MEF CEO Dario Betti looks to the burgeoning Indian gaming industry, where a unique regulatory landscape poses distinct challenges for local and international players.
India’s online gaming sector is at a critical juncture, characterized by rapid growth and evolving regulations. The legal distinction between games of skill and games of chance remains central to the regulation of this industry, shaping its future trajectory. Recent developments, including the introduction of the Intermediary Guidelines and tax reforms, have brought much-needed clarity to the sector’s operations.
However, several challenges remain, particularly in the areas of Foreign Direct Investment, cross-border transactions, and consumer protection.
The need for comprehensive, harmonized regulations is evident, especially as state governments continue to enforce varying rules on gambling. A well-defined regulatory framework, combined with clear tax policies and responsible gaming practices, will be key to fostering sustainable growth in India’s online gaming industry.
India a promising market, with concerns
India’s online gaming sector, currently valued at $3.1 billion, is projected to grow to $60 billion by 2034, according to a report by the United States India Strategic Partnership Forum (USISPF). The USA has played a major role in this growth, contributing $1.7 billion of the $2.5 billion in foreign direct investment (FDI), with 90% of this investment in the pay-to-play segment.
However, the sector faces regulatory and taxation challenges, including a 28% GST on player deposits. Factors like the increase in GST tax rate to 28% created a financial impact on the online gaming industry, particularly affecting startups and raising concerns about the long-term viability of the sector. Meanwhile, offshore illegal betting and gambling entities are causing a tax loss of $2.5 billion as GST annually by collecting deposits worth around $12 billion each year.
A report by the Digital India Foundation highlights additional challenges like money laundering, facilitated through in-game currencies, cryptocurrencies, and offshore betting platforms, which is impacting the sector’s integrity.
Nintendo, renowned for its strict IP protection, has once again updated its Content Guidelines for online video and image sharing platforms. These updates signal a stricter approach towards content creators using Nintendo properties, with potential implications for both large streaming platforms and individual creators.”
With the gaming community consisting of 600 thousand on-line gaming players, India ranks as the second-largest gaming community globally. However, companies like BigCash are planning to bring an additional 50 million users by the end of 2024. The steady increase in the sector can be attributed to multiple factors, but the online gaming surge post-COVID-19 primarily led to this growth. A rapid increase in internet usage and smartphone penetration, especially in tier 2 and tier 3 cities, enabled more consumers to participate in online gaming. Simultaneously, the adoption of 5G technology, which is projected to reach almost 5.6 billion subscriptions by 2029, could enhance online gaming experiences via faster connectivity, encouraging market growth. An average of market forecast show a compound annual growth rate of 28%.
Online Gaming and Recent Regulatory Developments
The rapid rise of online gaming, particularly real-money gaming, has prompted significant regulatory attention in India. In 2023, the Indian government introduced the Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Amendment Rules, marking the first step towards regulating online gaming. These guidelines define key terms such as “permissible online game,” “real-money game,” and “self-regulatory body” (SRB), while establishing a framework for self-regulation.
Under the Intermediary Guidelines, only “permissible online games” can be hosted on online platforms. For real-money games to be classified as permissible, they must be recognized by a self-regulating body. This framework is a significant step forward in regulating the sector and aims to balance innovation with the need for consumer protection.
Foreign Direct Investment (FDI) and Cross-Border Transactions
Foreign direct investment (FDI) in India’s online gaming sector is governed by the Foreign Exchange Management Act (FEMA), which regulates cross-border payments, deposits, and investments. While FDI is prohibited in gambling and betting activities, skill-based gaming platforms have a more favourable regulatory environment.
A Bombay High Court’s highlighted the issue of whether FDI can be permitted in platforms offering games of skill. The Department for Promotion of Industry and Internal Trade (DPIIT) argued that certain business models, including online rummy, should be considered gambling. However, the court ruled that platforms offering skill-based games could receive foreign investments without violating FDI policies.
Additionally, the DPIIT has recently proposed allowing 100% FDI in online real-money gaming, excluding gambling and betting activities. This proposal, if accepted, could significantly boost foreign investment in India’s burgeoning gaming industry.
Skill vs. Chance: A Legal Foundation
The core issue in regulating online gaming in India is whether a game is predominantly based on skill or chance. Games of skill are generally legal, while games of chance are categorized as gambling, which is often illegal. Indian jurisprudence on this topic dates back to the 1957 case, when the Supreme Court ruled that games relying substantially on skill should not be considered gambling. Even if an element of chance is involved, as long as the game predominantly requires skill, it would not fall under the purview of gambling laws.
This principle has been reaffirmed in various rulings involving online fantasy sports platforms. For instance, the Punjab & Haryana High Court classified fantasy sports as games of skill. The court noted that these games required significant judgment, discretion, and expertise from participants, thus exempting them from gambling laws. Similar rulings in other cases, such as those involving platforms like Dream11, reinforce the legal distinction between skill-based games and gambling.
Betting, Gambling, and Wagering in India’s Constitutional Framework
Under India’s constitutional framework, state legislatures have the power to regulate betting and gambling. The Public Gambling Act of 1867 is the central law prohibiting public gambling activities, but it makes an exception for games of skill.
The Madras High Court ruled that the legislature could prohibit games of chance, i.e., gambling, but it cannot ban games of skill, even in their online formats. The Karnataka High Court also ruled that rummy, a popular card game, whether played with or without stakes, remains a game of skill and cannot be classified as betting or gambling. These judgments further clarify the legal boundaries within which online gaming platforms must operate.
Wagering, as defined under the Indian Contract Act, 1872, refers to agreements where money or valuables are staked on uncertain events. Such agreements are deemed void in India. However, for a game to be classified as wagering, it must be based entirely on chance. Games involving skill, even if played for money, are not treated as wagering agreements, thus placing them outside the scope of this prohibition.
Tax Implications: GST and Income Tax Regulations
Taxation has been a focal point in the regulation of online gaming in India. The Goods and Services Tax (GST) Council recently introduced amendments to the Central Goods and Services Tax Act and the Integrated Goods and Services Tax Act, specifically targeting online real-money gaming. The new rules, which came into effect in October 2023, define online money gaming as any online game in which players deposit money or its equivalent in the hope of winning prizes. This definition includes both games of skill and chance.
Under the revised tax regime, the total amount deposited by players for participation is subject to GST. In practice, online gaming platforms typically collect fees in two parts: one portion as a platform fee, and the other as entry fees for games or contests. The new rules ensure that both these components are taxed at a standard rate.
The Finance Act, 2023 also introduced Section 115BBJ, which imposes a 30% tax on net winnings from online gaming, excluding surcharges and cess. Furthermore, gaming platforms are required to deduct tax at source (TDS) on winnings above a certain threshold. This comprehensive tax framework aims to bring clarity to the sector’s tax obligations and ensure that participants’ winnings are duly taxed.
Compliance with Anti-Money Laundering (AML) and KYC Regulations
Online gaming platforms operating in India must also comply with stringent anti-money laundering (AML) and Know Your Customer (KYC) regulations. These measures are necessary to prevent fraud, ensure player transparency, and deter illegal activities. Gaming operators must implement robust verification procedures to authenticate user identities, monitor transactions, and report suspicious activities to regulatory bodies.
AML compliance also intersects with FEMA regulations, particularly when gaming platforms involve cross-border payments. Platforms handling international transactions must comply with Reserve Bank of India (RBI) regulations on payment gateways and remittances to ensure that their activities are transparent and lawful.
Conclusion
The regulatory landscape of online gaming in India is both dynamic and evolving, driven by the exponential rise of online gaming platforms and the regulatory challenges they pose. Online gaming in India covers a wide array of formats, including both games played for real money and casual games. However, the real regulatory focus is on real-money gaming, where concerns around betting, gambling, and wagering arise. The classification of such games as either games of skill or games of chance plays a pivotal role in determining their legal standing.
