The focus of this article is on the litigation that may ensue on account of interpretations surrounding the taxability of actionable claims under goods and services tax (GST). This subject has garnered a lot of attention lately, particularly in the context of the online gaming industry. The sector is gearing up to face substantial tax litigation for alleged non-payment of GST in respect of online games.
The issue boils down to whether a prize pool generated in the process of conducting a game results in an actionable claim and if yes, whether the same would attract GST.
At the outset, it is pertinent to appreciate the law governing an actionable claim in India. In the context of GST, an actionable claim qualifies as ‘goods’ under Section 2(52) of the Central Goods and Services Tax Act, 2017. The term is defined in the same manner as provided for in Section 3 of the Transfer of Property Act, 1882. In essence, a claim to an unsecured debt or a claim to any beneficial interest in movable property that is not in the possession of the claimant qualifies as an actionable claim.
Transactions/activities in actionable claims are kept outside the ambit of GST, except for the following claims: lottery, betting, and gambling. In the context of online games such as rummy or fantasy sports games, the primary case of the Department of Revenue is generally that these qualify as games of chance that can be said to be betting or gambling, thereby attracting GST. Courts at various instances have dealt with the fascinating question of whether a particular game is one of skill or chance. This article does not intend to elaborate on this widely deliberated-upon topic.
Let us proceed on the basis that a particular game is one of skill and the participants have pooled in money that will be distributed to the winner. Can it be said that the prize pool qualifies as an actionable claim not attracting GST? Do the participants of this game have a claim to a debt or a claim to any beneficial interest in movable property that is not in their possession? At what point does the prize pool result in an actionable claim?
Likewise, let us take the case of loyalty/reward points issued by an online programme operator. These non-transferable loyalty points are redeemable by customers against vouchers. Can it be said that an actionable claim is created in favour of the customers when the loyalty/rewards points are vested in them, or will this transaction attract GST for qualifying as a supply of goods or a service?
Courts at several instances had the opportunity to discuss the nuances of what qualifies as an actionable claim in the erstwhile tax regime. While elucidating on the difference between goods and an actionable claim in the context of lottery tickets, the Constitutional Bench of the Hon’ble Supreme Court in Sunrise Associates v Govt of NCT of Delhi (2010 (10) SCC 420) elaborated on the following examples of an actionable claim:
The right to recover insurance money in the event of any loss;
A partner’s right to sue on account of a dissolved partnership;
The right to claim the benefit of a contract not coupled with any liability;
A claim for arrears of rent; and
The right to credit in a provident fund account.
Likewise, with regard to a lottery, the Hon’ble Supreme Court concluded that “on purchasing a lottery ticket, the purchaser would have a claim to a conditional interest in the prize money which is not in the purchaser’s possession. The right would fall squarely within the definition of an actionable claim.”
However, in the case of Yasha Overseas v Commissioner of Sales Tax (2015 (322) ELT 0007 S.C.), the apex court held that replenishment licences, considering their inherent value and free transferability, qualify as goods and are not merely an actionable claim.
Under the GST regime, the Hon’ble Bombay High Court in the case of Gurdeep Singh Sachar v UOI (2019-VIL-293-BOM) held that amounts pooled in an escrow account for operating an online fantasy game constitute an actionable claim, as the same are to be distributed among the winning participants.
Recently, the Hon’ble Karnataka High Court passed an interim order in the matter of Gameskraft Technologies v DGGI (2022-VIL-657-KAR) staying an intimation notice issued to an online gaming company demanding the payment of GST on alleged services rendered by it through the gaming platform. One of the questions that the Hon’ble Court would have to decide is whether the gaming company can be said to be involved in a transaction in an actionable claim. The outcome of this decision is eagerly awaited as it will have a significant impact on the online gaming sector.
From the above discussions, it is evident that the contours of actionable claims are extremely wide and may be present in multifarious forms across various commercial arrangements. While there is ample Indian and foreign jurisprudence that has evolved over time, the real nature of any transaction will ultimately depend on the facts of each case.
There is no doubt that one must keep an eye out for increasing litigation on the taxability of an actionable claim. It is imperative to note that such litigation – especially relating to online gaming, horse racing, fantasy sports, and rewards points – will have an impact on various legs of a transaction; viz., on what qualifies as the actionable claim, the presence of a service in the entire arrangement, the valuation of such service, and the rate of tax applicable. Taxpayers must tread carefully on this litigious path.
The views expressed in this article are entirely personal.
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