Online gaming industry seeks inspiration from global practices

online gaming regulation in india
In a quest for clarity and growth, India's online gaming industry wants the government to introduce global best practices in its regulatory regime.

A heated debate is going on regarding the classification of online games and the regulation of the gaming industry in India, particularly in the light of recent rules introduced by the Union government. On April 6, 2023, the government provided regulatory clarity to the online gaming industry by amending the IT Rules 2021 to include provisions for online gaming. As a result of these amendments, online real-money games offered by intermediaries will now be regulated by the ministry of electronics and information technology (MeitY) through recognised self-regulatory organisations.

On December 23, 2022, the Union government had amended the Government of India (Allocation of Business) Rules of 1961 (AOB Rules) to bring matters relating to online gaming under the purview of MeitY and to include e-sports as part of multi-sports events within the scope of the department of sports, ministry of youth affairs and sports.

This delineation has brought clarity to the regulation of betting, gambling, and online gaming. Betting and gambling fall under Entry 34 of the State List, while online gaming and e-sports are regulated by the Union government. However, it is worth noting that there remains some ambiguity regarding whether online gaming should be categorised as a game of skill or chance, as some state governments have explored ways to classify it as a game of chance under their state laws.

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Challenges to online gaming regulation

The distinction between games of skill and games of chance, particularly when it comes to games that involve predicting sporting events, continues to be a contentious issue. Nevertheless, case laws and judgments have made it clear that forecasting and wagering in sports, especially when money is involved, are considered gambling, and are therefore prohibited activities in India.

Looking at regulations in other countries, Denmark, Australia, and the United Kingdom treat games of skill and games of chance similarly. Denmark requires a licence for all activities involving wagering on future outcomes, without distinguishing between skill and chance. In the United Kingdom, gaming, betting, and lotteries are regulated by the Gambling Commission, with detailed guidelines for operators to ensure effective regulation.

In Australia, each state and territory has its own gambling-related laws, but clear definitions for gaming, gambling, and betting help reduce confusion in their interpretation. India could consider adopting similar regulatory approaches from these countries, potentially establishing a Skill Gaming Commission to enhance regulatory oversight.

One major issue for online gaming companies has been the receipt of GST notices alleging that games involving a combination of skill and chance, such as rummy and poker, are predominantly games of chance and subject to a 28% GST rate on the entire betting amount. This contradicts previous court rulings that considered rummy a game of skill separate from betting and gambling.

Some states, like Nagaland and Meghalaya, recognise games like poker as ‘games of skill’ and exempt them from gaming laws. However, amendments to the GST law, effective from October 1, 2023, have categorised all games, including rummy, as games of chance, subjecting them to the higher GST rate. This has led to debates about whether games involving both skill and chance should be treated as games of chance or skill. The distinction is crucial, as skill games attract a lower tax rate, while games of chance are taxed similarly to betting, gambling, and horse racing.

The mention of retrospective taxation in India brings to mind the contentious Vodafone case, which involved amendments to the Income Tax Act in 2012 that imposed taxes on past profits. The recent repeal of retrospective legislation on indirect transfer tax in August 2021 is a step toward resolving these issues. Retrospective taxation has been a source of concern, affecting India’s reputation as a safe investment destination and potentially violating international investment treaties.

Presently, the Central Board of Indirect Taxes & Customs (CBIC) has issued three show-cause notices: one with a tax evasion notice of INR 21,000 Crores to Gameskraft and two totaling INR 3,000 Crores to two other online gaming companies. Gameskraft is one of 40 companies being investigated by the Directorate-General of Goods and Services Tax Intelligence (DGGI) for potential tax evasion. The GST authorities’ decision to impose a uniform 28% tax rate on all online games has created uncertainty, as it fails to distinguish between games of skill and games of chance, which can be a fine line in some cases.

As it stands, online gaming rules in India are in their infancy, causing confusion in the market. However, there is much that India can learn from the regulatory practices of other countries. A cautious approach may not be ideal for nurturing a multi-billion-dollar industry like gaming.

With technological advancements, gaming is set to expand further. It is crucial to recognise that gaming is not inherently negative, and responsible gaming with regulatory oversight is a preferable approach to strict restrictions and bans. The ongoing tax litigation and potential rise in insolvency cases do not benefit stakeholders. A comprehensive and pragmatic policy approach is necessary to foster the growth of the gaming industry in India.

(Anubha Agarwal is a Delhi-based lawyer with over 15 years of experience as a legal professional.)