The Supreme Court’s two recent verdicts bringing the online gaming sector under the purview of the Central Goods and Service Tax (CGST) Act and upholding state laws banning these digital platforms has set the record straight on a host of legal issues governing this growing industry.The applicability of GST cannot depend on the outcome of the game but on the money staked, it said. (Representative Image/iStock)The twin decisions delivered by a bench of justices JB Pardiwala and R Mahadevan on May 27 have profoundly impacted the way such games used to be perceived as games of skill rather than of chance. The judgment dealt a blow to these companies by holding that once money is risked upon an uncertain outcome, the activity acquires the character of betting and gambling, making it amenable to the state’s legislative control.The GST tax demand raised by the Central revenue department was to the tune of over ₹2 lakh crore. Online gaming companies questioned such an “excessive” demand and argued that GST can be charged only on “supply” of goods or services and in their case, they only facilitate a service by providing the technological platform for users. Even if one was to assume that GST is to be levied, it should be on the platform fee or commission retained by the gaming company and not the entire amount staked by the players, they argued.The court set aside their contentions and held that the online gaming services supply an “actionable claim” which is taxable and the companies are “suppliers” of these services. On the quantum of tax, the court held that GST, by its very nature, is attracted upon “taxable supply” and not upon profits. A person who stakes money on the platform can either win or lose. The applicability of GST cannot depend on the outcome of the game but on the money staked, it said.The decision is a landmark one as it resolves the legal tangle involving tax on online gaming platforms, specifies the nature of the game, lays down the grounds on which the state is justified to ban such activities, and clarifies whether the gaming companies have a fundamental right to carry on such trade.The CaseThe two decisions came on separate appeals filed against multiple verdicts by high courts, both on taxation and on state laws banning such games.For instance, the Tamil Nadu government through the Tamil Nadu Gaming and Police Laws (Amendment) Act, 2021 introduced penal provisions, including imprisonment, for those engaging in wagering or betting on any game in cyberspace.Karnataka too introduced the Karnataka Police (Amendment) Act 2021 to curb such online betting and gambling games citing public health and public order concerns due to rise in suicides, depression, and addiction among youngsters.The two laws were struck down as unconstitutional by the Madras and Karnataka high courts resulting in appeals by the respective state governments before the top court. They claimed that “betting and gambling” can be regulated by state under Entry 34 in List II of the Seventh Schedule to the Constitution.The tax batch of cases decided by the top court arose from separate orders passed by the Karnataka and Bombay high courts in 2023 and 2019 respectively. The Bombay HC held that online gaming transactions do not constitute actionable claims under GST Act. On similar reasoning, Karnataka HC quashed show cause notices issued by the Directorate General of GST Intelligence in 2022 against gaming companies.The RealityThe top court noted the enormous task on its shoulders as the issue of tax or ban on such games had assumed dimensions of a “nationwide constitutional controversy”. It involved a rapidly growing digital industry operating across state boundaries and engaging millions of participants.At the outset it said that “betting and gambling” are in the nature of res extra commercium, (things outside commerce) and no one can claim a fundamental right in operating such an activity. While a game of skill enjoys protection of constitutional guarantee under Article 19, betting or wagering on any game, be it a game of skill, would not be entitled to receive any such protection unless the legislature creates an exception in its favour, the judgment held.The court weighed social reality as easy availability of a mobile phone and access to payment gateways had turned every mobile phone a virtual “gambling house” .“In terms of addiction, in terms of monetary losses and in terms of resultant widespread suicides, online money gaming has a definite impact on the public,” it said, adding that this disturbs public tranquility. It further observed the “addiction and depression” that stems from indulging in online money gaming that poses a widespread public health issue. “Any activity that is detrimental to public health and impairs public health or constitutes a manifest nuisance would fall squarely within the state’s competence under public order,” the bench said while upholding the two laws and setting aside the Karnataka and Madras HC rulings deciding to the contrary.The CostOnce liable to be banned being in the nature of “betting and gambling”, the court was called upon to determine the applicability of the GST framework on online games and fantasy sports. Central to this issue was the question of whether online gaming is about skill or chance.Analysing how online games are played, the judgment observed that unlike a tournament, players are not called by gaming companies. On the contrary, the invitation is to place stakes on the uncertain and unknown outcome of each game. “The online gaming platform is nothing but a systematic inducement technique to ensure a player bets more and more,” said the court. There is a prohibition to withdraw the deposited amount before it is turned into winnings by staking the deposited amount repeatedly. “This never happens in a skill-based competition,” the court observed.In a fantasy sport where a participant picks a dream team of 11 players, the court said, “even the best AI powered prediction models cannot predict with precision the outcome of a cricket match,” negating any statistical knowledge or skill behind such games.“The taxable event under the GST regime is not the abstract game, whether of skill or chance, but the supply of actionable claims arising from the staking of money on uncertain outcomes,” the court held.The GST Act includes “actionable claims” as goods and Entry 6 to Schedule III of the Act specifically states that actionable claims relating to lottery, betting and gambling are not exempt. Citing this, the court held that Parliament has legislative competence to levy GST on online gaming activities and dismissed the argument by the companies that the levy or valuation mechanism is commercially onerous, disproportionate or economically burdensome. “The challenge to the inclusion of actionable claims within the GST framework must therefore fail,” the court held.While setting aside the Bombay and Karnataka HC rulings, the court emphasised that fiscal certainty in emerging technological sectors is important not just from the tax assessment point of view but on the broader aspiration to emerge as a leading digital economy.To that extent, the twin decisions of the court have infused consistency in application of laws and nature of the online gaming industry that was largely undefined. Interestingly, the Promotion and Regulation of Online Gaming Act, 2025 passed by Parliament is under challenge in the top court. Last year, the Centre told the top court that activities on such platforms are allegedly linked to terror funding, hawala transactions and organised crimes. The final word on this is yet to be out.