In fact, this act is ‘side-betting’, the GST Authorities pointed out, drily adding that as per the High Court’s verdict, side-betting also amounts to gambling. 
  • Inside a race course, horse racing is a game of skill—but on the streets, it is a game of chance: Horse racing remains a game of skill even when played in the streets or bazaars, the Authorities said with “utmost respect”. However, those staking on these events would lose the protections of the law, as they would now be gambling outside of the two exceptions. 

M.J. Sivani v State of Karnataka (1995)

What the case was about: Whether video games should be regulated under the Mysore and Madras city Police Acts. Tamil Nadu and Karnataka did this by including video games under ‘gaming’ in both acts. Gaming was defined as forms of betting in relation to games of chance. A game of chance could include a combined game of skill or chance and a ‘pretended’ game of chance, or a ‘pretended’ combined game of skill and chance.

The GST Authorities recall the Supreme Court’s verdict: Gaming means playing any game, whether of skill or chance, for stakes, money, or money’s worth. This same act amounts to wagering, betting, or gambling. 

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Why do the GST Authorities think the Karnataka HC misread the verdict?: In light of the verdict, the Karnataka High Court should not have protected games of skill played for stakes, the GST Authorities argued:

  • The Supreme Court verdict purely dealt with games of chance—it never held that playing a game of skill with stakes amounts to gambling: The GST Authorities agreed that the ‘gaming’ definition only dealt with games of chance. However, in the Satyanarayana ruling (mentioned above), the Supreme Court also held that while rummy is predominantly a game of skill, it is also a mixed game of skill of chance. Rummy played for stakes would have amounted to ‘gaming’ under the facts of the M.J. Sivani case, as it is a combined game of skill and chance. The Karnataka High Court’s judgment “lost sight” of this definition, the Authorities added. 
  • The Supreme Court judgment isn’t an “authority” on determining whether a game of predominant skill played for stakes amounts to gambling: The Karnataka High Court was wrong in holding that the Supreme Court hadn’t addressed the issue of playing skill games with stakes amounting to ‘gaming’ (or gambling). In over three paragraphs, the Supreme Court held that wagering or betting on any game amounts to ‘gaming’ (or gambling), the Authorities responded. 
  • In an earlier verdict, the Karnataka High Court held that games of skill played online do not automatically become games of chance: The GST Authorities argued that they were not contending that a game of skill played online amounts to a game of chance. The core argument is only that games where amounts are staked on an unknown outcome amount to gambling, irrespective of whether a game of skill or chance. 

State of Bombay v R.M.D. Chamarbaugwalla (1957)

What the case was about: The Bombay Lotteries and Prize Competitions Control and Tax (Amendment) Act, 1952 defined prize competitions, and included competitions where prizes are awarded for forecasts of the unknown outcome of an event in the future or past. Lawyers argued that such competitions don’t constitute gambling—these games are played with skill, where forecasting of outcomes can be done using knowledge and statistics.

The GST Authorities recall the Supreme Court’s verdict: It held that such prize competitions amount to gambling. Even expert statisticians can only estimate the result of an unknown event, the Court observed. For ordinary people participating in such competitions, they are often simply taking a bet on an unknown outcome (or “hidden target”). This is exactly what Gameskraft players are also doing, the GST Authorities added.

Why do the GST Authorities think the Karnataka HC misread the verdict?: The GST Authorities clashed over the Southern court’s following observations:

  • The judgment isn’t an authority on games of skill played for stakes—and these don’t amount to gambling anyway: The GST Authorities argued that the distinction between games of skill and chance was irrelevant. If stakes are placed on an unknown outcome, then this constitutes gambling irrespective of the game type.
  • Players aren’t ‘forecasting’, they confidently use their skills to win, and to control the outcome of the rummy game. They make value judgments based on their skills which can’t be described as forecasting: While acknowledging that players may be confident of their skills, the GST Authorities pointed out that no level of confidence can predict the outcome of a game with certainty. Staking money on that uncertainty is gambling.
  • When wagering, players are not interested in the outcome of the game. In games of skill, players are interested in winning: The GST Authorities argued “with utmost respect” that persons playing games of chance are also interested in the game’s outcomes, especially if a reward is pegged to the person winning.
  • The games discussed in R.M.D. Chamarbaugwalla only apply to games offered in newspapers, and not to online games played with stakes: The Supreme Court held that forecasting the result of any unknown and uncertain event amounts to gambling, the GST Authorities noted. It doesn’t matter whether the medium is a newspaper or an online rummy game.
  • The judgment only dealt with third-party forecasting on games of chance. Games of skill are excluded—which means not all forecasting is gambling: The GST Authorities described the High Court’s order as self-contradictory. On the one hand, it holds that rummy players are not forecasting game outcomes and placing stakes. On the other hand, it holds that forecasting on games of skill isn’t gambling.

R.M.D. Chamarbaugwalla & Anr v Union of India (1957) 

The GST Authorities recall the Supreme Court’s verdict: Games of skill and chance are distinct and separate categories. Once a game’s character is determined, it should fall under either of these categories. Games of skill enjoy constitutional protection under Article 19(1)(g) (the fundamental right to practise any profession), which can also be subjected to reasonable restrictions under Article 19(6). Games of chance do not enjoy Article 19(1)(g) protections as they lie outside the scope of commerce.

Why do the GST Authorities think the Karnataka HC misread the verdict?: The Supreme Court’s judgment also dealt with entry fees paid by participants in competitions. The Karnataka High Court interpreted them to mean that if these competitions involve playing games of substantial skill, they don’t amount to betting and gambling. 

The GST Authorities argued that paying entry fees for “legitimate” competitions enjoying “constitutional protection” cannot be termed gambling. These entry fees are anyway largely used to accommodate the prize money and the organiser’s needs, and not to bet on an unknown outcome. These competitions can’t be used as an example to suggest that the Supreme Court intended to protect games played for stakes. That would be “nothing short of rewriting” the judgement, the Authorities argued.

Closing arguments

How have other courts interpreted these judgments?: According to the GST Authorities, the High Courts of Madrasand Kerala followed the Supreme Court’s verdicts in “letter and spirit” when they separately held that playing rummy for stakes amounted to gambling. Subsequent challenges against these decisions were dismissed by the Supreme Court given the merits of the verdicts themselves.

On the flip side, the High Courts of Kerala and Andhra Pradesh have also declared that rummy played for stakes doesn’t amount to gambling. The GST Authorities allege that these High Court verdicts didn’t consider the Supreme Court’s decisions in their “true context”. Important principles that emerged from the Supreme Court’s verdicts were not placed before the High Courts either, and so observations on them were missing in the judgments too.

However, the GST Authorities claim that the Karnataka High Court’s Gameskraft verdict falls into neither of these buckets. The High Court was aware of all of the Supreme Court’s judgments, the conflicting verdicts from High Courts, and the petitions that were dismissed by the Supreme Court challenging High Court verdicts. These were all submitted to the Karnataka High Court, and counsels argued on these points as well. Despite this, the Karnataka High Court chose to interpret the judgments contrary to their findings, the GST authorities alleged.

By the by: The Supreme Court is also hearing two separate challenges by the Tamil Nadu and Karnataka state governments challenging their High Courts’ decisions to overturn their bans on ‘online gambling’. In both states, the banned games included online games of skill. 

The GST Authorities reminded the Court that its interpretations of five historic cases mentioned above in these two challenges will directly impact their arguments. 

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Note: the subheadings for this article were updated on 19/9/23 at 12:55 pm following editorial inputs.

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