In a significant development, the Supreme Court of India on Friday stayed the issuance of show-cause notices amounting to ₹1.12 lakh crore under the Goods and Services Tax (GST) law against online gaming companies. The Court ordered that all further proceedings under these notices be suspended until the legal dispute is conclusively resolved. This move provides temporary relief to gaming companies while ensuring that these notices do not become time-barred during the ongoing litigation.
The GST dispute stems from the government’s decision to classify online gaming, including games of skill and chance, under a 28% GST slab. The crux of the disagreement lies in whether GST should apply to the entire contest entry amount (including the prize pool) or only to the platform’s commission or fees. This distinction is critical, as the higher tax rate could substantially increase the financial burden on gaming companies.
Core Issue: GST Applicability on Online Gaming
The government has maintained that a 28% GST rate should be applied to the contest entry amount, effectively taxing the entire prize pool. In contrast, gaming companies argue that GST should be levied only on their platform fees or commissions. Many online gaming companies emphasize that their offerings are skill-based games rather than games of chance, making them fundamentally different from gambling or betting activities.
Adding to the complexity is the question of whether the applicable GST rate should be 18%—typically levied on services—or 28%, which is imposed on gambling and similar activities. The outcome of this debate holds significant financial implications for the industry. A higher tax rate could escalate the tax liabilities of gaming companies, potentially impacting their operations and profitability.
Court’s Decision and Next Steps
During the hearing, the Supreme Court consolidated multiple cases related to GST demands against online gaming companies. The Court also scheduled the next hearing for March 18, 2025. This consolidation ensures a unified approach to resolving the legal questions surrounding the tax treatment of online gaming.
The Court’s decision to pause proceedings has been welcomed by the gaming industry. According to Abhishek Rastogi, founder of Rastogi Chambers and the legal representative for many gaming companies, this stay prevents immediate coercive actions by tax authorities. Rastogi also highlighted that the Supreme Court’s intervention safeguards the interests of the revenue authorities by ensuring that the demands remain valid throughout the litigation process.
Industry Reactions and Implications
The online gaming industry has expressed optimism following the Supreme Court’s decision. Anuraag Saxena, CEO of the E-Gaming Federation (EGF), described the development as a “win-win” for both gaming operators and the government. Saxena noted that clarity on taxation could unlock the industry’s full potential, fostering increased investments, job creation, and higher valuations. He added that this resolution is particularly crucial given the recent dip in foreign institutional investments (FII) in Indian equity markets.
Saurabh Agarwal, tax partner at EY, emphasized the importance of the upcoming final hearing in March 2025. He stated that the judgment would be pivotal in shaping the regulatory framework for online gaming in India, ensuring a transparent and fair taxation regime.
Sandeep Sehgal, Partner at AKM Global, echoed similar sentiments, calling the Supreme Court’s decision a “temporary relief.” He pointed out that the final ruling would determine whether games of skill are treated differently from games of chance under GST laws. This differentiation could influence the GST rate applicable to the industry and its overall tax valuation.
Background: GST and Online Gaming
The GST controversy began in July 2023 when the GST Council classified online gaming, including both skill-based and chance-based games, under the 28% GST slab. This change, effective October 1, 2023, marked a significant shift, as skill-based games were previously taxed at a lower rate of 18%.
In December 2023, the government revealed in the Rajya Sabha that it had issued 71 show-cause notices to online gaming companies for alleged GST evasion amounting to ₹1.12 lakh crore for the financial year 2022–23 and the first seven months of 2023–24. These notices alleged that gaming companies had not paid GST on the full contest entry amounts, leading to substantial revenue shortfalls.
Impact on Gaming Companies
Before October 1, 2023, gaming companies were paying 18% GST on their revenue (platform fees or commissions) rather than on the entire contest entry amount. The government’s decision to impose a 28% tax on the full deposit amount significantly increased their tax liability. Many companies have argued that this approach is unfair, particularly for skill-based games, which they believe should not be equated with gambling.
Several major gaming companies, including Games24x7 and Head Digital Works, had moved the Supreme Court challenging the GST demands. In previous cases, the Karnataka High Court had quashed a ₹21,000 crore GST notice issued to an online gaming firm, setting a precedent that companies are now relying on in their legal battle.
Market Reactions
The stock market responded positively to the Supreme Court’s decision. Shares of gaming companies such as Delta Corp and Nazara Tech experienced fluctuations, with Delta Corp gaining 4.4% and Nazara Tech witnessing a minor decline of 3.7%.
India’s Gaming Industry: A Growing Sector
India’s online gaming industry is on a rapid growth trajectory. According to a report by Lumikai, an Indian interactive media and gaming venture capital fund, the sector’s revenue surged to $3.8 billion in FY24 and is projected to grow to $9.2 billion by FY29. India is the world’s second-largest mobile gaming market, with 15.2 billion downloads recorded in FY24 alone.
The report highlights several key trends:
- Rising User Base: India has 591 million gamers, with women accounting for 44% of the total user base.
- In-Game Purchases: Approximately 148 million gamers made in-game purchases in FY24, with mid-core games driving revenue growth.
- Increased Engagement: Gamers spent an average of 13 hours per week playing games in FY24, a 30% increase from the previous year.
Conclusion
The Supreme Court’s intervention offers temporary relief to India’s burgeoning online gaming industry while ensuring that the GST demands remain valid during litigation. The upcoming hearing in March 2025 will be a critical moment for the sector, as it seeks regulatory clarity and a fair taxation regime. For now, the industry remains hopeful that the final judgment will strike a balance between fostering growth and ensuring compliance with tax laws.
