The online gaming industry has witnessed a 39% increase in revenue during financial year 2022 with 77% of the revenues being derived from online real money games where users deposit a sum with the hope of earning winnings. At present, revenues are projected to increase by 20% by financial year 2025. However, increased instances of online scams, fraud, and gambling addiction, have led to the central government effecting a slew of regulatory changes with the intention of encouraging responsible gaming and protecting citizens. These amendments may discourage new entrants and potential investments in the sector and, consequently, affect future revenues.
Regulatory background
The Public Gambling Act, 1867 (Gambling Act) was enacted to regulate gambling in India. However, after the enactment of the constitution in 1950, the regulation of gambling and betting became the exclusive purview of individual states. As a result, the Gambling Act only applies to those states (such as Punjab and Uttar Pradesh) that have adopted it, with or without state specific amendments. Other states (such as Karnataka and Andhra Pradesh) have enacted separate statutes to regulate gambling in their respective states.
The Gambling Act prohibits games of chance, ie games whose outcome is determined purely on chance, and does not apply to games of skill, ie games whose outcome is determined by the skill of the participant. However, there is no such uniformity across states. Some states have legalised games of chance while other states only permit games of skill and have conflicting interpretations of whether a game is one of skill, or chance. Illustratively, Tamil Nadu has classified rummy and poker as games of chance1 unlike several other states. Accordingly, online gaming platforms must restrict or tailor access to games in states based on their legality under state legislation and state-level judicial precedent – to the extent available.
Online gaming entities are now intermediaries
In April 2023, the government amended the Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Rules, 2021 (Intermediary Guidelines), which regulate persons who operate digital media platforms in India, to bring online gaming within their purview. The Intermediary Guidelines impose obligations on entities hosting online games (each, a gaming intermediary) such as requiring them to publish a privacy policy and terms of use for their websites, disable access to any online game as may be directed by the central government, verify users prior to providing access to online real-money games, and establish a grievance redressal mechanism for users to raise any claims pertaining to their use of the gaming intermediaries’ websites or online games.
The Intermediary Guidelines also provide for the establishment of a self regulatory body for online gaming who will determine which online real-money games are permitted<sup2. The government has yet to designate a self-regulatory body for this purpose. The Intermediary Guidelines, unlike state-specific gambling statutes, are applicable throughout India. This is likely to create problems where the self-regulatory body’s determination regarding the permissibility of a real-money game conflicts with the legislation of a particular state. This could result in games that were previously prohibited being legalised and, or, legalised games of chance being prohibited, and is likely to create greater uncertainty. The validity of the Intermediary Guidelines to the extent they regulate online gaming has been challenged before the Delhi High Court on the ground that betting and gambling are to be regulated by state governments.
Restrictions on advertising
In June 2022, the Ministry of Information and Broadcasting (MIB) issued an advisory to newspapers, private satellite television channels, and publishers of news and current affairs content instructing them not to advertise online betting platforms so as to protect the citizens from financial risks that may arise from online real-money games. Further advisories to curb surrogate advertising for online gaming were issued in October 2022 and April 2023. In May 2023, the MIB also wrote to the Chief Secretaries of all states directing them to take steps to curb outdoor advertisements for online betting platforms.
Taxation
In August 2023, the Integrated Goods and Services Tax Act 2017 and the Central Goods and Services Tax Act 2017 were amended to provide that all gaming intermediaries based outside India providing services in India through an intermediary must register with the government, and comply with applicable laws, including obligations under extant tax regulations. To further maximise revenue from online real-money games, the government has imposed a tax of 28% on monies deposited by users. This has received significant pushback from several stakeholders as users may choose to use offshore betting platforms accessible in India which provide a more favourable tax environment against deposits and winnings. This could significantly impact revenues of Indian online gaming platforms, and has also negatively impacted the stock prices of public companies in the gaming sector in India, such as Nazara Technologies Ltd and OnMobile Global Ltd.
Looking ahead
The government has published a draft policy for the promotion and growth of the animation, visual effects, gaming, comics, and extended reality sectors in India (AVGC Policy) which, among others, provides for the reimbursement of duties and levies and game production costs (including in respect of online games) for entities in the AVGC sector, with the intention of promoting foreign direct investment and increasing export revenues. However, the AVGC Policy may not benefit platforms hosting real-money games given the ambiguity regarding the classification of games as those of skill or chance, increased tax obligations, and additional compliance requirements under the Intermediary Guidelines. The changes to the regulatory framework may result in consolidation within the market and, therefore, create barriers to entry for new participants. The changes may push Indian gaming entities to move to more favourable jurisdictions and ceasing or limiting operations in the Indian market.
Notes
- Tamil Nadu Prohibition of Online Gaming and Regulation of Online Games Act 2022.
- Per the Intermediaries Guidelines, these are only games that do not involve wagering.