Introduction
The Indian online gaming industry, already facing intense scrutiny from tax authorities, saw a major legal twist on May 23, 2025. The Supreme Court of India stayed a ₹5,712 crore GST show-cause notice issued to First Games Technology, a subsidiary of One 97 Communications, which operates under the popular brand Paytm.
This interim relief comes amidst a wave of show-cause notices targeting gaming platforms, especially fantasy sports and skill-based gaming apps, which are under the scanner for alleged evasion or underpayment of Goods and Services Tax (GST).
Background: What is the Dispute About?
The case revolves around how GST is calculated and applied to online gaming services in India. Tax authorities argue that platforms like Paytm First Games are essentially offering “betting or gambling” services and hence must pay 28% GST on the full entry amount received from players.
On the other hand, First Games maintains that its platform is based on skill-based gaming and not gambling. Therefore, the company claims that it should be taxed at 18% GST on the platform fee (or gross gaming revenue), not on the total pool of money collected from users.
This distinction significantly affects the amount of tax owed. The ₹5,712 crore notice issued by the Directorate General of GST Intelligence (DGGI) was based on the 28% GST applied on full face value of the games from the period before the new uniform gaming tax regime was enforced.
Supreme Court’s Order: What Happened?
On May 23, 2025, a Supreme Court bench comprising Chief Justice D.Y. Chandrachud and Justice J.B. Pardiwala heard the appeal filed by First Games challenging the GST show-cause notice.
After reviewing the arguments, the Court granted an interim stay on the ₹5,712 crore notice. This means:
- All ongoing proceedings, including tax recovery efforts, are temporarily put on hold.
- No coercive action can be taken by GST authorities until the court reaches a final decision.
- The issue will now be addressed during final hearings where legal clarity will be sought on whether such gaming services constitute betting or a skill-based activity.
First Games’ Argument
Paytm’s First Games unit has maintained that its business involves games of skill — such as fantasy sports and certain card games — and that these are legal and distinct from gambling under Indian law.
Key points in their argument include:
- Skill vs. Chance: Courts have previously ruled that games where skill predominates over chance should not be categorized as gambling.
- Platform Fees: GST should be charged only on the commission or platform fee, not the total amount pooled from players.
- Business Model: The platform does not guarantee returns, nor does it bet against users. It simply facilitates player competitions, collects a service fee, and distributes the pool among winners.
The Government’s View
On the other side, the government, through the GST Intelligence wing, has argued:
- Online money games, whether skill-based or not, involve monetary stakes, which are similar to gambling in practice.
- Such games are indistinguishable from betting, especially when users pay to participate and expect returns based on outcomes.
- Tax should therefore be levied at 28% on the full face value, not just the service fee.
This argument has been the basis for several large show-cause notices issued recently to other gaming companies like Dream11, Gameskraft, and Delta Corp.
Industry-Wide Implications
The Supreme Court’s stay order is not just important for Paytm’s First Games, but has wide-reaching consequences for the entire online gaming industry in India:
- Tax Uncertainty: Several platforms are under investigation or have received tax notices amounting to tens of thousands of crores. A final verdict will determine how GST is to be calculated for online games involving real money.
- Investor Sentiment: High tax demands have created fear and instability among gaming startups and their investors. A favorable ruling could restore confidence in the sector.
- Legal Precedent: The court’s final decision will serve as a legal precedent for how such businesses are to be taxed going forward.
Timeline of the Case
| Date | Event |
|---|---|
| 2021–2024 | DGGI sends notices to multiple gaming companies. |
| Mar 2025 | ₹5,712 Cr GST notice sent to Paytm’s First Games. |
| May 2025 | First Games challenges the notice in the Supreme Court. |
| May 23, 2025 | Supreme Court issues stay, halting further proceedings. |
The 28% GST Controversy
In July 2023, the GST Council decided to impose a uniform 28% GST on online gaming, casinos, and horse racing, regardless of whether the games were skill- or chance-based. This rule came into effect in October 2023.
However, the current show-cause notices were based on activities prior to this date, when tax treatment was more ambiguous. Companies argue that they should not be retrospectively penalized based on rules that were not in place.
This retrospective interpretation has led to staggering tax demands, creating significant friction between the gaming industry and tax authorities.
What Happens Next?
The Supreme Court’s stay is only an interim relief. The case will continue and a final judgment will be delivered after all arguments are heard. The outcome will hinge on:
- Whether First Games’ services qualify as skill-based.
- Whether tax can be levied retrospectively under changed GST rules.
- How GST should be applied — on full player deposits or only on the service fee.
Meanwhile, similar petitions are being heard by the Karnataka High Court and Bombay High Court, as many companies seek legal clarity on the issue.
Statements from Industry Experts
Pranjal Jain, Tax Analyst at Groww Digest:
“This stay provides much-needed breathing room for the gaming industry. However, it also underscores the need for consistent tax policy and regulatory clarity.”
Kunal Sinha, Gaming Law Expert:
“The industry operates in a legal grey zone. This case could set the boundaries between legitimate business and illegal gambling from a tax perspective.”
Impact on Paytm
For One 97 Communications, which has been restructuring its business amid regulatory pressures, the Supreme Court stay is a major relief. Paytm has already been dealing with restrictions from the RBI and increased scrutiny over its payments bank operations.
First Games is one of the company’s key digital offerings outside its financial services arm. Shielding it from a ₹5,712 crore liability — at least for now — offers both financial and reputational protection.
Conclusion
The Supreme Court’s decision to stay the ₹5,712 crore GST notice against Paytm’s First Games marks a crucial pause in one of the most high-profile tax disputes in India’s fast-growing online gaming sector. While it does not settle the case, it gives temporary relief and sets the stage for a deeper legal examination.
As the country continues to grapple with how to regulate and tax digital platforms, this case will be closely watched by tax officials, legal experts, investors, and the broader gaming community. A final verdict could reshape the industry’s future — either fueling its growth or adding more regulatory hurdles.
External Source Links
- https://economictimes.indiatimes.com/industry/media/entertainment/paytm-owned-first-games-sc-stays-rs-5712-crore-gst-notice/articleshow/121379626.cms
- https://www.medianama.com/2025/05/223-supreme-court-stays-gst-notice-against-paytms-gaming-unit/
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