Central Board of Indirect Taxes and Customs (CBIC) will initiate action against online gaming companies, based on its investigation, after the Karnataka High Court decides on a challenge petition filed by Bengaluru-based Gameskraft.

“Online gaming is mainly game of chance and, accordingly, it will attract GST at 28 per cent. We are investigating online gaming companies and it will continue. However, we would like to wait for Karnataka High Court ruling before initiating any action such as issuance of show cause notice,” a senior government official said. In September, Bengaluru-based online gaming company Gameskraft Technologies challenged the show cause notice issued by the Directorate General of Goods and Services Tax Intelligence (DGGI) for a tax demand of over ₹21,000 crore. The official said that hearing in the matter has been completed with submissions by both parties, and the court has reserved its order, which is expected any day.

There is a two-tier rate structure for online gaming — 18 per cent for game of skill and 28 per cent for game of chance. Most online gaming companies levy GST at 18 per cent, claiming it is a game of skill contrary to the GST Department’s claim. These claims and counter-claims have been subject to litigation.

Commenting on the latest development, Jatin Arora, Partner, Phoenix Legal, said the larger issue is how to differentiate between a ‘game of skill’ and a ‘game of chance’. Whether a player applies mind and skill or it is all dependent on chance and no skill is involved. The other issue is the valuation. Should GST be levied on the amount collected by the online gaming companies from players or on the entire pool. The courts are looking into this.

“While the litigation will take its own course, the GST Council should also carry out wider consultations with the industry and other stakeholders to come out with a proper solution which is not counter-productive for the industry,” he said.

Samudra Sarangi, Partner with Panag & Babu, felt the determination of whether a game is skill-based or chance-based is not easy. The courts have set certain principles to help with this distinction in the background of certain traditional games. However, it remains unclear how these would apply to the plethora of online games that have flooded the market. Therefore, “it would be prudent to identify a proper classification mechanism which can segregate between innovative and complex games which are skill-based, and those which are not. This would be a good starting point to regulate a booming sector with immense potential being saddled with regulatory issues in each state,” he said.