Gaming rules: The maze of legality
Introduction
The online gaming sector in India has undergone significant growth and transformation in recent years. Initially viewed as a small segment of the media and entertainment industry, it has now become the fourth largest segment in M&E sector. Statista estimates that the number of online gamers in India is likely to reach a staggering 442 million by 2023, generating nearly $1.3 billion in revenue. Naturally, with such success, the government aims to benefit from this thriving sector through taxation. As a result, a new measure has been introduced in India, which entails the application of a 28% GST levy on the overall value of online gaming, horse racing, and casinos. This development raises concerns as it signifies that skill-based online games, which are devoid of gambling elements, are subjected to the same taxation treatment as games of chance.
It is worth noting that this elevated tax burden arrives at a juncture when the Indian online gaming sector has achieved noteworthy milestones, such as the prestigious unicorn status attained by Dream11, MPL, and Games 24×7 in the years 2019, 2021, and 2022, respectively. Furthermore, Nazara Technologies, a prominent gaming company, has made an impressive debut on the stock exchanges, consolidating its position within the market. In addition to the recently imposed high GST, the flourishing sector also confronts challenges stemming from inadequate regulatory frameworks. The domain of online gaming exists in a regulatory ambiguity. Hence to better understand why a comprehensive regulation is needed, it is first important to understand what entails online gaming, what are the types of online games and what are the already existing complex and multifaceted laws.
Revisiting the Fundamentals
• Online Game: Indian government defines it as "A game that is offered on the Internet and can be accessed by a user through a computer resource or an intermediary.”
• Online Intermediary: It refers to a platform that provides one or multiple online games. Being an intermediary implies that its main function is to host and transmit user-generated content from third parties. The Indian government clarified that publishers do not fall under the category of intermediaries according to the IT Act.
Types of Online Games
• E-Sports: Video games once played privately or on consoles, now organized online games among professional players, individually or in teams.
• Fantasy Sports: These games in which group of actual players are selected from various teams, and points are earned based on the athletes' real-life performance. Like: Dream11
• Online Casual Games: Are skill-based i.e., the outcome is primarily determined by mental or physical abilities and based on chance i.e., the result is heavily influenced by random activities like rolling a dice.
• Online real money game: Refers to a game where users deposit cash or non-cash items with the anticipation of earning winnings based on their performance in the game and its rules. Winnings encompass any prizes, whether in cash or non-cash form, that are distributed or intended to be distributed to users of online games.
• Permissible online game: An online real money game or any other online game that is not an online real money game.
• Permissible online real money game: Refers to online real money games that have been verified by a self-regulatory body for online gaming.
Existing Regulatory Framework
The Indian Constitution grants authority to State governments to enact laws pertaining to betting, gambling, and sports of chance through specific entries in the State List of the Seventh Schedule. Games of skill, on the other hand, are beyond the purview of State legislation. In India, the legal distinction between these two categories is significant, as courts have consistently ruled that betting on games of skill is permissible, whereas betting on games of chance is not.
Apart from the Constitutional power given to States to regulate betting and gambling, States have formulated state laws around the age-old Public Gambling Act of 1867 or Police laws. But the limitations of Public Gambling Act are that it does not apply to games of mere skills and it does not define online gambling.
Similarly, IT Act does not deal with gambling directly but entails various cybercrimes which may result from online gaming. So, it is another law used to tackle problems associated with online gaming.
Key legal pronouncement
Ø The Supreme Court of India ruled that games of skill are legal and not considered gambling under the Public Gambling Act of 1867. The court emphasized that games requiring skill, judgment, or discretion to win are exempt from being classified as gambling.
Ø Horse racing is a game of skill and is, therefore, not considered gambling under the Public Gambling Act, 1867.
Ø Virtual currency utilized in online gaming does not qualify as "money," as it is not under Gujarat Prevention of Gambling Act, which implies that engaging in online gaming with virtual currency cannot be classified as gambling.
Ø Fantasy sports games, such as Dream11 and Rummy involve a notable amount of skill and, as a result, do not qualify as gambling.
State-by-State Perspectives on Online Gaming
Image Source: ME report 2023 (ey.com)
Need for a Central Law
Ø The absence of a regulatory framework for online gaming in India has resulted in a lack of consensus among states regarding its legal status.
Ø Some states consider online gamers as illegal gamblers under existing police or gambling laws, while others have embraced online gaming as a legitimate profession.
Ø This disparity leads to a situation where the legality of activities like poker playing varies depending on the state.
Ø Enforcing rules like geo-blocking specific apps or websites within state territories has proven challenging for governments.
Ø Establishing a comprehensive regulatory structure is crucial to curb underground activity, generate revenue, and provide legislative clarity.
Ø However, regulating online gaming across India is complex due to its borderless nature and lack of physical presence.
Hence, there is a need for central laws with a certain level of state autonomy to ensure consistent protection of data, intellectual property rights, privacy rights, and a uniform policy for online gaming regulation.
New Guidelines Proposed by MEITY
Formation of SROs:
Ø The new guidelines call for Self-Regulation of the online gaming through establishment of SROs (Self-Regulatory Organisations).
Ø Initially government will notify three SROs, more will be added later.
Ø These SROs comprising of educator, a specialist in psychology or mental health, and someone who has served as an officer or member of an organization focused on safeguarding child rights will be responsible for determining the permissibility of games.
Verification of Games
Ø Gaming companies or platforms are required to refrain from offering, publishing, or sharing online games that contain harmful or prohibited content. Furthermore, they must authenticate the identity of online gamers.
Ø Online games that incorporate any form of gambling, including advertisements, will be disallowed.
Ø SROs will also ensure that games adhere to guidelines aimed at preventing addiction and mental harm. This will be accomplished through the implementation of parental controls, regular warning messages, and age-rating systems.
Ø Gamers will have the choice to discontinue participation once they have reached their self-imposed limits regarding time or money spent.
List of members
Ø The SRO is required to release and keep an up-to-date record containing information about all its members, including current and past members. This record should include the dates when each member joined, their corporate or business-related identification number, additional details, and any instances of membership suspension or revocation.
Verification of Users
Ø Online gaming intermediaries are required to perform user identification and verification prior to accepting cash or non-cash deposits for authorized real-money online games. The verification and identification procedures used by entities regulated by the Reserve Bank of India when establishing a customer account relationship will be applicable in this context.
Redressal Mechanism
Ø SROs must publish complaint resolution guidelines and Grievance Officer contact details on their website or app. Complaints will be acknowledged within 24 hours and addressed within 15 days.
Revoke or Suspend an SRO
Ø If the SROs fails to perform its duties, its designation as SRO will be suspended or revoked after hearing its plea.
A Win-Win for Startups
The imposition of bans by states leads to a loss of user base and revenue for gaming operators. It further, disrupts future growth strategies and financial planning. The abrupt bans negatively impact the industry as it puts pressure on technicians to quickly reframe systems to comply with the orders, causing further disruption. Additionally, these incidents affect the confidence of founders, investors, advisers, and employees. Moreover, the regulatory instability makes it challenging for gaming startups to attract investors, despite the sector's potential.
By implementing regulations and addressing the current policy gaps, India can harness the potential of the thriving gaming industry while safeguarding user privacy and confidentiality. This approach ensures that the benefits of the gaming sector can be maximized while maintaining a secure and trustworthy environment for gamers.