Player transactions not operator’s tax burden, gaming firms argue in Supreme Court

The online Real Money Gaming companies on Tuesday mounted a strong legal challenge in the Supreme Court against the imposition of 28% Goods and Services Tax (GST) on online money gaming, terming the government’s taxation approach as fundamentally flawed and contrary to the legal framework.

Represented by senior advocate V. Sridharan, the petitioners argued that GST provisions prior to October 2023 were wholly inadequate to impose 28 percent tax on online gaming operators in the manner attempted by the authorities. The government’s reliance on Rule 31A of the GST Rules, introduced in 2018, was challenged on grounds that the rule lacked statutory authority under the Central GST Act.

Rule 31A Under Fire

According to the submissions by V Sridharan, Rule 31A, which prescribed the valuation method for betting and gambling, did not comply with the mandatory two-step process under Section 15(5) of the CGST Act. Specifically, the rule was issued without first notifying actionable claims as taxable supplies, rendering it ineffective and invalid.

Further, the rule was introduced using general rule-making powers (Section 164) instead of the specific provision meant for valuation (Section 15(5)), undermining its legal basis.

Actionable Claims Not Classifiable as Goods Before October 2023

The petition contends that attempts to tax actionable claims like betting and gambling as “goods” by amending the Goods Rate Notification were also flawed. Until October 1, 2023, there was no entry for actionable claims in the Customs Tariff Schedule, making their classification as goods unsustainable under GST.

Sridharan pointed out that gambling and online gaming were consistently treated as “services” under various GST notifications and the Integrated GST Act, and this abrupt reclassification lacked legislative coherence.

Major Legal Overhaul from October 2023

The petition acknowledges that from October 1, 2023, the government made sweeping changes to the GST and Customs frameworks. These included:

Creation of a new tariff heading (CTH 9807) for actionable claims.

Amending the definition of “supplier” to deem gaming platforms as suppliers of actionable claims.

Excluding gaming from the services category.

However, the petition argues that these changes only validate the earlier deficiencies. “Without such machinery in place earlier, any demand under the old regime is legally untenable,” said Sridharan in court.

Platform Fees vs. Prize Pool Contributions

A key plank of the petitioners' argument is the distinction between platform fees — on which GST is already paid — and prize pool contributions made by players, which are held in trust and returned to winners. The petition claims that these deposits do not constitute consideration and thus cannot be taxed under GST.

"In the case of online games, the online games are played between the players with the online gaming operator merely providing platform services. The Operator, as the supplier of platform services, has discharged GST during the relevant period at the specified rate. However, the Operator, does not make any other supplies and only holds the Prize Pool as a deposit to be settled in favour of the winner, which is decided between the players. Thus, the Operator cannot be made liable for supplies made inter-se between the players."

The legal team relied on Indian and international jurisprudence, including decisions from the European Court of Justice, to assert that such deposits held for prize distribution are not revenue for the platform and hence cannot attract GST.

Transactions Between Players Not Taxable

The petition further argues that gaming transactions between players on a platform cannot be treated as taxable supplies. Since the platform only facilitates gameplay and does not engage in betting or gaming itself, it cannot be held liable for GST on such inter-player transactions.

The case hinges on the absence of clear taxing provisions and the necessary machinery to enforce tax collection before the October 2023 overhaul. The petition concludes that attempts to retroactively impose GST without statutory backing violate fundamental tax principles and must be struck down as ultra vires.

"It is submitted that in the absence of any chapter in the First Schedule to the Customs Tariff Act, 1975 covering ‘actionable claims’ as goods, the amendment to the Goods Rate Notification (supra) is ineffective and no GST is leviable on actionable claims."

The Supreme Court has scheduled July 25, 2025, as the date for the final hearing in a case involving show-cause notices issued to several online gaming firms. The case, with an estimated financial impact of ₹2.5 lakh crore, is one of the biggest tax battles in India’s history.

Division bench of the Supreme Court comprising Justices JB Pardiwala and R. Mahadevan on Tuesday were shocked to see the list of petitioners appearing on behalf of casinos, lotteries and real money gaming companies to submit their arguments and remarked, "This is a long list of petitioners, this will be a never ending saga." Upon which Justice Pardiwala directed that the court will hear all petitioners until July 17 and will hear rejoinders by the government from July 18.

Pardiwala said, "We will reserve the judgement on July 25 and it will be the last day of hearing the gaming batch matters."

The matter will be heard again on Wednesday afternoon.