The Centre informed the Supreme Court on Monday that online gaming operations, even skill-based ones, constitute betting and gambling when played with monetary stakes. The government said these should be taxed at 28% under the Goods and Services Tax (GST) regime.

This position has also triggered a controversial shift in how online games are classified. The government has reclassified them from services to “actionable claims,” a category that was previously limited to activities like lotteries and horse racing.

The Directorate General of GST Intelligence (DGGI) presented this argument before a bench led by Justice JB Pardiwala. According to the DGGI, the distinction between skill and chance becomes irrelevant when games involve monetary stakes. Additional Solicitor General N. Venkataraman, representing the government, argued that when outcomes are uncertain, they become “speculative outcomes,” which fall under the definition of gambling.

Venkataraman asked, “How can gaming companies contend that games of skill, when played for stakes, are not betting and gambling?” This question reflected the crux of the government’s argument in court.

The government has issued show-cause notices to 71 online gaming companies and casinos, alleging tax evasion worth Rs 1.12 lakh crore. It claims these entities wrongly applied an 18% GST rate, which is applicable to regular services, instead of the 28% rate applicable to gambling and betting.

To support its position, the government cited a landmark Constitution bench judgment in the Satyanarayana case, which held that any game played for stakes and with an uncertain outcome qualifies as gambling under Section 30 of the Contract Act.

This legal challenge holds major consequences for India’s booming online gaming industry. Smita Singh, a partner at S&A Law Offices, told financialexpress.com, “The instant matter will have huge significance on the viability of the entire business of online gaming.” She noted that the enormous tax liability has put the industry’s future at risk.

The GST Council had clarified and amended the rules in 2023, making it mandatory for gaming platforms to pay 28% GST on the full face value of bets from October 1. However, companies are now also facing retrospective tax demands going back to July 2017. Industry stakeholders argue that GST should apply only on the platform fee or commission, and not the entire bet amount.

Singh said, “The online gaming industry has been paying GST @18%.” She explained that after the amendments, the government began demanding 28% GST retrospectively on the full bet value, which companies have challenged. They argue that only the platform’s commission should be taxed.

She also raised concerns over how authorities are calculating turnover. “As per the stand taken by the tax authorities, even the award money received by the winners from these gaming companies is to be included in the turnover of the gaming platforms, in spite of the fact that such award money is not accrued to these gaming platforms,” she said.

The reclassification of online games as “actionable claims” also shifts them from being treated as services to being categorised as goods. Singh pointed out, “Treating gaming as an actionable claim also consequently changes the classification of such online games from services to goods. This is a stark deviation from the basic principles of classification of goods and services and confronts the scheme of GST itself.”

The legal battle has already cast a shadow over the sector, which had seen massive growth over the last decade. Singh warned that the existing tax policy is hurting both consumers and gaming platforms. “With the introduction of 28% GST on the entire amount paid by the participant customers and 30% income tax on the winnings, the earning of the customers have gone down, resulting in lessor number of participants and gaming companies facing significant losses, thus, challenging the viability of the online gaming industry.”

The Supreme Court’s verdict, once delivered, is expected to redefine how India regulates and taxes online gaming. The outcome will likely shape the future of a multi-billion-dollar industry now facing deep legal and financial uncertainty.