Online gaming: Regulation must inspire confidence among stakeholders

online gaming
The government's efforts to regulate online gaming industry seek to strike the right balance between user protection and industry growth.

The deadline for submitting feedback on the recently published draft online gaming rules expired on Tuesday. The government has been in touch with stakeholders, industry leaders and online gaming companies to create a rulebook for a large number of start-ups in this sunrise segment. Currently, the sector is riddled with various issues that need urgent intervention by the government and policymakers if they are serious about creating a regulatory framework.

The draft rules released by the government lay out two important characteristics for defining an online game. For one, they are offered on the internet and are accessible through a computer resource. Second, a user makes a deposit with the expectation of winnings. Going by the current definition of e-games, it is clear that the government looks to regulate betting-related games. However, industry leaders are of the opinion that the definition is too vague and needs to be specified.

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Take for instance the number of chess tournaments where participants deposit money and the winner takes home a significant prize. At the same time, there are games of chance such as online roulette where people deposit money and win just by luck. The two categories are entirely different even though both come under the government’s definition of online gaming.

Number of online gamers in India (millions)

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policy circle image

India is currently a hotbed for online gaming opportunities with rising internet penetration and a young savvy population. According to a gaming-focused investment fund Lumikai, India had 507 million gamers in 2021-22 including 120 million paying gamers. As of 2022, there were over 900 gaming companies in the country, and the majority of the $2.8 billion invested in the industry has come in the last 2.5 years. Obviously, a burgeoning industry needs regulation lest involved parties are bound to suffer.

Other than user grievances, the industry too has a list of issues which it hopes will be resolved in the Budget session of Parliament. Over the past few months, gaming companies have been under increased scrutiny from tax authorities over issues related to revenue calculation and detection of tax evasion. Some of the tax-related issues of the online gaming industry impact companies offering real money products.

Online gaming companies have sought clarity on the taxation structure for games based on skill. They recommend that the industry should be taxed on the basis of the gross gaming revenue which is the fee charged by a company for facilitating the participation of players. With Budget 2023 round the corner, the companies are eager to put their interest forward and have urged the government not to reduce the current tax deducted at source (TDS) threshold of Rs 10,000.

Currently, gaming companies are required to deduct TDS at the rate of 0.1% for winnings more than Rs 10,000. Gross winnings from gaming or betting attract a flat tax of 30%. Internet industry body IndiaTech recently recommended taxation-related incentives for indigenous start-ups in the sector. It said that the same will boost production of Indian intellectual property, research and development, and improve inflow of investments.

Need for regulating online gaming

Online gaming is most often confused with gambling and there is a need to distinguish games of chance, games of skill and e-sports as illustrated earlier. The sector has been repeatedly forced to keep justifying itself even when the judiciary has authoritatively held that fantasy sports are skill predominant and that a ‘game of skill’ is distinguishable from gambling.

The flourishing industry of online gaming suffers from a lack of regulatory oversight. To correct this, the government plans to set up a self-regulatory organisation or SRO which will act as a regulator in the space. The minister for state of electronics and IT Rajeev Chandrasekhar has assured the stakeholders that the gaming companies will not be allowed to control or dictate narratives to SROs and accountability and transparency will be maintained. The body will also be responsible for certifying games and ensuring that the online games follow rules and regulations.

The government and policy makers also need to fix the inherent ambiguity in the legal regime as it poses a challenge to investors and a significant compliance burden on game operators. Unlike foreign countries, India lags behind in this area as other countries have well developed regulations for the sector. Globally, online gaming is a fairly well-regulated space and many developed countries including the UK, the US, and the European Union ensure that users can enjoy this form of entertainment responsibly. India needs to take a leaf out of the book and inspire confidence of stakeholders.

The online gaming industry is complex in nature, but it also presents a great opportunity for the government in terms of economic benefits considering the industry’s sway over the country’s youth.