Two orders of significance on indirect taxes were passed by the judiciary in the month of May. The first was by the single judge of the High Court of Karnataka in a long pending matter of leviability of Goods & Services Tax (GST) on online gaming. The second was by a bench of the Supreme Court on the availability of the benefit of Settlement under the Customs Act in certain situations.
Order of the High Court of Karnataka
The matter, which came up before the Karnataka HC for consideration, was whether offline/online games such as Rummy that preponderantly based on skill and not on chance, and whether they are played with/without stakes tantamount to ‘gambling or betting’ as contemplated in Entry 6 of Schedule III of the Goods and Services Act, 2017.
It may be recalled that the issue of leviability of GST on online gaming has been dogging the GST Council for a long time. A group of ministers (GOM) appointed by the GST Council did make recommendations--given the divergence of views --the Council could not arrive at any final decision. In the meantime, notices were issued by the Central Board of Indirect Taxes (CBIC) alleging evasion of GST. One such notice which had made headlines for the humongous demand of above Rs 22,000 crore came up before the single judge of the High Court of Karnataka.
By way of background, it may be mentioned that any supply of goods or services are taxable under GST. However, as per the Act, actionable claims other than lottery, betting, and gambling, (Entry 6 of Schedule III) are out of the purview of supply.
After detailed discussions and citing extensively from Supreme Court decisions the High Court has held that there is a distinct difference between games of skill and games of chance. Games such as rummy, whether played online or physical, with or without stakes would be games of skill and test of predominance would apply.
The Court has decided that Entry 6 in Schedule III to the CGST Act taking actionable claims out of the purview of supply of goods or services would clearly apply to games of skill. Hence only games of chance such as lottery, betting and gambling would be taxable.
Further, the court has opined that taxation of games of skill is outside the scope of the term “supply” in view of Section 7(2) of the CGST Act, 2017 read with Schedule III of the Act.
Rummy is substantially and preponderantly a game of skill and not of chance. Further it has been held that there is no difference between offline/physical Rummy and Online/Electronic/Digital Rummy, and both are substantially and preponderantly games of skill and not of chance.
In the circumstances the Court opined that the Online/Electronic/Digital Rummy game and other Online/Electronic/Digital games played on the Petitioners’ platforms are not taxable as ‘Betting’ and ‘Gambling’. Consequently, the Show Cause Notice has been held to be ‘illegal, arbitrary’, and ordered to be quashed. Having disposed the case on merits the judgement did not address the other vexatious issue of valuation- whether it would be on the platform commission or on the gross gaming revenue.
Order of the Supreme Court
The second major decision has been by the two-judge bench of the Supreme Court. The two issues which came up for consideration was whether a petition could be filed under Article 32 of the Constitution in a matter which was before the Settlement Commission; And whether a person attempting to smuggle goods which fall under Section 123 of the Customs Act has recourse to the relief of Settlement.
Article 32 gives a citizen the right to move the Supreme Court for the enforcement of any rights conferred; the right to come to the Court when they feel that their right has been unduly deprived. Section 123 of the Customs Act places the burden of proof on the accused; In other words, the accused must prove his innocence rather than the department having to prove that the accused was involved in smuggling.
Cases of smuggling involving goods falling under Section 123 ibid have been placed outside the clause of Settlement. The facility of Settlement was inserted with the primary aim of expeditiously settling cases of tax evasion based on a bona fide disclosure by the offender. The offender would on this basis be given immunity from either fine or penalty. Incidentally there were contrary decisions of the High Courts in the matter.
The first Honourable Judge has held that the benefit of Article 32 would be available. The Honourable Judge has also held that the ‘discharge of burden proof rather than the question of burden of proof itself becomes redundant in cases of seizures in the Customs Area ‘and that the bar from availing the benefit of settlement would not apply. In other words, even in cases of seizures involving goods which fall under Section 123, the facility of settlement would be available in certain situations. This is a new interpretation of the law.
The second Honourable Judge has dismissed the application on the issue of maintainability itself. He has opined that the ‘practice of circumventing the well-established principles of the exercise of the power of Article 32 should not be encouraged ‘. He has not opined conclusively on the applicability of Section 123.
In both the cases above the last word has not been heard. In the case of online gaming the CBIC has consistently maintained that there is a case for levy of GST. There is bound to be an appeal against the decision of the single judge. In the other matter given the divergence of opinion, the matter would go before the Chief Justice for further action. Both the issues have substantial bearing both for the department and the taxpayer - and it would be nice if the matters reach finality soon.
—The author, Najib Shah, is former Chairman, Central Board of Indirect Taxes & Customs. The views expressed are personal.
Read his previous articles here
(Edited by : C H Unnikrishnan)
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