The Karnataka High Court determined that Schedule III of the CGST Act excluded lottery, betting, and gambling from the definition of actionable claims for tax purposes, indicating that games of skill were not included and thus exempt from GST. It also clarified that GST was applicable solely to the service fees charged by operators.
The Supreme Court’s extensive 400-page ruling examined all aspects related to the taxation of betting, gambling, horse racing, online money gaming, lotteries, and casinos. It deliberated on the constitutional validity of relevant provisions, the retrospective applicability of recent amendments, classification, valuation, and other associated matters. The court systematically countered the High Court’s findings and dismissed the counsels’ arguments regarding show cause notices issued to the parties, especially concerning the use of gross betting amounts as the taxable value and the classification of their business as suppliers of actionable claims rather than service providers. The Assistant Solicitor General adeptly defended the interpretation of the statutory provisions by the authorities.
The core of the judgement states that activities involving stakes and an element of chance fall under betting and gambling, even if skill is involved. The GST law uses the term “betting and gambling,” which represents a related category. The court also refuted the argument posited by counsels that online gaming operators merely provided a service by offering a platform and organizing games, taking a small commission or fee in return.
According to the Court, under the Transfer of Property Act, beneficial interests can be present, accruing, conditional, or contingent. Upon placing a stake, a contingent actionable claim is established in favor of the players, categorizing it as a supply of actionable claims. GST applies not to the act of betting and gambling per se but to the supply of actionable claims, which is encompassed within the definition of goods under Section 2(52) of the CGST Act.
The court further indicated that the recent definitions and explanations regarding Actionable Claims, Specified Actionable Claims, and Online Money Gaming are merely clarifications and thus applicable retroactively. Similarly, the Hon’ble Court found no inconsistencies regarding valuation and deemed the newly implemented Rules 31B and 31C, which govern the valuation of online games and casinos, consistent with the valuation provisions in Section 15, and categorized them as clarificatory and retroactive in nature.
The Court noted that the newly introduced Rules 31B and 31C serve as elaborations of Rule 31A, which already established a valuation mechanism for actionable claims related to chances of winning in betting, gambling, and horse racing. From the industry’s standpoint, the only favorable aspect seems to be the validation of the Explanation under Rules 31B and 31C, stating that bets made from winnings in ongoing online games, events, or casinos would not be included in the gross value for GST purposes.
Without this Explanation, the department argued that, in the absence of records for multiple bets from winnings in continuously played games, the gross value of each bet should be extrapolated. Several show cause notices were issued to casino operators based on extrapolated values derived from a mathematical formula of the House Advantage constant. For one operator with a turnover of about Rs one crore, a demand notice exceeding Rs. 33 crores was issued, which seems exceedingly unreasonable.
The pivotal question before the Supreme Court was whether the platform operators of online betting, money gaming, casinos, horse races, and similar activities were providing services or goods in the form of actionable claims. Interestingly, none of the advocates referenced the recently enacted Promotion and Regulation of Online Games Act, 2025, and its associated rules. This Act categorizes online gaming platforms as service providers.
Section 2(h) of the Act defines “online money gaming service” as a service offered for entering or playing an online money game. Rule 2(h) of the Rules, 2026, further elaborates that “online game service provider” refers to any individual or entity that offers, operates, organizes, manages, or makes available online games. It is clear that the Ministry of Electronics and Information Technology, which oversees the promotion and regulation of the online gaming industry, recognizes these platforms as service providers.
Although legal principles dictate that different statutes may define activities uniquely for specific legislative purposes, this discrepancy leads to confusion among regulated entities and tax authorities, complicating compliance and enforcement. Initially, the department accepted payment of GST on platform fees, treating it as a supply of service. However, including actionable claims in the CGST Act’s definition deviates from the widely recognized understanding of goods as defined under the Sale of Goods Act and the Constitution.
Previously, in the Skill Lotto judgment, the Hon’ble Court had ruled that, in light of the CGST Act’s definition, actionable claims would be classified as goods concerning that Act, adding further complexity to the situation. When interpreting the law as it stands, the Hon’ble Court did not suggest that, given the disproportionate impact on the industry, the government might consider amending the legislation.
Ultimately, it has been confirmed that the activities of betting and gambling facilitated by online gaming companies, as well as lotteries, casinos, and horse racing, are considered actionable claims subject to GST as supplies of goods based on the gross value of bets. While a review petition has been filed in the Supreme Court as a last-ditch effort by the industry seeking relief, it is unlikely to gain traction unless forwarded to a larger bench.
The primary concern for gaming companies does not seem to be whether their supplies are classified as goods or services, nor the applicable tax rate, but rather the valuation of supplies and the retroactive application of the newly clarified provisions. The gaming companies had been treating their operations as the provision of services for playing online games, paying GST at rates of 18% or 28% on the service charge they retain from total receipts, with the remainder allocated as prize money for winners.
With the legal standing established, numerous pending demand notices totaling thousands of crores of rupees are likely to be confirmed, accompanied by substantial interest and penalties. Given that the total turnover of online gaming and casino operators is only a fraction of the tax demands, the confirmed assessments, interest, and penalties will only inflate uncollectible revenue arrears.
Moreover, the recently introduced Promotion and Regulation of Online Games Act, 2025, prohibits online money games beginning May 1, 2026, potentially leading to the termination of the entire online money gaming industry. It is hoped that the GST Council will consider recommending that the commission or platform fees kept by suppliers of actionable claims be regarded as the assessable value for the period prior to October 1, 2023, when extensive clarificatory amendments were enacted.
—The author, O.P. Dadhich, is a Former Member of the Central Board of Indirect Taxes and Customs (CBIC). The views expressed are personal.
