Gaming companies face Rs 2.5 lakh crore hit as SC upholds GST

NEW DELHI: In a big setback to online gaming firms facing show-cause notices for GST evasion of around Rs 2.5 lakh crore (with penalty), Supreme Court Wednesday upheld levy of 28% tax on the full face value of online gaming bets and validated rules under CGST for determining valuation of taxable supplies for lotteries, betting, gambling, horse racing and casinos.

Justices J B Pardiwala and R Mahadevan said there was no constitutional infirmity in levying GST on online games and declared it valid.

In June last year, court had stayed GST proceedings against 49 gaming firms over retrospective demand notices to them. It extended the protection granted to them for another three months.

In Oct 2023, GST Council had imposed 28% tax on full face value of online gaming bets. Gaming industry, however, has been asking for the tax to be calculated on gross gaming revenue rather than face value of bets. The companies had received show-cause notices alleging GST evasion of Rs 1.12 lakh crore. As GST Act allows for a penalty of up to 100% of tax demand, the total liability will add up to around Rs 2.5 lakh crore.

Highlighting that addiction to online betting and gambling is creating disturbance in society and damaging social tranquility, Supreme Court on Wednesday held that the govt can take decision to ban such activities to protect public health and online companies can’t claim violation of fundamental right to practice any trade or business.

A bench of Justices J B Pardiwala and R Mahadevan upheld the decisions taken by the Tamil Nadu govt and Karnataka govt to prohibit and criminalise online games played for money or stakes. The court allowed the plea of the state govts which approached the SC after the respective high courts quashed the laws passed by them to ban online betting and gambling.

The bench said that the Madras high court and the Karnataka high court erred in giving narrow interpretation to the law. Tamil Nadu first brought in an ordinance in Nov 2020, later replaced by the Tamil Nadu Gaming and Police Laws (Amendment) Act, 2021. Karnataka also framed the law on the same line but Karnataka High Court in 2022 struck down provisions of the Karnataka Police (Amendment) Act 2021 that prohibited and criminalised online gambling and betting. The law had banned all forms of wagering or betting, except for lottery and horse racing. Similar law was passed by Tamil Nadu which was quashed by the HC.

Reviving the two laws, the bench said “When the element of betting and gambling enters the picture, the nature of the game ceases to be of relevance.”

Rejecting the fundamental right claim of the online companies, Justice J B Pardiwala while pronouncing the judgement in open court, said “betting and gambling does not need any protection” and states are competent to frame law to curb the mischief of betting and gambling. It said online gambling has adverse effects on society and its addiction causes depression among people. The court rejected the plea that betting on games of skill falls outside state legislative power. The court’s ruling will certainly have an impact on the SC’s hearing on Centre’s 2025 law to ban online betting and gambling whose validity is also under consideration of the apex court.

Justifying its decision to ban online money games by bringing Promotion and Regulation of Online Gaming Act, Centre earlier told SC that unregulated online gaming sector had links with terror financing and money laundering but informed the court that it was premature to examine validity of the law as it has till now not been notified after President’s assent. In an affidavit filed in the court on batch of petitions challenging validity of the law, the Centre told the court that the Act was meant to protect individuals, especially youth and vulnerable populations, from the adverse social, economic, psychological and privacy related impacts of online money games and to safeguard the integrity of financial systems and security and sovereignty of the country.
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