Online Gaming, Taxation, and Legal Uncertainty in India

In a landmark case, the central government has taken a strong position before the Supreme Court regarding the taxation of online games under the Goods and Services Tax (GST) framework. The Centre has argued that it makes no difference whether a game is based on skill or chance when it comes to tax classification. The core argument is that any form of betting on an outcome, regardless of whether the underlying game is skill-based or chance-based, should be treated as gambling for tax purposes.

Key-Arguments made by the Government

• Petitioners argue that such a tax regime violates Article 14 (equality before law) and Article 19(1)(g) (freedom to practise any profession). They say it unfairly places skill-based games in the same category as games of chance, imposing disproportionate financial and compliance burdens.
• Government’s Arguments:
  • Stakes Define the Activity: The classification of a game as skill-based or chance-based is irrelevant when determining its tax liability.
  • The activity of betting on the outcome of any game, regardless of its nature, falls under the broader umbrella of gambling.
  • GST Law Operates Independently: Even in states like Nagaland, where skill-based games are allowed and legally protected, betting on the outcomes of those games should still be categorized as gambling and subjected to the 28% GST rate.
  • Valuation Rules Are Valid: Rule 31A(3) of the CGST Rules, which is under challenge, is consistent with earlier court-approved frameworks.
  • Centre Has Taxing Power: The 101st Constitutional Amendment gives the Centre taxation rights over betting and gambling. State regulatory powers do not override this.
• If the Supreme Court upholds this stance, it could result in many online gaming platforms facing the same tax burden as traditional gambling activities, which would make participation in games like fantasy sports significantly more expensive for users.

Gambling Laws in India

• Online gambling in India falls into a gray area because there are no specific laws at the national level regulating it.
• Gambling in India has long been regulated by colonial-era laws like the Gaming Act of 1845 and the Betting Act of 1853, which were enacted during British rule to govern gambling activities.
• Now, gambling is a state subject under the Indian Constitution, each state has the power to create laws governing gambling within its jurisdiction.
  • For instance, some states like Nagaland have legalized certain forms of skill-based gaming, including fantasy sports, while others, like Tamil Nadu, have imposed a ban on online gaming activities.
• Telangana was one of the first states that banned online gambling with a legislation in 2017, which was then followed by Kerala, Tamil Nadu, Andhra Pradesh and very recently, Karnataka.
• The Prevention of Money Laundering Act 2022, Telecom Commercial Communications Customer Preference Regulations 2010, The Prize Competition Act 1955, Foreign Exchange Management Act 1999 and the Cable Television Network Rules 1994 put forth some regulations on the promotion of gambling.

Challenges

• Conflicting state laws: This inconsistency has led to a lack of clarity, creating challenges for businesses that operate across state lines.
• Regulatory vacuum: There is no central authority or set of laws to govern the sector as a whole.