Unlike several industries that were brought to a standstill due to the Covid-19 pandemic, the online gaming industry thrived, providing users with a platform for remote interaction and diversion. In 2022, Deloitte revised the projections of growth of the online gaming industry in India to a CAGR of 32%, with an estimated value of USD 1.65 trillion by financial year 2025. The industry’s progress towards achieving this growth, however, has been impaired by several controversies and litigations, arising out of inadequacies and deficiencies in the existing regulations.
Gaming in India is primarily governed by the Public Gambling Act, 1867 (PGA), which penalises the acts of public gambling and the keeping of a common gaming house. The PGA includes a safe harbour provision which stipulates that the provisions of the PGA will not apply to any ‘game of mere skill’. However, the term ‘game of mere skill’ has not been defined in the PGA. There has also been significant debate on whether the PGA applies to ‘online gaming’. The 248th Report of the Law Commission of India in 2014 observed that the PGA is an archaic pre-independence legislation and recommended that it be repealed.
The Indian Courts have adopted the ‘dominant factor test’ to objectively classify games as either games of skill or games of chance. In State of Andhra Pradesh v. K. Satyanarayana, the Supreme Court adopted a two-pronged test to make such a classification. The first prong is to determine whether the outcome of the game is dictated by skill as a dominant factor, and the second prong is to ascertain whether the entity organising the game is gaining any monetary benefit from the activity. However, there remains a need for legislative action to regulate such classification of games.
This article looks to provide a brief overview of the major regulatory updates brought about by the Central Government in 2023, for the regulation of the online gaming space.
To address certain shortcomings of the PGA, the Ministry of Electronics & Information Technology (MEITY) notified an amendment to the Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Rules, 2021 (Intermediary Rules) on April 06, 2023, which looks to address certain concerns in the existing regulatory regime.
The Intermediary Rules define the term ‘online game’ as a game that is offered on the internet and is accessible through a computer resource or an intermediary while the term ‘online real money game’ has been defined as an online game where a user makes a deposit in cash or kind with the expectation of earning winnings on such deposit. Further, the term ‘online gaming intermediary’ is defined as an intermediary that enables the users of its computer resource to access one or more online games.
As per the amended Intermediary Rules, online gaming intermediaries who enable access to online real money games may only make such games accessible to the public after they have gained approval from a registered ‘online gaming self-regulatory body’. Such regulatory bodies will designate an online real money game as a permissible online real money game if, after its inquiry, it is satisfied that such game does not involve wagering on any outcome, and that the online gaming intermediary has complied with Rules 3 and 4 of the Intermediary Rules which deal with the due diligence to be undertaken by all online gaming intermediaries.
Under the new Intermediary Rules, online gaming intermediaries that offer online real money games must undertake additional due diligence, appoint a chief compliance officer, a nodal contact person, and a resident grievance officer, and publish monthly compliance reports detailing the complaints received and actions taken. They must also publish their physical contact address in India and set up a complaint mechanism allowing users to track their complaints. Online gaming intermediaries must display a mark of verification by an online gaming self-regulatory body on the online real money game, and include information regarding policies related to withdrawals, refunds, winnings distribution, as well as KYC verification procedures and deposit protection measures in their rules and regulations, privacy policy, terms of service, and user agreements.
Rule 4B of the Intermediary Rules provides the manner in which a body may make an application to MEITY for registration as an online gaming self-regulatory body. It further provides for the criteria that such applicant body must satisfy in order to be designated as an online self-regulatory body.
Under the Central Goods and Services Tax Act, 2017 and the Central Goods and Services Tax Rules, 2017 (CGST Rules), a rate of 28% is applicable on activities involving betting or gambling on the total transaction value of betting. As per Rule 31A of the CGST Rules, the value of supply of an actionable claim in the form of betting, gambling or horse racing is 100% of the face value of the bet or the amount paid to the totalizator.
In the 2019 case of Gurdeep Singh Sachar v. Union of India it was alleged that an online fantasy sports entity was evading taxes by not paying GST at the rate of 28% as required under Rule 31A of CGST Rules. The Bombay High Court noted that Rule 31A of the CGST Rules applies only to ‘gambling’ or ‘betting’ services where 28% GST is payable on the face value of the bets. However, the court observed that the explanatory note to entry code ‘998439’ of the category “other online content” suggest that for entities engaging in role-playing games, strategy games, action games, card games, children’s games, etc., a rate of 18% GST is applicable on the commission they receive from the players. This verdict was upheld in January 2023 by the Rajasthan High Court in the case of MyTeam11 Fantasy Sports Private Limited v. Union of India, where it set aside the show cause notice issued by the GST Department to MyTeam 11, an online virtual fantasy sports platform, for recovery of tax dues on the grounds that they had misclassified their game as a game of skill. The Rajasthan High Court observed that the game was a game of skill and the entity had paid the requisite 18% GST on the platform fee that they charge and therefore would not be liable to pay 28% GST as they did not provide gambling or betting services.
Recently, the High Court of Karnataka in the case of Gameskraft Technologies Pvt. Ltd. v. Directorate General of Goods and Services Tax & Ors. observed that the GST payable by an online gaming intermediary offering Rummy and other games of skill online with stakes shall be 18% of the platform fees collected from the players. The Court further noted that such games of skill fell outside the ambit of betting and gambling even though players were allowed to play for stakes on an online platform and therefore rejected the contention of the respondents that the petitioner was liable to pay 28% GST on the entire amount deposited by the users.
The Finance Act, 2023 brought in certain amendments which look to specifically tax users’ winnings from online games. The online gaming intermediary will deduct tax on the total net winnings from online gaming either at the time that the user withdraws (partly or wholly) their winnings from their user account, or at the end of that particular financial year. If the user withdraws their winnings from an online game during a financial year, the person responsible for making such payments is required to deduct income tax on the net winnings being withdrawn (at the time of such withdrawal), as well as the remaining net winnings in the account of the user, at the end of the financial year. The rate of taxation of such winnings, however, remains unchanged at 30% of the net winnings.
The amendments to the Intermediary Rules regarding online gaming intermediaries are a step in the right direction with respect to regulating online real money games, as they ensure that such intermediaries adhere to certain minimal standards while securing deposits from and transacting with users, and that the users are adequately informed about the risks and benefits of their actions when playing online real money games.
However, these rules introduce certain layers of uncertainty in the categorisation of online games, by prohibiting games involving "wagering" from being classified as permissible online real-money games. The meaning and scope of this term remains unclear, as different State Governments have varying regulations for games of chance and skill. Certain states, like Nagaland and Meghalaya, have prescribed exhaustive lists of games of skill where wagering is allowed under their respective legislations. This creates a conflict between state and central laws, since the Intermediary Rules prohibit any real-money game that allows wagering on outcomes from being classified as permissible, regardless of it being a game of skill or game of chance.
Furthermore, the Intermediary Rules mandate that online gaming intermediaries' privacy policies and terms of use inform users that their computer resources cannot display content that promotes gambling or games causing harm to the user. However, the term "harm" remains undefined in these rules, leading to further ambiguity.
While these amendments are a step in the right direction and endeavour to protect users, there continues to remain several conflicting views and interpretations on the games that are allowed, the manner in which they may be monetized as a business, and the corresponding compliances to be followed by both gaming platforms and their users.
Christopher Rao is a Partner at Krishnamurthy & Co. The author would like to thank Yash Chadha for his assistance.