Summary: In this article, the author argues that the amendment to tax both games of chance and games of skill at the same rate violates Article 14. This move lacks an intelligible classification and rational nexus with the objectives of the GST statute and could fail constitutional scrutiny.

Introduction

The distinction between a game of chance and a game of skill has been repeatedly affirmed by various Supreme Court (‘SC’) and High Court judgments. Taxation statutes are no exception to this distinction. Recently, the Karnataka High Court in Gameskraft v DGGI (‘Gameskraft’) applied this distinction to the CGST Act, 2017 (‘Act’). The court held that ‘games of skill’ cannot be equated with chance-based gambling activities as they would be actionable claims falling outside the definition of ‘lottery, betting, and gambling.’ The effect of Gameskraft was that it saved online gaming platforms that amount to ‘games of skill’ from taxation.

However, the CGST Amendment Bill, 2023 (‘Bill’), has discarded the distinction between a game of skill and a game of chance to tax online gaming platforms as well (§2(a)). The Bill has amended Entry 6 of Schedule III such that online gaming, regardless of skill or chance, can be taxed at par (§4). Thus, skill-based online games and chance-based activities will be subject to the uniform tax rate of 28% on full face value.

Prior to the Bill, actionable claims, or in other words, unsecured debts, were excluded from the definition of supply under Entry 6 of Schedule III. Hence, such claims could not be taxed. However, the Act excluded ‘lottery, betting, and gambling’ from this exemption.

The existing literature on the Bill has failed to distinguish between chance-based and skill-based activities and has focused on the economic burden of 28% GST on online gaming. Further, the difference between games of chance and games of skill has been analyzed by various authors primarily from the perspective of Article 19. This piece, however, explores whether blurring the line between chance-based and skill-based activities for taxation will survive the test of Article 14.

In this piece, I argue that the failure to distinguish between a game of chance and skill under GST offends Article 14 of the Constitution. I establish this first by discussing how courts have applied the equality doctrine to taxation statutes. I argue that although courts provide wide leeway to the legislature for taxation statutes, such statutes are not immune from Article 14. Second, I apply the test of intelligible classification to the Bill. I establish that merging games of chance and skill into the same class fails this test. Third, I apply the test of rational nexus. I establish that classifying games of chance and skill into the same class has no nexus with the underlying policy objectives of the GST statute.

The Amendment Bill on the Anvil of Article 14

Admittedly, courts have given wide leeway to taxation statutes when they are assessed on the anvil of Article 14. In Khadinge Sham Bhat v Agricultural Income Tax Officer, the SC held that the legislature has wide discretion in taxing different subjects. In R. K. Garg v Union of India, the court held that when it comes to economic matters, the legislature should be given wider latitude than in matters concerning civil rights (¶10). This implies that the fundamental principles underlying Article 14 should not be applied as strictly to taxation statutes.

In Murthy Match Works v CCE, the SC considered the question of whether the judiciary can compel the legislature to classify two objects separately for taxation purposes. In this case, the government had removed the distinction between two categories of matchstick manufacturers based on the output. These two categories were then subjected to a uniform tax. The court deferred to the legislature’s wisdom in choosing not to classify these two categories separately. The court held that the question of classification is ordinarily a legislative and not a judicial question. The judiciary should exercise restraint before holding taxation statutes in violation of Article 14 for merely not classifying dissimilar things.

These cases are evidence of judicial deference towards taxation statutes and their reluctance to hold such statutes unconstitutional on grounds that they violate Article 14. However, even taxation statutes are not immune to the doctrine of equality under Article 14. In State of Kerala v Haji K. Kutty Naha, the SC held that even a taxation statute cannot impose a uniform tax on dissimilar subjects. Failure to make a reasonable classification may result in a violation of Article 14. Even in the Murthy Match Works, I argue that the court has only indicated that the judiciary would not ‘ordinarily’ intervene in matters of classification under taxation statutes. While the court has urged to exercise restraint, the court has not barred itself from applying the equality doctrine to taxation statutes. In Murthy Match Works, the classification was urged between two categories that followed almost identical manufacturing processes. The only difference was in the quantity produced by the manufacturing units under these two categories. Therefore, I argue that the Court was justified in deferring to the legislature’s wisdom because the difference urged between the two classes was not substantial.

 Further, the SC has not shied away from holding taxation statutes unconstitutional if they classify dissimilar subjects together. In K. T. Moopil Nair v State of Kerala, the SC declared a tax statute unconstitutional because it imposed a uniform tax on all types of land, regardless of whether the land was capable of yielding any income. Therefore, the court held that if there exists a valid basis for classification and the legislature fails to make such a classification, then such law will be hit by Article 14. While drafting the Bill, the legislature has ignored the fundamental difference between games of chance and games of skill.

Having established that taxation statutes are also subject to the doctrine of equality, I shall now analyze whether the Bill meets the dual test of Article 14: (i) intelligible classification, and (ii) rational nexus with the object of law.

Un-Intelligible Classification

Admittedly, the legislature has wide discretion in classifying things for taxation purposes. Courts tend to uphold the taxation policy adopted by the legislature. Notwithstanding the wide leeway in classification, the taxation policy itself must be constitutionally permissible (¶22). If the policy itself is discriminatory by treating unequal entities equally, then it may not survive the test of intelligible classification. Classification requires that the entities falling under the same class should have common properties and characteristics. Such a class cannot be made arbitrarily. There should be a systematic relation between the elements of such a class. Therefore, to survive the test of intelligible classification, it must be established that games of chance and games of skill can be clubbed into the same class.

The distinction between games of chance and games of skill is fortified by multiple judicial pronouncements in India. In RMD Chamarbaugwalla v Union of India (‘RMDC-II’), the SC held that activities of a gambling character are distinct from activities where success depends substantially on skill. Thus, chance-based and skill-based activities form two separate categories.

Courts have also extended this distinction to the realm of online gaming. In AIGF v State of Karnataka, the Karnataka High Court held that all games cannot be said to acquire the character of ‘games of chance’ merely because they are played on an online medium (Part XII). The court also held that a statute cannot treat games of chance and skill as a homogeneous class. To do so would be to ignore the long-standing jurisprudential difference between these two categories (Part XXI). The Bill stands in clear violation of this distinction. The Bill has defined ‘online money gaming’ to include all games whether they are based on chance, skill, or both (§2 (a)).

Even for taxation purposes, the legislature cannot create a class that has fundamentally distinct components. Because games of chance and games of skill are different in their characteristics and properties, the legislature’s attempt at classifying these two types of games into one class shall fail the test of intelligible classification.

Absence of Rational Nexus with the Objective of Taxation

For argument’s sake, I concede that the legislature can classify games of chance and skill together. Even then, I argue such classification would fail the test of rational nexus. For invalidating a taxation statute on grounds of violating Article 14, this test becomes paramount. In this piece, to support my position, I have relied on the K. T. Moopil Nair. But even this judgment has not been interpreted to establish a rule that a taxation statute treating unequal entities equally will automatically fall foul of Article 14. In other words, it is not sufficient that merely because a taxation statute treats unequal entities equally, it offends Article 14. What further needs to be shown is that such treatment should have no rational relation with the intended object of the statute.

I argue that the Bill lacks policy justifications for taxing games of chance and games of skill at the same rate. Gambling activities, by their very nature, have been considered sinful. In State of Bombay v RMD Chamarbaugwala (‘RMDC-I’), the SC acknowledged that gambling is morally a vice. Therefore, in the eyes of the law, chance-based activities exist under a cloud of unrespectability.

Because of this, taxation is used to discourage chance-based activities. This justification is similar to taxing harmful substances like alcohol and tobacco. On the other hand, skill-based activities stand on a different footing because they are not considered ‘sinful’ in law. The effect of imposing a uniform tax on these two distinct activities is that a sinful good is being taxed at par with a non-sinful good.

The object behind taxing activities which are of the nature of gambling is to discourage them. The Bill is justified in imposing an exorbitant tax on sinful activities such as games of chance. However, the object of discouraging chance-based activities can be achieved without taxing games of skill at the same rate. There is no reason to tax games of skill at the same rate as games of chance. Such classification does not further the object of the legislation if it is to discourage sinful activities.

In any case, the CGST Act was enacted to simplify the tax regime by reducing the multiplicity of taxes (pp 104). However, taxing games of chance and skill similarly does not aid in simplifying the indirect tax regime. The effect of the Bill is to increase the burden of tax on games of skill. Therefore, the Bill’s attempt to classify games of chance and skill together has no rational nexus with the object of the CGST Act.

Conclusion

The distinction between games of chance and skill is firmly entrenched in Indian jurisprudence. This piece has shown how they form two separate legal concepts and cannot be clubbed together. The decision of the legislature to tax games of chance and skill at the same level is not justified by the policy justifications for taxing sin goods. Nor is the imposition of a uniform tax tenable considering the jurisprudence on games of chance and skill. The Bill puts games of chance and games of skill in the same class. This is neither an intelligible classification nor does it have any rational nexus with the object of the legislation. By deliberately erasing the distinction between skill-based and chance-based activities, I have established how the Bill may not survive an Article 14 challenge.

Akshat Agarwal is a second-year B.A., LL.B. Student at NLSIU. 

[Ed Note: This article has been edited by Apoorv Vats and publihsed by Harshitha Adari from the Student Editorial Board.]