The Indian online gaming industry is at a crossroads as tax authorities gear up to issue final tax demands by February 5, 2025, based on the pending show-cause notices (SCNs). As the deadline nears, many gaming companies have already been served tax notices by authorities. Although gaming firms are waiting for the Supreme Court’s deliberation on the matter, given the timeline, a verdict before February 2025 appears unlikely, according to a report by The Economic Times.
The demands pertain to the 28 per cent goods and services tax (GST) levied on betting amounts, a controversial issue currently being deliberated by the Supreme Court.
With some companies already receiving tax demands, gaming industry bodies are lobbying to prevent aggressive enforcement actions, such as bank account freezes, until the Supreme Court resolves the matter. These trade associations are also contemplating a joint petition to the Central Board of Indirect Taxes and Customs (CBIC) to seek leniency and protect their operations during this time.
However, unless the court issues an interim order, gaming companies may have no choice but to comply with the adjudication process.
Key dispute: Skill vs chance
At the heart of the dispute is the classification of games like poker, rummy, and fantasy sports —whether they are ‘games of skill’ or ‘chance’. The Supreme Court’s decision could redefine how the industry is taxed:
1. If classified as gambling or games of chance: The entire betting amount may be taxed at 28 per cent, severely impacting gaming companies and user interest.
2. If recognised as games of skill: The court may still uphold the tax department’s stance of taxing the full betting amount, which could erode profits and discourage users.
Gaming companies argue that GST should only apply to platform fees, typically 5–20 per cent of the betting amount. This outcome could enable the industry to grow and attract investors.
The tax department contends that games involving prize money on faceless online platforms are inherently random, as opponents are selected by software. This undermines the claim that such games allow players to assess or compete based on skill.
Adjudication orders and tax demands
Three gaming companies have already received adjudication orders confirming tax demands for the financial year 2017-18, when GST was introduced. If SCNs are not converted into final tax demands by the February 2025 deadline, they will lapse. However, once an order is passed, gaming firms must challenge the order before appellate authorities or courts, requiring a 10 per cent deposit of the disputed tax amount.
Regulatory implications
The court’s decision will shape the future of India’s nascent online gaming sector, which operates in a legal and regulatory grey area. A ruling favouring the tax department’s interpretation could jeopardise the industry, while a more favourable outcome might encourage growth and investment.
The ambiguity over whether games are skill-based or purely chance-driven extends beyond poker, rummy, and fantasy sports. The classification of other games will require separate legal proceedings in the future.