Lawyers and gaming industry executives welcomed the verdict, stating that the ruling will serve as a precedent for online gaming startups across India and also as a reference point for the GST Council meeting next month.

DGGI sent a show-cause notice to Gameskraft on 8 September, alleging the gaming startup misclassified its offerings as a service instead of filing for actionable claims, which leads to a difference of nearly 40 times in the total quantum of tax liability for the company. While online games of skill, which qualify as a service, are taxable at 18% on the total margin earned by a gaming platform as commission, DGGI's notice claimed that Gameskraft's offering qualified as a game of chance and was thus to be taxed at 28% of the entire revenue (and not just income) of the firm.

On 26 September, Gameskraft appealed the order at the Karnataka high court, stating it had fully complied with its tax liability of ₹1,500 crore for FY22 and challenged the DGGI's order as misrepresentation.

The court on Thursday ruled that DGGI erred in its interpretation of the law and that online rummy is not a game of chance.

"Sometime in the mid-last year, DGGI changed tack to claim that while rummy could qualify as a game of skill when played offline, it should qualify as a game of chance when played online and with money involved. There are plenty of verdicts from high courts and even the apex court that a game of skill simply does not become something else just because money is staked or it is played online. If there is enough precedent to suggest that a game qualifies as one of skill, it cannot be held as betting or gambling as per laws of the land that date back to the 1960s," said Sudipta Bhattacharjee, a lawyer representing Gameskraft and partner, indirect taxation at law firm Khaitan & Co. Bhattacharjee said that the tax quantum claimed by DGGI was bizarre. "Gameskraft's total turnover in the past five financial years amounts to roughly ₹8,000 crore. Market reports have said that in FY22, the entire online gaming sector in India was worth around ₹18,000 crore. If the government is talking about encouraging gaming as a sunshine sector, coupled with the GST Council being unable to take a straightforward decision on the tax quantum for online gaming as an industry for over three years now, such a claim simply never added up," he said.

Gaming industry executives said the verdict could establish a precedent for the taxation of online gaming companies, particularly regarding the quantum of taxation.

The question of how to tax online gaming firms has been central to the GST Council's ongoing discussions about the industry as well. Several online gaming firms have received similar notices from DGGI, making the outcome of this case of great interest to the industry.

Joyjyoti Misra, group general counsel at Gameskraft, said that the verdict may "pave the way for constructive dialogues with GST authorities and form the basis of progressive GST regulations for the industry."

Sameer Chugh, chief legal officer of Mumbai-based gaming startup Games24x7, said that the verdict can "guide future discussions on economic and taxation policies pertaining to the skill gaming industry."

Malay Shukla, secretary of the industry body E-Gaming Federation, said that the verdict brought "clarity to the existing position of law".

"This will have a direct and material impact on the growth of the online gaming industry and help the industry operate with clarity," Shukla added.

A senior industry expert, who spoke on condition of anonymity, said that DGGI sought to differentiate games of skill based on the rationale of prize money paid out in sporting tournaments, such as the Indian Premier League cricket tournament and associated 'fantasy' gaming leagues operating in India.