ARTICLE
11 October 2023

The Governance Of Gaming: Too Risky A Gamble?

Since its inception and the subsequent intervention of the internet revolution, the online gaming industry has grown at an exponential rate and continues to do so, breaking linguistic and financial
India Media, Telecoms, IT, Entertainment

Introduction

Since its inception and the subsequent intervention of the internet revolution, the online gaming industry has grown at an exponential rate and continues to do so, breaking linguistic and financial barriers along the way. However, the resolve of the industry was put to the test with the new developments in the regulatory sphere revolving around the new taxation regime and the introduction of the amendments to the Information Technology rules. With the advent of the Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Amendment Rules, 2023 ("IT Rules"), the Central government paved the way for a new framework in order to facilitate the regulation of online games within the territory of India by the Central government, deviating from the pattern in practice over the last century. However there have been considerable delays in recognising the Self Regulatory Bodies ("SRB") which would approve the games. This delay, combined with the increased slab of taxation which includes both Games of Skill and Games of Chance in the 'sin tax' bracket has led to widespread concern within the gaming industry which despite its growth still finds itself to be a fledgling industry in an Indian context. Through this article, the implications of the legislative changes and the arguably discriminatory treatment of certain games shall be discussed in depth, with the hope of identifying a model recourse to the issues faced by the industry at present.

Implications of the IT Rules and the new taxation regime

Upon the appointment of the MEITY as the nodal ministry to regulate all online games offered within the country and the implementation of the IT Rules, all online games shall now be regulated by the SRBs. These bodies once recognised, shall be responsible for approval of online games proposed to be offered by Online Gaming Intermediaries ("OGI"). Approval by the SRBs shall be granted subject to the game evaluation and the game meeting certain prerequisites, after which the OGIs shall be required to fulfil the due diligence obligations placed onto them, under the IT Rules.

The IT Rules were published in the gazette on 06.04.2023 by the Ministry of Electronics and Information Technology (MEITY) The term 'permissible online game' is included in the IT Rules to mean 'a permissible online real money game or any other online game that is not an online real money game' with an "online real money game" further being defined therein to mean "an online game where a user makes a deposit in cash or kind with the expectation of earning winnings on that deposit" and a "permissible online real money game" being defined as "an online real money game verified by an online gaming self-regulatory body under rule 4A". The said IT Rules remain silent with respect to drawing a proper distinction between games of chance and games of skill and have rather provided the requisites to be met by the OGIs, in order for the games (offered by the OGIs) to qualify as a 'permissible online game'. The reason behind the same was later clarified by the Minister of State for Electronics and Information Technology, Mr. Rajeev Chandrashekhar, who stated that "there is no need in this framework to get into nuances of chance or skill, because the harm of wagering is directly being prohibited – regardless of nature of game" vide a tweet from his official handle. Such a theme is also on display in the latest taxation regime pertaining to the gaming industry too, which has further added to the confusion, prevailing in the gaming industry pursuant to the 51st Goods and Services Tax (GST) Council Meeting held on 02.08.2023. Post this meeting the GST Council confirmed the imposition of 28% tax on the full-face value of bets placed in online games, including overseas platforms, as well as casinos and horse racing.

While the recognition of these SRBs with MEITY is still in the works, the All India Gaming Federation (AIGF), the Federation of Indian Fantasy Sports (FIFS) and E-gaming Federation (EGF) combined, have filed two separate applications towards recognition as a Self-Regulatory Body under the MEITY rules. In addition, the All India Gaming Regulator (AIGR) Foundation has also filed an application to be recognised as a SRB.

The 'Charter for Online Fantasy Sports Platforms' (OFSP) by FIFS, provides for the minimum standards and expectations entities offering an OFSP should carry out. In an OFSP contest, the skill component of is predominantly determined by the manual selection of team by users. Therefore, the opportunity or option to auto-select or auto-fill any part or portion of the fantasy sports teams is not something that is offered to the users of OFSP. Moreover, all contests on an OFSP are to lock prior to the commencement of the underlying real-world competition to which the contest relates, and users are not to be permitted to make any changes to their fantasy team during the course of a match or afterwards, which affects the tabulation of points with respect to such match.

'The Online Games of Skill Charter' by the AIGF also provides for the essential ingredients of pre-approved games, i.e., Online Fantasy Sports Games. In the said charter, it has been stated that "a winning outcome in a fantasy sports game shall always reflect the relative knowledge and skill of the user. A winning outcome and every aspect of a fantasy sport game shall always be determined predominantly by the incontrovertible statistical results and elements of players'/athletes' performances." Moreover, it states that the fantasy game format shall define the substitution conditions and the predetermined deadline post which, all users will be restricted from drafting or editing their fantasy sports team or responses, for a particular round.

Distinction in treatment of 'Fantasy Sports' against 'Predictions in Sport'

At this stage, it is important to note that the IT Rules prohibits games that involve 'wagering on any outcome'. Despite the same, it is to be understood that 'Fantasy Sports' are likely to be deemed permissible games, despite the fact in principle the activity involves 'wagering or staking on an outcome'. The status of 'Game of Skill' granted to Fantasy Sports, is likely to be applied prejudicially in comparison to other activities such as 'predictions in sport', which also share common characteristics. Especially taking into light the statement provided for in the AIGF's 'The Online Games of Skill Charter'. In order for gaming operators to acquire and continue to maintain its membership with the AIGF, the provisions stipulated under this charter are considered mandatory.

While evaluating the format of fantasy sports, the Hon'ble Punjab and Haryana High Court in Varun Gumber v. Union Territory, Chandigarh1;, had held: "b) Any fantasy sports game offered by them is a game which occurs over a predetermined number of rounds (which may extend from a single match / sporting event to an entire league or series) in which participating users select, build and act as managers of their virtual teams (constituted of real players or teams) that complete against virtual teams of other users, with results tabulated on the basis of statistics, scores, achievements and results generated by the real individual sportspersons or teams in certain designated professional sporting events. The winner of such fantasy sports game is the participant whose virtual team accumulates the most number of points across the round(s) of the game."

The format of the online fantasy sports as a 'game of skill', has been consistently recognized by multiple High Courts across India and the Supreme Court of India, including in Avinash Mehrotra vs. State of Rajasthan & Ors. Therefore, online fantasy sport platforms, are considered to be skill predominant and as a legitimate business activity, duly protected under Article 19(1)(g) of the Constitution of India.

Moreover, the Rajasthan High Court in Ravindra Singh Choudhary v. Union of India2 inter alia considered the charter of FIFS and held that online fantasy sports is not gambling:

"11. ... It is also clear that offering the fantasy games of Dream- 11 involving substantial skills is a business activity and not wagering having protection granted by Article 19(1)(g) of the Constitution. ... We are, therefore, of the view that the issue whether the fantasy games played on the platform of respondent No.5 are or are not gambling/betting activities was thus closed and decided in favour of respondent No.5...

  1. ... This legitimate business activity having protection under Article 19(1)(g) of the Constitution contributes to Government Revenue not only vide GST and income tax payments, but also by contributing in increased viewership and higher sports fan engagement, thereby simultaneously promoting even the real world games.
  2. ...we are of the independent view, particularly based on the Charter of FIFS, of which Dream-11 is a Member, that a participant of online fantasy sports platforms offered by the Dream-11 App, who enrols in an online fantasy sport game and puts monetary stakes therein, performs a role similar to that of a real life team manager/selector, which requires use of substantial knowledge, strategy, skill, and adroitness against other participants. A participant is actually playing an online sport and not gambling, betting or wagering on the outcome of any game or an event inasmuch as the result achieved by a player of online fantasy sports on completion of the corresponding real life match, is wholly independent of the final result or outcome of such real life match / game / event."

While excluding 'Dream 11' from the category of 'betting', 'wagering', or 'gambling', the Division Bench of the Bombay High Court in Gurdeep Singh Sachar vs. Union of India and Ors.3, held that 'Dream 11', a prototypical cricket fantasy game, does not qualify for classification as 'betting', 'wagering', or 'gambling' and that success in the game involves application of substantial amount of skill by a player and that the success of an individual is not dependant on the winning or losing of a particular team in a real-world game, thereby stating that a singular event and the possible binary outcome of the same is irrelevant to one's success in a Fantasy Sport.

The prevalence of skill in fantasy sports games was, furthermore, more particularly assessed by the Hon'ble Supreme Court in August 2021, wherein it was held by the Court that fantasy sports has considerable skill and judgement and is, therefore, legal. The Court opined that in order to attain success in a fantasy sports, the user's knowledge, attention, and execution act as determining factors as a result of which, success in fantasy sports is not dependent on probability. 'Predictions in Sports', on the other hand, involves staking on an outcome and which happens to share similarities with fantasy sports. Therefore, the same can be perceived as yet another format of fantasy sports since whilst deviating from the standard format of fantasy sports, it essentially functions as an activity whereby the rate of success in such an activity, i.e., 'prediction in sports' highly depends on the knowledge, expertise and adroitness of any player. However, despite sharing significant similarities with fantasy sports, 'prediction in sports', as is apparent from the existing laws governing games in India, is rather treated differently.

It is essential to take note that despite the extant standard format of fantasy sports devised by the FIFS, AIGF and those prescribed by the Hon'ble Punjab and Haryana High Court in Varun Gumber v. Union Territory, different formats of fantasy sports continue to be offered by various operators of online fantasy gaming platforms. While drawing a comparison between fantasy sports and traditional gambling, it is understood that in a fantasy sport, participation by users is possible only in real time, simultaneous with an actual sports event, as opposed to online gambling that is accessible ad hoc and has a rather different framework involving players playing bets basis luck only. 'Prediction in sports'­, akin to fantasy sports, also requires analytical abilities, knowledge of the sport, intelligence and similar traits without which a player is unlikely to gain success or perform satisfactorily. It would not be amiss to mention that some of the leading members of the proposed SRBs, have also invested in and support entities which offer fantasy games, allowing for team changes or selection during a live game and in some instances also offer dynamic price and ability to trade during a live sporting event. Thus there remains hardly any distinction between such fantasy sport games and prediction in sports.

While 'prediction in sports' is as an activity which is perceived to be prohibited, games based on similar principles offered as fantasy sports have been regarded as permissible for operations and are thriving. This is when both the activities involve dependence on future outcomes whilst requiring a significant level of skill set depending on the format of the games offered.

Conclusion

With the introduction of the IT Rules, there is still lack of clarity as to how games of skill and games of chance will be regulated in states which have adopted their own legislations in relation to the governance of "betting and gambling". The amendments therefore do not differentiate between wagering on games of skill and wagering on games of chance which is likely to be a cause of concern for current operators of online games of skill for stakes. Furthermore, the IT Rules have not provided any exception for Horce Racing, i.e., wagering on horse, which been recognized by the Hon'ble Supreme Court as a game of skill. The new GST regime that shall be effective from 01.10.2023, also fails to draw any distinction between games of skill and that of chance thereby imposing a 28% tax on online gaming, casinos and horse racing on the full-face value.On account of the same, online gaming platforms are expected to face their profit margins immensely squeezed and operators are likely to run their gaming platforms offshore to avoid these regulatory hurdles.

Amidst this rising lack of ambiguity, the activities involving prediction in sports or wagering on sports, are in the dire need to be regulated and monitored instead of being subjected to a blanket ban. India may also adopt an approach that is equitable to all and provide licensing for running all operations involving wagering on future outcomes. Moreover, because the IT Rules prohibit any activity involving 'wagering on future outcomes', it is important to highlight how both fantasy sports, i.e., a permissible game, and prediction in sports involve such wagering, thereby requiring no actual distinction in terms of treatment. In order to adopt an approach similar to this, India may also look into the existing legislations of several countries wherein the provision for same treatment exists with respect to both prediction in sports as well as fantasy sports.

It is to be noted as per reports, on account of the GoM's i.e., Group of Ministers' decision to approve the new rate of taxation at 28%, the online skill gaming industry is likely to experience a significant rise in taxation. Globally, the gaming industry is taxed on their gross gaming revenue at approximately 10-20% of its earnings as taxes. In the event the incidence of tax is the turnover the rate of tax is generally between 2-5%. The online skill gaming industry in India is booming and continues to do so, revenue were expected to reach Rs. 29,000 crores by financial year 2025. However, categorising games of skill under the same category as gambling or other games of chance is bound to be a bane of the industry.

Recently the Hon'ble Supreme Court vacated the stay granted by the Karnataka High Court in May 2023, pertaining to a notice of GST demand. The High Court had quashed a notice issued by the GST department, claiming ₹21,000 crore in dues from Gameskraft i.e., online gaming company. The said notice was quashed basis the observation that the online rummy game and other digital skill games played on the Gameskraft's platforms, were not taxable as 'betting' and 'gambling' i.e., at 28% on the face value of the bets.

As contended by the company, the initial amount of tax alleged to have been evaded by Gameskraft was summed up to ₹419 crore. However, pursuant to July 2022, upon the authorities raising allegations against Gameskraft indulging in betting the amount of ₹419 crore increased to ₹5,000 crore and had a further rise amounting to ₹21,000 crore. This imposition of increased tax rates on online gaming platforms is expected to disrupt the industry and bring it to a standstill. Reassessment of the taxation rate and a reconsideration of the applicability of what permissible games are, should be undertaken so that the Indian gaming industry does not die prematurely.

Footnotes

1. CWP No.7559 of 2017

2. D.B. Civil Writ Petition No. 20779/2019

3. Criminal PIL No. 16 of 2019.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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