Court documents seen by Mint showed that Karnataka HC has stayed the notice issued by the Directorate General of GST Intelligence (DGGI) advising payment of taxes and said that the matter will be heard after the festival Dusshera.

The company said in a statement on Sunday that the tax demand was a departure from the well-established law of the land. The tax demand comes at a time a ministerial committee set up by the federal indirect tax body, the GST Council, is deliberating over what should be the tax rate for the online gaming sector and what should be the base on which the tax rate should be levied.

The notice issued by DGGI on 8 September alleged that the taxes paid by the company involves 'misclassification' as a service and not as actionable claims which are taxable at 28%. Also, the tax authority alleged that its activity is in the nature of betting and hence the full face value of the bet amount should be taxed at 28%.

An email sent to the finance ministry spokesperson seeking comments for the story on Sunday remained unanswered at the time of publishing.

Gameskraft said in a statement that games of skill are a constitutionally protected activity per the Supreme Court and various High Courts.

"Rummy is one such game declared to be a skill game like horse racing, bridge and fantasy games. Therefore, the notice is a departure from the well-established law of the land. As a responsible start-up with Unicorn status in the online skill gaming sector, we have discharged our GST and Income Tax liabilities as per standard industry practice, which is now over a decade old," a spokesperson for Gameskraft said in a statement.

"We are confident that we will be able to respond to this notice to the full satisfaction of the authorities since they have sought to apply 28% tax applicable to games of chance and lottery, instead of the 18% applicable to online platforms of games of skill," the spokesperson said.

Lawyers said that GST officials have been trying to apply Rule 31A of the CGST Rules, which applies to betting, horse racing etc., to online skill gaming firms for a while now.

"This doesn't make sense since rummy, etc. have already been held to be games of skill by the Supreme Court and multiple High Courts, and hence do not fall under the ambit of gambling or betting," said Jay Sayta, a prominent gaming lawyer, who works closely with various online gaming firms in India.

Online gaming firms had agreed to pay 28% GST but the bone of contention is what part of their revenues this should be applied to. At the moment, GST on the sector applies to gross gaming revenue (GGR). However, the ministerial group had been mulling over levying it on gross gaming value (GGV), which is the total value of the stake put in by players.

In the online gaming industry, players combine their money to create a prize pool, which is then used to pay out winnings. The difference between these combined deposits and winnings makes the GGR. Industry experts and stakeholders were worried that applying 28% GST to GGV would more than double the tax the industry had to pay and force some firms to shut down.

Sayta noted that even if the GST Council decides to levy 28% GST on GGR, it's unclear whether these notices, which apply to revenues in the years past, will be thrown out as well.