Karnataka HC seeks DGGI response on Gameskraft notice

The Karnataka High Court has set an October 11 date for the next hearing in the case of Directorate General of GST Intelligence (DGGI) vs Gameskraft. The unicorn gaming startup submitted a writ petition on September 26, against a show-case notice issued by the DGGI despite an earlier stay order issued by the court against an intimation notice. An intimation notice is issued by the department to inform a company of outstanding taxes, and it is usually followed up by a show-case notice (SCN).

On September 25, the DGGI had served an SCN on Gamekraft of ₹21,000 crore, claiming that the company had misclassified as a service while filing taxes, instead of actionable claims, which are taxable at 28%. The intimation notice was issued on September 8.

The Karnataka HC has now sought a response from the DGGI, a law enforcement agency under the Ministry of Finance, regarding its initial demand and subsequent SCN.

In a hearing earlier today, the Justice SR Krishna Kumar-led bench observed that it cannot issue a stay on the show cause notice that the DGGI has served Gameskraft, without hearing both the parties adequately. The bench also noted an appeal from N Venkatraman, additional solicitor general (ASG) at the Supreme Court who is representing the DGGI at the Karnataka High Court, which highlighted that a stay order on the show cause notice is not imperative — since the latter already gives Gameskraft 30 days to respond.

The DGGI counsel also argued that the provisional attachment, which assessed GST duties to the tune of ₹21,000 crore from Gameskraft, is also valid till November 10, which therefore did not require an immediate verdict on either notice served by the DGGI to Gameskraft.

On September 26, Gameskraft moved the Karnataka High Court against the DGGI for issuing a show cause notice to the company, despite the court issuing a stay order on the former’s GST demand intimation.

According to Gameskraft’s petition at the Karnataka High Court, documents of which were seen by Mint, the show cause notice was served to Gameskraft by the DGGI despite a bench led by Justice SR Krishna Kumar issuing a stay order against the DGGI’s demand from Gameskraft to pay goods and service taxes (GST) to the tune of ₹21,000 crore, plus interest and penalties.

The petition further stated that the DGGI “illegally, contemptuously and maliciously” issued the notice, and also penalized, at a personal level, Ramesh Prabhu — who serves as the chief financial officer of Gameskraft.

The tussle between the GST law enforcement body and the gaming firm comes amid a period of overall turmoil for the online gaming sector. On September 8, the DGGI’s demand notice to Gameskraft said that the company’s assessment of its tax liabilities were deemed to be “miscalculation” — while Gameskraft perceived its business to fall under services, the DGGI deemed it to be under actionable claims.

In simpler terms, the DGGI is seeking to tax the company at a rate of 28% on its total revenue, which is the tax slab determined for gambling. The latter also includes online games of chance — which is different from online games of skill, which is taxed at 18% of a company’s operating profit. While Gameskraft has argued that it has paid its due diligence of ₹1,500 crore in GST for FY22, the DGGI assessment pegs its tax liabilities at a much higher rate.

Industry experts have noted that a lack of clarity on the classification of online games of skill and games of chance has led to confusion on which games are considered under gambling, and which aren’t. According to Gameskraft, 96% of the games played on its platform fall under rummy, which has been mostly ruled as a game of skill — and therefore does not fall under gambling.