Indian Gaming Regulation: A Work in Progress

Introduction

Per some estimates, the industry has already grown annually by 28 percent between 2020 – 2023, and is estimated to surge to INR33,243 crores by 2028 (approximately US$4 billion). In April, 2024, Prime Minister Modi famously spent a day with top Indian gamers and sought to understand the regulatory and other challenges in the industry. It has been suggested that the growth of online gaming in India forms a crucial part of the Government’s ‘Digital India’ initiative which is set to transform India into a digitally empowered nation.

However, despite the promising growth story of India’s online gaming industry, regulatory uncertainty remains. The Government backtracked on the much-anticipated federal co-regulatory framework between designated self-regulatory bodies and the Ministry of Electronics and Information Technology (“MeitY”), contemplating a Government regulator instead. The absence of federal regulations has resulted in the State-wise uncertainties persisting, as well as confusion among other regulators and law enforcement agencies. Certain Indian states have challenged their respective High Court orders striking down bans on skill gaming as unconstitutional, before the Indian Supreme Court (“SC”). The outcome of these appeals may determine important questions on the permissibility of prohibition on skill games by states.

In addition, several gaming operators have received show cause notices from goods and services tax (“GST”) authorities seeking retrospective payment of 28 percent GST on the entire bet value. The industry has hitherto been paying GST at the rate of 18 percent on the platform fee. These show cause notices have been challenged before High Courts, and the proceedings have now been transferred to the SC, for its consideration. Meanwhile, since October, 2023, the industry has been grappling with amendments to the GST law imposing 28 percent GST on the entire deposit amount. Some reports estimate that half of real money online gaming entities have experienced a dip in revenue pursuant to these amendments. While the GST Council is reportedly proposing to introduce amendments to the GST law to enable a waiver of the retrospective imposition of taxes, the prospective GST rate will remain. Finally, concerted efforts by regulators and self-regulatory bodies to curb remote gambling operators’ operations in India continue and is likely to be a focus of Indian regulators in 2024.

We recap some of these key developments in our update on India’s online gaming industry, and consider what the next few months may bring.

Before we delve into these developments, certain aspects are worth noting: betting and gambling is governed by state-wise anti-gambling laws6 (“Gaming Enactments”) in India. Skill games are excluded from the gambling bans in most states. Some High Courts have recognized that states may regulate games of skill. However, the treatment of games is not consistent across the states, leading to significant state-wise uncertainty. The regulatory treatment of games is constantly changing at a state level. For instance, after the ban on skill gaming in the state of Tamil Nadu was set aside by the Madras High Court, the state government brought in a regulatory framework for online games. In addition, Gaming Enactments do not have extra-territorial applicability to apply to offshore operators.

Abandoning the self-regulatory approach

Amidst calls for federal regulation of online gaming, on April 6, 2023, an amendment was introduced to the Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Rules, 2021 (“IT Rules”) to regulate online gaming at a central level. This amendment did not replace the existing State Gaming Enactments but created an independent framework for online gaming.

The amendment sought to establish a light-touch, co-regulatory framework between the Ministry of Electronics, Information and Technology (“MeitY”) and designated self-regulatory bodies (“SRB”). Co-regulation through SRBs was consistent with the goals of eliminating prescriptive regulations and for improving the ease of doing business in India.

The amendments focused on the regulation of two categories of games – (i) permissible online real money games (“PORMG”), and (ii) other online games. Online gaming intermediaries (“OGI”) offering PORMG would be regulated by designated SRBs. Verification of a game as a PORMG would be the responsibility of the SRB, subject to certain conditions, including that the game does not involve wagering on any outcome. Hence, games like sports betting were sought to be excluded.

Three SRBs applied for designation, however, as per news reports the anticipated co-regulatory framework for online gaming through SRBs has been scrapped by MeitY. This was reportedly done amidst concerns that the SRB may be heavily influenced by major industry players, and hence lack independence. Reports suggest that there may be an independent regulator set up for the gaming industry for registration of online games, and only registered entities be permitted to offer gaming services in India.

It has been reported that there are ongoing collaborative consultations with industry stakeholders. These multi-part round table discussions are being spearheaded by an Indian university, the National Law University Delhi (“NLUD”) and E-Gaming Federation (“EGF”), one of the industry bodies that had applied for designation.

Supreme Court to consider whether bans on skill games are constitutional

The SC has held that offering and playing games of skill are constitutionally protected activities. Amendments introduced by the state of Tamil Nadu to the Tamil Nadu Gaming Act, 1930 (“TN Act”) prohibited all forms of online games of “mere skill” if the games were played for a “wager, bet, money or other stake”. In the matter of Junglee Games India Pvt. Ltd. & Anr. v The State of Tamil Nadu & Ors, this amendment was challenged as unconstitutional before the Madras High Court.

The court struck down the amendment as unconstitutional. An appeal against this judgement has been filed by the State Government of Tamil Nadu before the SC and is currently pending.

Thereafter, and pending the SC challenge, the Tamil Nadu Prohibition of Online Gambling and Regulation of Online Games Act, 2022 (“TNOGA”) was enacted by the State Government of Tamil Nadu to prohibit the offering, playing and advertising of games of chance with stakes. TNOGA provided for a specific definition of the term “online game of chance”. Games like Rummy and Poker which have been recognized as games of skill by Indian courts were specified as games of chance by the TNOGA. The rationale was that whilst Indian courts had recognized physical versions of these games as games of skill, online versions of these games were games of chance.

The constitutional validity of TNOGA was challenged before the Madras High Court. By an order dated November 9, 2023, the court struck down the provisions classifying rummy and poker as games of chance as unconstitutional. The Madras High Court noted that the same level of brain activity would be required to play poker and rummy online as it would be required to play these games offline. It was also highlighted by the court that the state had included rummy and poker within the umbrella of games of chance on a “mere presumption”. However, the court upheld the constitutionality of other provisions of the TNOGA. The Government of Tamil Nadu filed a Special Leave Petition (“SLP”) before the SC challenging the order of the Madras High Court.

Similarly, petitions were filed before the Karnataka High Court to hold that the provisions of the Karnataka Police (Amendment) Act, 2021 (“Karnataka Police Act”), which also sought to ban all online games with stakes (including games of skill), were unconstitutional.21 These provisions were struck down as being unconstitutional by the Karnataka High Court. However, the entire Act was not struck down by the court. Later, the Government of Karnataka filed a SLP before the SC against this decision. The three appeals before the SC have been clubbed and are currently pending.

In addition to this, writ petitions were filed before the Telangana High Court challenging the constitutionality of the Telangana Gaming (Amendment) Act, 2017, which also sought to ban games of skill when played for stakes. In light of the SLPs filed by the States of Karnataka and Tamil Nadu mentioned above, the State of Telangana followed suit and filed a transfer petition in the SC for the issue to be heard along with them.

The outcome of these matters will play a key role in determining the constitutional validity of restricting games of skill by States. The SC’s decision is binding on all Indian states.

GST on Online Gaming: A hornet’s nest

Indian Real Money Gaming (“RMG”) operators have been receiving a slew of GST notices from GST authorities across India, seeking to impose 28 percent GST on the entire deposit amount by players. The industry had been paying 18 percent GST on the service fee component. Reportedly, authorities have issued notices to 71 online gaming companies.

One of the first show cause notices of his nature was received by Gameskraft Technologies Pvt. Ltd. (“Gameskraft”), to the tune of INR 21,000 crores (approximately US$2.5 million). The Karnataka High Court had previously provided relief to Gameskraft, quashing the show cause notice. Dissatisfied with this decision, the GST authorities subsequently challenged the High Court’s decision before the SC, where it is now under consideration. The SC has imposed an interim stay on the Karnataka High Court’s decision. The central issue in this matter was whether online games played for monetary stakes constitute ‘betting and gambling’ or qualify as a ‘game of skill’ under GST law.

Other operators have also challenged the issuance of the show cause notices before the High Courts. In many instances, the relevant High Courts have granted a stay on the operation of the show cause notices to the gaming operators. These cases have been consolidated with the Gameskraft matter in the SC and are awaiting adjudication. In these matters the operators have challenged the legal provisions on the basis of which the show causes notices were issued. Hence, the issue is larger than the Gameskraft matter.

However, in a positive breakthrough for the industry, the GST Council is reportedly considering amendments to the GST law, under which the government will be given the power to regularize non-levy or short-levy of GST, where tax was being short paid or not paid due to ‘common trade practices’. It may be possible that the Government grants relief for past GST demands in cases where positions were taken on basis of industry practices or there was an industry-wide interpretational issue on the applicable rate of GST. However, at this stage, it is not clear what will be included in ‘common trade practices’. Further, it is not clear how the Government will ‘regularize’ non-levy / short-levy of GST i.e. whether GST will be completely waived or whether a GST waiver would depend upon payment of certain interest / penalty.

In parallel, the Indian Government had introduced several amendments levying GST at the rate of 28 percent on the entire deposit value, with effect from October 1, 2023. The amendments also require compulsory GST registration for offshore gaming operators and blocking of gaming platforms in case of non-compliance. Prior to the amendments, the GST authorities had requested MeitY to block several platforms29 and estimated GST loss from offshore illegal betting firms amounting to US$2.5bn.30 GST authorities have been actively pursuing gaming platforms that are not complying with the changes introduced. In March 2024, GST authorities reached out to MeitY asking them to block 60 gaming platforms for non-compliances.

Crackdown on Advertisements of Offshore Platforms

The Ministry of Information and Broadcasting (“MIB”) and the Central Consumer Protection Authority (“CCPA”) under the Ministry of Consumer Affairs, have continued their active stance against advertisements for remote gambling platforms by issuing advisories. Media platforms, including social media platforms have been advised to refraining from publishing / broadcasting advertisements of “online betting platforms” and surrogate advertisements for such platforms. The MIB advisories go on to specify that non-compliance falls foul under various statutes such as the Consumer Protection Act, 2019. Further, the CCPA has specifically advised influencers / celebrities to refrain from endorsing and promoting activities related to betting and gambling.