Introduction
The significant rise of online gaming in the Indian context has given rise to its own set of multifaceted regulatory impediments. This becomes especially relevant in the context of various formats and mechanisms pertaining to the operation of such online gaming platforms. Such games may be played for real money where the apprehensions pertaining to the nature of games being in the nature of betting, gambling, or wagering arise. Further, there has now been substantial jurisprudence regarding the classification of such games under the bucket of ‘games of chance’ or ‘games of skill’ to determine the nature and legality of operations of such online gaming platforms.
Online gaming or fantasy sports platforms generally allow users to participate in various games. Many of these platforms offer the chance to win real money, raising several concerns about their operations, taxability, etc.
Before delving further into this topic, it is essential to understand the broad classification of these games, which eventually leads to the determination of their legality. Depending on the nature of the games offered by these platforms, they may be classified as either ‘games of skill’ or ‘games of chance’.
Jurisprudence of ‘Games of Skill’ v. ‘Games of Chance’ in the Context of Online Gaming
In the Indian legal context, the nature of games is primarily determined by whether their outcomes depend on skill or are merely a matter of luck. The jurisprudence pertaining to the same dates to RMD Chamarbaugwala v. Union of India[i] wherein the Supreme Court, while deliberating upon the same, held that a competition where success does not depend to a substantial degree upon the exercise of skill is to be recognised as gambling in nature. From thereon, the Supreme Court, in the catena of judicial pronouncements, has analysed the law relating to the same and held that despite there being an element of chance, if a game is preponderantly a game of skill, it would nevertheless be a game of mere skill. Accordingly, the expression ‘mere skill’ (used in the Public Gambling Act) would mean a substantial degree or preponderance of skill.
In the context of online gaming, the Punjab & Haryana High Court, in the case of Varun Gumber v. Union Territory of Chandigarh[ii], while examining the nature of games being offered on an online fantasy sports platform which allowed its participants to win real money, held that participation in a fantasy league involved considerable skill, judgment, and discretion on the part of the participant. These factors would affect the result of the game, thus making it a game of skill and excluding it from the ambit of gambling. Similar rulings have been made in other cases involving platforms like Dream11, where the courts have upheld that such fantasy sports are games of skill, not gambling.
Therefore, determining whether the games offered by online gaming platforms are betting, gambling, or wagering would depend upon whether such games are games of skill or games of chance. Hence, it has become crucial to understand the connotation of these terms in the context of online gaming.
Betting, Gambling, Wagering
A. 246, read along with entry 34 of the list - II of the seventh sch. of the Constitution of India (‘Constitution’), provides that the legislatures of the States shall have the power to make laws with respect to ‘betting and gambling’. Pursuant to the provisions, the Public Gambling Act, 1867 (‘Gambling Act’) was enacted to prohibit public gambling activities. S. 12 of the Gambling Act provides that any games of mere skill shall not be prohibited. The Finance Act, 1994 defined the term ‘betting’ and gambling’ interchangeably as ‘betting or gambling means putting on stake something of value, particularly money, with consciousness of risk and hope of gain on the outcome of a game or a contest, whose result may be determined by chance or accident, or on the likelihood of anything occurring or not occurring.’
Further, in Junglee Games India Private Limited v. State of Tamil Nadu[iii], the Madras High Court has held that the term ‘betting’ in entry 34 of the second list of sch. 7 in the Constitution is limited to betting on activities based on chance only.
While analysing the nature of online games of rummy and poker, the Madras High Court in All India Gaming Federation v State of Tamil Nadu[iv] has held that such games would be purely games of skill, even in online formats. The High Court held that the legislature would be well within its competence to prohibit online gambling, i.e., games of chance only, and regulate games of skill only. Furthermore, the Karnataka High Court in Gameskraft Technologies Private Limited v. DGGI[v] held that rummy, whether played with or without stakes, is a game of chance and does not constitute betting or gambling.
Therefore, based on the above, it can be concluded that games of chance would fall within the ambit of betting and gambling, while games of skill played with or without stakes would not.
On the aspect of wagering, s. 30 of the Indian Contract Act, 1872 (‘Contract Act’) states that ‘Agreements by way of wager are void and no suit shall be brought for recovering anything alleged to be won on any wager, or entrusted to any person to abide the result of any game or other uncertain events on which any wager is made.’ The Contract Act does not define ‘wager’ and/or ‘wagering agreements.’ However, the Supreme Court in Gherulal Parakh v. Mahadeodas Maiya[vi] opined that ‘a promise to give money or money’s worth upon the determination or ascertainment of an uncertain event accurately brings out the concept of wager declared void by s. 30 of the Contract Act.’ It can thus be concluded that the essential requirement of a wagering agreement is that a wager should be based on an uncertain event. Consequently, only games of chance would fall within the contours of wagering agreements.
Legal Framework Governing Online Gaming
After discussing the classification and nature of these online gaming platforms, we now discuss their treatment under various laws.
The regulatory framework for gaming in India is divided between central and state laws. The Gambling Act serves as the central statute prohibiting betting and gambling, with certain exceptions for lotteries and skill-based games. Under entry 34 of list II, state legislatures are empowered to enact laws prohibiting gambling, and many states have done so by framing their own regulations.
Intermediaries Guidelines
The central government brought into force the Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Amendment Rules, 2023 (‘Intermediaries Guidelines’), which aims to regulate online gaming.
The Intermediaries Guidelines define an online game as a game offered on the Internet Source through a computer or intermediary[vii]. The Intermediaries' Guidelines further define and introduce the concept of ‘permissible online game,’ ‘permissible online real money game,’ ‘online real money game,’ and ‘online gaming self-regulatory body.’
Further, these guidelines allow only ‘permissible online games’ to be hosted and offered to users in India. An online game is considered permissible only when it is not a real-money online game. If it is a real-money online game, it is recognised by a self-regulating body (‘SRB’) under the Intermediary Guidelines.
These guidelines were the first step toward regulating and recognising online gaming in India. Though the Intermediary Guidelines only provided for self-regulation of online games through MeitY, they were a first positive step toward regulating the sector and introducing the novel self-regulatory mechanism.
Treatment under Goods and Services Tax Law
The Goods and Service Tax Council brought certain amendments to the Central Goods and Services Tax Act, 2017 (‘CGST Act’) and the Integrated Goods and Services Tax Act, 2017 (‘IGST Act’) with respect to online money gaming, which came into effect from 01.10.2023. The amendment introduced s. 2(80B) in the CGST Act to define online money gaming as ‘online gaming in which players pay or deposit money or money’s worth, including virtual digital assets, in the expectation of winning money or money’s worth, including virtual digital assets, in any event including game, scheme, competition or any other activity or process, whether or not its outcome or performance is based on skill, chance or both and whether the same is permissible or otherwise under any other law for the time being in force.’
Further, for the purpose of valuing supply in the case of online money gaming, R. 31B has been inserted in the Central Goods and Services Tax Rules, 2017 (‘CGST Rules’). The said rule, inter alia, provides that the value of supply in the case of online money gaming, including the supply of actionable claims involved in online money gaming, shall be the total amount paid or deposited by the user with the supplier.
As a matter of general business practice, when the participants deposit money in their wallets, it includes two components - one component is used to pay a marginal ‘platform fee’ to the online gaming platforms. In contrast, the participants use the other amount to participate in the fantasy sport or game being offered on the platform.
Income Tax Implications
The Income-tax Act, 1961 inserted s.115BBJ vide the Finance Act, 2023 (‘FA2023’), which provides for taxation at 30%, excluding surcharge and cess on the net winnings from online gaming. Further, the FA2023 also introduced s. 194BA, which provides that the person responsible for paying any person's income by way of winnings from online games shall deduct income tax on the net winnings in the user account. The applicable rate of TDS shall be 30% at the time of withdrawal (without any threshold) of such winning amount.
FEMA Implications
The issues pertaining to the Foreign Exchange Management Act, 1999 (‘FEMA’) implications for the online gaming sector will have to be examined from two perspectives: the nature and permissibility of foreign direct investment (‘FDI’) in the online gaming sector in India and the remittance and acceptance of deposits from participants from abroad.
FEMA is the primary legislation in India that governs cross-border transactions. In the context of online gaming platforms, the applicable provisions of FEMA and its allied rules and regulations pertaining to acceptance of deposits from abroad and remittances abroad will have applicability. S.6 of the FEMA empowers RBI to regulate capital account transactions, which would encompass various aspects of online gaming, such as payments, receipts, and foreign investments. Further, compliance with FEM (Deposit) Regulations, 2016, will also have to be ensured, as these govern foreign currency accounts in India. Therefore, the online gaming platforms that receive and remit international payments must establish these accounts in compliance with FEMA. Moreover, the online gaming platforms will have to ensure compliance with the regulations of the Reserve Bank of India (‘RBI’) pertaining to payment settlement and gateways.
Further, online gaming operators/intermediaries need to implement and comply with the anti-money laundering laws and know your customers (KYC) measures to ensure player identification, transparency in payments, and prevention of money laundering.
As a matter of general law, FDI is prohibited in gambling and lottery. Hence, the prima facie view should be that FDI would be permitted in games of skill that are not in the nature of gambling or betting.
In Play Games 24*7 Pvt Ltd v RBI[viii], the Bombay High Court was posited to decide if FDI would be permitted in online gaming platforms that offered games such as online rummy and other fantasy-based sports. The Department for Promotion for Industry and Trade (‘DPIIT’) informed the High Court that the Petitioner's business fell within the prohibited category. Thus, remittances received for the allotment of shares contravened the FDI Policy.
The High Court, however, concluded that the Petitioner's business could not be categorised as gambling, as the scope of betting and gambling was settled in a catalogue of judicial pronouncements. Thus, there was no prohibition on FDI with respect to such gaming activities.
It is also relevant to note that recently, the DPIIT proposed 100% FDI in the online real-money gaming sector except gambling and betting.
Conclusion
Based on the above, the regulatory landscape of the online gaming sector in India is still evolving and at a nascent stage. The jurisprudence pertaining to games of skill v. games of chance remains the epicentral force in regulating this sector.
From a taxation perspective, though the recently introduced amendments to the GST and Income Tax Laws have provided clarity regarding the tax treatment of services offered by online gaming operators and the net winnings of the participants, certain issues remain, such as those pertaining to the taxation of the entire gross gaming revenue (‘GGR’), which might require legislative intervention.
As the sector has been embroiled in a series of uncertainties because of the regulatory crackdown by the taxation authorities and directorate of enforcement, these regulatory clarities would definitely provide some certainty to the sector. However, there still remains a need for comprehensive regulation pertaining to the operations and governance aspects of the sector, especially in the context of the determinability of the nature of games being offered by the gaming platforms.
End Notes
[i] 1957 SCC Online SC 12.
[ii] 2017 SCC Online P&H 5372.
[iii] 2021 SCC Online Mad 2762
[iv] 2023 SCC OnLine Mad 6973.
[v] 2023 SCC Online Kar 18.
[vi] AIR 1959 SC 781
[vii] Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Rules, 2023, Rule 2 (qa)
[viii] 2023 SCC Online Bom 2966.
Authored by Huzaifa Salim, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinions.