Published On: December 31st 2025
Authored By: Nithyasree S
Govt. Law College TVPM
Introduction
India’s online gaming industry stands at a critical juncture as the Supreme Court deliberates on one of the most significant tax disputes in the country’s history. The ongoing case, involving approximately ₹2.5 lakh crore in tax demands, centers on whether online gaming platforms should be taxed at 28% (recently increased to 40%) on the full value of player deposits or at 18% on platform fees alone. This landmark litigation has far-reaching implications not only for India’s burgeoning digital economy but also for the constitutional framework governing taxation and business regulation.[1]
The Genesis of the Dispute
Legal Framework and Constitutional Context
The controversy stems from Rule 31A of the Central Goods and Services Tax (CGST) Rules, 2017, which was originally designed for lottery, betting, and gambling activities but has been extended by tax authorities to cover skill-based online games. The fundamental legal question revolves around whether games like rummy and fantasy sports, traditionally recognized as games of skill, can be classified as “betting and gambling” for GST purposes when played with monetary stakes.[2]
The constitutional dimension adds complexity, as the 101st Constitutional Amendment removed the states’ power to tax betting under Entry 62 of the State List, transferring this authority to the Union government. This creates a unique jurisdictional challenge where the classification of an activity as “betting” determines not just the tax rate but also the governmental authority empowered to regulate it.[3]
The Gameskraft Case: A Watershed Moment
The lead case involves Gameskraft Technologies Pvt. Ltd., which received a staggering ₹21,000 crore GST demand notice in 2022. The Karnataka High Court initially ruled in favor of Gameskraft, declaring that skill-based rummy games do not constitute betting or gambling and should be taxed at 18% on platform fees rather than 28% on the full contest entry value. However, the Union government’s appeal to the Supreme Court has stayed this favorable ruling, creating uncertainty across the industry.[4]
Arguments by the Petitioners (Gaming Companies)
Constitutional and Legal Grounds
The gaming companies, represented by senior advocates including Arvind Datar, Dr. Abhishek Manu Singhvi, and Gopal Sankaranarayanan, have built their defense on several pillars:[5]
- Distinction Between Skill and Chance: The petitioners emphasize that over 96% of games on platforms like Gameskraft are rummy variants, which have been consistently recognized by Indian courts as games of skill requiring memory, strategy, and decision-making. They cite landmark judgments including State of Andhra Pradesh v. K. Satyanarayana and K.R. Lakshmanan v. State of Tamil Nadu to establish this legal precedent.[6]
- No Supply of Actionable Claims: Gaming companies argue that they merely facilitate gameplay between users and do not supply “actionable claims” that can be taxed as goods under GST law. They contend that player funds are held in escrow accounts, with platforms retaining only a small service fee (typically 10% of deposits) while 90% is distributed to winners.[7]
- Constitutional Protection: Under Article 19(1)(g) of the Constitution, the petitioners assert their right to practice legitimate business activities. They argue that skill-based gaming is a constitutionally protected activity that cannot be arbitrarily classified as gambling.[8]
- Procedural Violations: The companies challenge the retrospective application of tax rules, arguing that businesses operated for years understanding their services attracted 18% GST on platform fees. They contend that retrospective demands violate principles of fairness, certainty, and constitutional protections.[9]
Economic and Technical Arguments
The industry emphasizes that their revenue model is fundamentally different from traditional gambling. Gaming platforms:[10]
- Charge a transparent platform fee (typically 10% of entry amounts)
- Do not participate in games or hold any stake in outcomes
- Facilitate peer-to-peer competition rather than house-versus-player gambling
- Operate under stringent regulatory frameworks with proper licensing and compliance measures
Arguments by the Respondents (Government/Revenue Department)
- Taxation and Regulatory Justifications
- The government, represented by Additional Solicitor General N. Venkataraman, has defended the higher tax regime on multiple grounds:[11]
- Supply of Actionable Claims: The revenue authorities argue that online platforms supply actionable claims between players, qualifying as a “supply” under Section 7 of the CGST Act. They contend that participation in games creates enforceable rights (actionable claims) that constitute goods under GST law, warranting taxation of the full stake value.[12]
- Elimination of Skill vs. Chance Distinction: The government maintains that once money is staked, even skill-based games fall within the definition of gambling. They argue that the 2023 amendments to GST law validly removed the conceptual distinction between games of skill and chance for taxation purposes.[13]
- Public Policy Considerations: Revenue authorities invoke public policy concerns, arguing that online gaming poses addiction and financial risks, particularly for young players. They contend that high taxation serves as a deterrent to potentially harmful activities while generating necessary government revenue.[14]
- Uniform Treatment Principle: The government argues that treating all online games uniformly ensures regulatory clarity and prevents revenue leakage that might occur from complex classifications between skill and chance-based activities.[15]
Recent Shift in Government Position
In a significant development, the government has altered its constitutional stance before the Supreme Court. While previously maintaining that “betting and gambling” fell under the State List, the Centre now argues that online games with stakes have pan-India impact requiring Union-level legislation. This shift coincides with the passage of the Promotion and Regulation of Online Gaming Act (PROGA) 2025, which bans all real-money gaming regardless of skill levels.[16]
International Best Practices and Comparative Analysis
Global Taxation Models
International gaming taxation follows two primary models, each with distinct characteristics and outcomes:[17]
Gross Gaming Revenue (GGR) Model: Most developed countries, including the UK, Germany, France, and several US states, tax gaming operators on their net revenue (total deposits minus prizes awarded). This approach:[18]
- Taxes only the value retained by platforms as service fees
- Maintains moderate to high tax rates (typically 15-25%)
- Aligns taxation with actual business revenue
- Provides regulatory clarity and compliance ease
Turnover/Deposit Tax Model: A few countries tax the full value of player deposits, but with significantly lower rates to maintain revenue neutrality. For example:[19]
- Germany: 5.3% on full deposits
- Poland: 12% on full deposits
- Portugal: 23% on full deposits (highest globally before India)
International Trends and Lessons
- Migration to GGR Models: Countries are increasingly shifting from turnover-based taxation to GGR models to enhance competitiveness and prevent operators from relocating to more favorable jurisdictions. The UK transitioned from a 6.75% turnover tax to a 21% GGR tax, while France is currently implementing a similar shift from its 20% turnover tax.[20]
- Revenue Optimization: Research indicates that GGR-based taxation with moderate rates generates higher long-term revenue than punitive turnover taxes, as it encourages legal operators while discouraging black market activities.[21]
- Regulatory Effectiveness: Countries with balanced tax regimes report better compliance, stronger consumer protections, and more robust regulatory oversight compared to jurisdictions with prohibitive tax structures.[22]
The Constitutional and Regulatory Landscape Post-PROGA 2025
The Double Regulatory Strike
The gaming industry faces an unprecedented “double attack” from the government:[23]
- Regulatory Prohibition: PROGA 2025, enacted in August 2025, imposes a blanket ban on all online real-money gaming, making such activities cognizable and non-bailable offenses.[24]
- Fiscal Strangulation: The GST Council has simultaneously increased the tax rate from 28% to 40% effective September 2025, further penalizing any remaining gaming activities.[25]
Constitutional Challenges and Federal Issues
The simultaneous implementation of PROGA and the GST demands creates complex constitutional questions:[26]
- Legislative Competence: If online gaming is classified as betting/gambling (justifying GST demands), then only states have constitutional authority to regulate it, potentially invalidating the Union’s PROGA legislation.[27]
- Federalism Implications: The government’s changed position on legislative competence raises questions about the proper division of powers between Union and state governments in digital economy regulation.[28]
Economic and Industry Impact
Financial Stakes and Industry Size
India’s gaming market, valued at $3.8 billion and projected to reach $9.2 billion by 2029, employs over 130,000 skilled professionals. The industry has attracted foreign investment exceeding ₹25,000 crore and contributes approximately ₹20,000 crore annually in taxes.[29]
The current tax dispute threatens this ecosystem:
- Immediate Impact: ₹2.5 lakh crore in retrospective tax demands could bankrupt major operators
- Regulatory Uncertainty: Conflicting legal frameworks discourage investment and innovation
- Job Losses: Industry estimates suggest potential loss of 200,000+ direct and indirect jobs
Comparative Economic Analysis
India’s approach contrasts sharply with global competitors:
- Singapore: 7% GST on GGR, supportive regulatory environment
- Malta: 5% tax rate, established as European gaming hub
- UK: 21% on GGR but with clear regulatory framework and player protection
These jurisdictions demonstrate that balanced taxation can generate substantial revenue while fostering industry growth.
A Way Forward: Learning from Global Best Practices
Recommended Policy Framework
Based on international best practices and the current legal challenges, India should consider a comprehensive reform approach:
Immediate Reforms:
- Adopt GGR-Based Taxation: Transition to taxing gaming operators on net revenue (typically 18-22%) rather than gross deposits
- Prospective Application: Limit new tax regimes to future transactions, avoiding retrospective demands that undermine business certainty
- Clear Skill vs. Chance Distinction: Maintain judicial precedents distinguishing games of skill from gambling for regulatory purposes
Medium-term Structural Changes:
- Unified Regulatory Framework: Establish clear, consistent regulations that provide certainty for operators and investors
- Consumer Protection Measures: Implement robust age verification, responsible gaming tools, and anti-money laundering protocols
- Federal Coordination: Clarify Union vs. state jurisdiction to prevent regulatory conflicts and ensure uniform application
Long-term Strategic Vision:
- Digital India Integration: Position gaming as part of India’s digital economy strategy rather than treating it as a vice industry
- Innovation Incentives: Provide tax incentives for Indian gaming companies developing indigenous technologies and content
- Global Competitiveness: Align Indian regulations with international standards to attract investment and prevent capital flight
Lessons from International Regulatory Evolution
- UK Model: The UK’s evolution from restrictive gambling laws to a regulated, competitive market demonstrates how balanced approaches can maximize both revenue and consumer protection while fostering innovation.
- Singapore Approach: Singapore’s measured regulatory framework shows how developing economies can capture gaming revenue while maintaining social safeguards.
- US State Variations: The diverse approaches across US states provide natural experiments in regulatory effectiveness, generally favoring moderate tax rates with strong oversight.
Constitutional and Legal Considerations for the Supreme Court
Key Legal Doctrines at Stake
The Supreme Court’s decision must navigate several constitutional principles:
- Doctrine of Pith and Substance: Courts must determine whether online gaming is essentially a commercial service (Union jurisdiction) or gambling activity (state jurisdiction).[30]
- Manifest Arbitrariness: Treating all online games identically regardless of skill requirements may violate Article 14’s equality guarantee.[31]
- Proportionality in Taxation: The Court must assess whether current tax rates are proportionate to legitimate regulatory objectives or constitute confiscatory taxation.
Potential Judicial Outcomes
- Scenario 1 – Industry Favorable: The Court could uphold the skill vs. chance distinction, limit GST to platform fees, and strike down retrospective demands. This would provide clarity while maintaining moderate taxation.
- Scenario 2 – Government Favorable: A ruling supporting full-value taxation could legitimize current demands but might drive the industry underground or offshore.
- Scenario 3 – Middle Path: The Court might uphold Parliament’s power to impose uniform taxation prospectively while rejecting retrospective applications, providing partial relief to both parties.
Conclusion and Strategic Recommendations
The Supreme Court’s impending decision in the gaming taxation cases represents more than a fiscal dispute—it embodies India’s approach to digital economy governance, constitutional federalism, and regulatory innovation. The current trajectory, combining prohibitive taxation with regulatory bans, risks destroying a promising industry while failing to address underlying policy concerns.
- For Policymakers: India should learn from international experiences favoring balanced regulation over prohibition. Countries that have embraced measured approaches to gaming taxation have successfully generated revenue, protected consumers, and fostered innovation simultaneously.
- For the Industry: Gaming companies must prepare for multiple scenarios while advocating for policies that recognize the legitimate distinction between skill-based services and gambling activities. The focus should remain on demonstrating positive economic and social contributions while addressing valid regulatory concerns.
- For Legal Framework: The resolution requires constitutional clarity on jurisdictional boundaries, respect for established legal precedents distinguishing skill from chance, and adoption of taxation principles that align with the actual economic substance of gaming activities.The Supreme Court’s decision will ultimately determine whether India positions itself as a leader in digital economy regulation or pursues a path that may inadvertently strengthen illegal operators while weakening legitimate businesses. The stakes extend far beyond the ₹2.5 lakh crore in immediate dispute to encompass India’s broader approach to emerging technology governance and economic development in the digital age.As the gaming industry awaits the Court’s verdict, the international community watches closely. India’s decision will influence not only domestic policy but also serve as a precedent for other developing economies grappling with similar challenges in digital economy regulation. The opportunity exists to create a framework that protects consumers, generates appropriate revenue, and positions India as a leader in balanced digital governance—but only if policymakers embrace the lessons offered by global best practices and constitutional principles.
References
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[2] Breaking: Games of skill or chance—If stakes involved, it’s gambling: Govt tells Supreme Court. (n.d.). Storyboard18. https://www.storyboard18.com/gaming-news/breaking-games-of-skill-or-chance-if-stakes-involved-its-gambling-govt-tells-supreme-court-78274.htm
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