[Shashwat is a student at Institute of Law, Nirma University.]
On 6 September 2023, the Supreme Court put a stay on a judgement delivered by Karnataka High Court in July 2023. The High Court in Gameskraft Limited case quashed a GST notice of a staggering INR 21,000 crore issued by the state to the gaming company, which primarily hosts Rummy games on its platform. The court stated that Rummy is a game of skill and is different from a game of chance, and therefore, it cannot be taxed as an 'actionable claim' under entry 6 of Schedule III of Central Goods and Services Tax 2017 (CGST Act).
In this post, the author highlights the contradiction between provisions of CGST Act and the settled jurisprudence by the Indian judiciary over a game of skill and a game of chance. This post further focuses on how the court in Skill Lotto Solutions wrongly interpreted the inclusion of actionable claims within the meaning of goods and how it impacts the soaring gaming sector, which is against the decision of the constitutional bench. It also touches upon the need of a uniform legislation to avoid Stare decisis.
Definition
Actionable claim is not defined under the CGST Act and takes its definition from Section 3 of the Transfer of Property Act 1882 (TP Act). It refers to a claim against any debt connected to any gain from moving property that isn't in one's possession. Section 2(52) of the statute includes actionable claim within the definition of goods.
The Judicial Interpretation of Game of Chance and Actionable Claim
The nature of lottery tickets, gambling and betting on whether they, being the res extra commercium, are goods or actionable claims settled in the constitutional court in Sunrise Associates. The five-judge bench had the task of reviewing H Anraj, which essentially held that lottery tickets are 'goods' under Article 366(19A)(a), which we will discuss later, of the Constitution. The court stated that lottery tickets were goods, but as a slip of paper or memorandum indicating, (a) participative right in the draw, and (b) claim to a prize based on the purchaser's success.
It relied on the judgement given in the case of Gannon Dunkers, wherein the then constitutional bench interpreted Section 3 of the Sale of Goods Act 1930 to ascertain the state's taxing power over lottery tickets. The court in Sunrise Associates held that (a) lottery tickets are only evidence to take part in the competition and do not have any innate value per se, (b) the right to participate is a complete right in itself and the distinction between right to participate and chance to win is unwarranted and (c) since winning is a conditional interest, not in the purchaser's possession, it squarely falls under actionable claim. Later on, the apex court in Skill Lotto Solutions, which we will discuss later, included an actionable claim under the definition of goods by upholding Section 2(52) of the CGST Act.
Present Issue and Critical Analysis
In the Gameskraft case, the tax department contended that under Rule 31(A) of Central Goods and Services Tax Rules 2017, the gaming company should be taxed 100% of the face value at the rate of 28% rate on the entire amount of the bet received and not only the platform fee which is 18% of the amount received as applicable on games of skill.
In the present context, whether such games as Rummy attract the definition of 'actionable claim' or not is blurred. However, as per Section 7(2)(a) of the CGST Act read with Schedule III, betting and other related activities would be seen as a supply of goods or services.
To constitute the essentials of the 'supply' as per Section 7(1)(a), (a) there should be a consideration, and (b) the transaction should be done in the furtherance of 'business', which in turn is enumerated under Section 2(17). Clause (a) also mentions 'wagering and other similar business activities'. In the case of Public Prosecutor v. Veraj Lal Sheth, the Madras High Court found betting and wagering to be similar activities wherein a stake is won or lost depending on an unknown event's occurrence. The dilemma which arises after analyzing the provision is that betting or wagering was never recognized as a 'business' in the landmark case of RMD Chamarbaugwala.
The Karnataka High Court, in its judgement, heavily relied upon Section 2(17) to protect game of skill as a trade under Article 19(1)(g) of the Constitution. However, the section is ambiguous, even including wagering as a legitimate activity. Hence, the only way for the GST Council to impose a 28% GST on Rummy or any other game of skill was to include them within the purview of 'wagering' because it would not be possible otherwise on account of their distinctive nature.
To counter this challenge, the 51st GST Council included Rule 31(B) as it aims to bring both subsets of the game into a single, broad category of 'online gaming'. It eventually means that the value of the actionable claim will be over the entire bet amount, irrespective of the nature of the game, and will be subject to a uniform GST rate of 28%.
Further, the sheet anchor of the argument to include an actionable claim within the definition of 'goods' is Skill Lotto Solutions. In this particular case, the court upheld the inclusion of the 'actionable claim' within the definition of 'goods' under Section 2(52) of the CGST Act. The rationale behind such action can be found in paragraph 42 of the judgement wherein the court added an extract from the Sunrise Case referring to “were actionable claims not otherwise includible in the definition of 'goods', there was no need for excluding them.”
The court in Sunrise Associates devised a two-prong test to determine an actionable claim, considering Section 3 of the TP Act. It held that there should be (a) a claim in the movable property and (b) the movable item in which such beneficial interest is claimed must not be in the claimant's possession.
Putting Rummy under the test, the overlapping nature between the lottery and Rummy is the not in possession but with a beneficial interest in the property. However, it does not mean that actionable claims are logically included in the definition of goods, particularly in light of the following points: (a) the court did not alter the definition of 'goods' and only interpreted the actionable claim in terms of the right to win the lottery, as lottery ticket in itself does not hold any value and is devoid of characteristics of 'goods', and (b) Article 366(12) defines goods as 'all materials, commodities, and articles'. Because it solely pertains to materials, commodities, and items, the definition in the Constitution precludes actionable claims.
Further, Rule 31(A) encompasses lottery, betting, gambling and, surprisingly, horse racing for the taxability of 100% on the supply value. Including 'horse racing', essentially a game of skill as recognised in the case of KR Lakshmanan, with the activities purely based on chance, violates the principle of ejusdem generis. In the case of Bangalore Turf Limited, the High Court also held Rule 31(A) as ultra vires to the CGST Act in the case of horse racing as it would undermine the rule that tax can only be assessed on consideration received under the CGST Act.
The position would have been apparent if the apex court had not put a stay on the judgement delivered by the Bombay High Court in the case of Gurdeep Sachar v. Union of India. In the instant case, the court ruled that the application of Rule 31A(3) is limited to activities related to betting, not games of skill; hence, it is outside the purview of actionable claims. Since Gameskraft and Gurdeep Sachar square off to a similar question, it would be on the apex court to settle it for once and all.
Conclusion
The polarizing views of the Indian judiciary and the GST Council in the wake of the CGST Act and the subsequent amendments have led to multiple rounds of litigation without settling the substantial question of law. For instance, in Nagaland, Rummy is classified as a game of skill, while in Tamil Nadu, it is a game of chance. Thus, a uniform legislation, on par with Judicial developments, is the need of the hour.
Moreover, the GST imposition of INR 22,000 crore on a single company is more significant than the profit of the entire gaming industry combined. The 51st GST council, entrusted with formulating beneficial legislation for the ever-rising gaming industry, has inversely made it weak at its knees. In such a scenario, the stake would be at an all-time high when the bench led by CJI resumes the hearing regarding the future of the gaming industry.