BREAKING NEWS: Supreme Court Turns Up Heat on RMG Industry by Staying Karnataka High Court Order in GamesKraft’s ₹21,000 Crores GST Evasion Case

As the October 1 deadline looms for the introduction of a hefty 28% GST on all deposits on online real-money gaming platforms – marking a 300-500% tax hike – the sector faced another significant setback on Tuesday. A division bench of the Supreme Court headed by the Chief Justice of India, DY Chandrachud, stayed the Karnataka High Court’s decision of dismissing a GST show cause notice to the tune of ₹21,000 Crores against Bengaluru-based gaming company Gameskraft Technology.

Challenging the Karnataka High Court’s decision, the Director General of Goods and Services Tax Intelligence (DGGI) filed a Special Leave Petition in the Apex Court. On September 6, the case was presented before a three-judge bench comprising the Chief Justice of India, DY Chandrachud, Justices JB Pardiwala and Manoj Misra. While siding with DGGI`s request and staying the High Court order, the Supreme Court has sought a response from GamesKraft and is scheduled to revisit the matter in three weeks.

While the CJI noted, “Do not worry…nothing is going to happen in three weeks,” the implications of the Supreme Court’s stance are significant. The verdict paves the way for the DGGI to proceed against GamesKraft and potentially issue similar notices to 35 other firms, hinting at challenging times ahead for the broader industry.

In today’s proceedings, Additional Solicitor General N Venkatraman contended that their move to the Supreme Court was prompted by the High Court’s substantial reliance on a previous order of a two-judge bench of the same court. The ASG voiced concerns that this judgment halted multiple show-cause notices, presenting challenges to the GST department. He indicated that notices to at least 35 other real-based online gaming firms are on hold due to the High Court order.

The CJI verbally questioned if the company`s offering truly constitutes games of skill or wagering. Despite strong objections from Dr Abhishek Manu Singhvi, the senior counsel representing Gameskraft and from Mukul Rohatgi and Sajan Poovayya, representing intervening federations, the Supreme Court set aside the Karnataka High Court’s single bench ruling that had annulled the ₹21,000 Crores show cause notice to Gameskraft. This move has effectively reopened the show cause notice proceedings.

After considering the arguments, the CJI directed Gameskraft to submit its case response. The Directorate of Revenue Intelligence of GST was also granted permission to submit a counter-response.

This decision means that proceedings against GamesKraft have rewoken the fear of retrospective taxation that looms large over the online gaming industry. The Supreme Court’s forthcoming decision will shape the future of retrospective GST liabilities for all real-money online gaming entities. If the Supreme Court overturns the High Court order in the final hearing, it could deal a fatal blow that will not just cripple but wipe out the entire RMG industry in India.

In a statement shared with PokerGuru, Technology and Gaming lawyer, Jay Sayta said, “The favorable order of the single bench of the Karnataka High Court quashing the ₹21,000 Crores showcause notice issued to Gameskraft has been stayed by a 3-judge bench of the Supreme Court. Thus, the show cause notice proceedings against Gameskraft are revived until the ad-interim stay on the High Court orders is not vacated or until the proceedings in the Supreme Court do not reach a conclusion. It is not clear at the moment if the department intends to also proceed with coercive action against Gameskraft, such as freezing of bank accounts and assets etc.”

“Further, the Additional Solicitor General (ASG) N. Venkatraman, during arguments in the Supreme Court today, clearly stated that the department is in the process of issuing show cause notices to at least 35 other real money online gaming companies. The ghost of retrospective taxation for the online gaming industry has been revived, and the ultimate outcome of the proceedings in the Supreme Court will determine the fate of retrospective GST liabilities of all real-money online gaming companies.”

The Origin of the Gameskraft GST Saga

The story unfolded when GamesKraft received a staggering ₹21,000 Crores intimation notice from GST authorities on September 8 last year — marking this as the most substantial claim ever in indirect taxation history. This notice was challenged before the High Court. On September 23, 2022, a single judge stayed this notice, observing several contentious issues in the case.

The online gaming company moved the Karnataka High Court again, claiming that despite this stay order, the authorities illegally, contemptuously, and maliciously issued a show-cause notice on the very same day as the High Court’s order. The petition also highlighted that the Chief Financial Officer of the company, Ramesh Prabhu, was levied with a personal penalty. It was argued that the allegations in the GST authorities’ show-cause notice were exactly the same as those in the intimation notice, which had already been stayed. The authorities had erred in alleging that the gameplay facilitated by the petitioner was taxable at 28%, it was stressed.

A raid conducted by the GST authorities on GamesKraft’s office in November 2021 culminated in an order by which all the company’s bank accounts were attached.

The amount of tax alleged to have been evaded by GamesKraft was at first ear marked at ₹419 Crores. However, this increased to ₹5,000 Crores and ultimately to over ₹21,000 Crores after July 2022, when the authorities changed their narrative and began to allege that Gameskraft might be indulging in betting, the gaming company contended.

Gameskraft Technology Private Limited faced accusations of endorsing online betting through games and platforms like Rummy Culture, Gamezy, and Rummy Time. Officials pointed out that Gameskraft consistently failed to provide invoices to its clientele.

The GST department imposed a 28% tax on an approximated betting amount of nearly ₹77,000 Crores, stating, “GTPL was engaged in the betting by allowing its players/gamers to place bets in the form of money stakes on outcome of card games played online.”

A forensic examination revealed that the gaming platform had produced counterfeit or backdated invoices. Officials further alleged that Gameskraft designed its system to encourage betting since funds, once added to the wallet, were non-refundable.

In response to the show-cause notice, Gameskraft sought the Karnataka High Court’s intervention. In May 2023, the High Court nullified the notice, noting that the department was selectively presenting its case.

Subsequently, the Directorate of Revenue Intelligence of GST contested this decision in the Supreme Court.

This is a developing story. Keep following PokerGuru for the latest updates!