Introduction
Millions of people use online gaming as a form of entertainment, and some, to a certain extent, use it as a mode of earning income.Online gaming has become increasingly popular in recent years due to the growing accessibility to the internet. Nonetheless, some nations are considering outlawing or restraining online gaming due to its potential to cause addiction and harm one’s mental and physical wellbeing. Not just this, but games that seem to encourage violence or any socially unacceptable form of behaviour have been subject to governmental scrutiny.
In December 2019, the High Court of Punjab and Haryana directed the Ministry of Electronics and Information Technology (“MEITY”) to look into a representation made to advocate the immediate ban of the popular online multiplayer game, PUBG.[1] Following this, the MEITY in September 2020 ordered a ban on PUBG under Section 69A of the Information Technology Act, 2000, along with 117 other Chinese apps on grounds of endangering public order and national interests.[2]
Given its ease of accessibility, the emergence of online gaming has garnered regulatory attention and has put into question the legality of its existence. This has also set a precedent for compliance with data privacy rules for any global online gaming entity planning to enter the Indian market.
Gaming the system
While data privacy violations remain a national security concern, the sudden uptick in online gaming for money, i.e., online gambling apps have brought in yet another legally contentious conundrum. While gambling is forbidden in India, the Public Gambling Act of 1867 (“Gambling Act”) makes no mention of online gaming. Due to this, the legality of online gaming is frequently decided on a case-by-case basis.
Regardless of whether online gaming is mentioned or not, Section 12 of the Gambling Act exempts any game of mere skill from its scope. The Supreme Court of India (“SC”) declared in 2015 that skill-based games are lawful, since they do not fall under the category of gambling.[3] Games of skill don’t just depend on luck to win; they also require a certain amount of strategy, knowledge, and skill. As long as a game is based on skill, it will not attract the ire of the authorities. Decisions by the Apex court have reaffirmed time and time again that banning games of skill is unconstitutional, and provided some relief for games that have been often misrepresented as gambling activities, such as the game of rummy.[4]
All India Gaming Federation v. State of Tamil Nadu [W.P. No. 13203 of 2023]
In April 2022, the Tamil Nadu Prohibition of Online Gaming and Regulation of Online Games Act, 2022 (“Act”), made it illegal to play or offer real money games such as rummy or poker. The Madras High Court, on 9th November, 2023 passed a judgment revoking the ban. This follows the judgment passed by the same court in 2021, wherein it held that amendments to the Tamil Nadu Gaming and Police Laws (Amendment) Act, 2021 were unconstitutional and violative of fundamental rights enshrined under Article 19(1)(g) of the Constitution of India.[5]
The Act was challenged in court by a number of gaming companies, leading to the Madras High Court’s decision. The argument made by gaming companies that the state can regulate online games but not outright ban them was upheld by the Madras High Court.
The All-India Gaming Federation was one of the petitioners, where companies like Gameskraft, Play Games 24×7, Head Digital Works, Junglee Rummy, and A23 also filed challenges. They contended that although the game is allowed to be played in person, it is prohibited when it is made available online. The gaming companies countered that the TN government is only able to regulate online gaming—it cannot outright outlaw it. They added that there is insufficient evidence to back up claims of addiction.
It was submitted on behalf of the State that there existed an apprehension of the games using artificial intelligence bots for the purpose of regulating or controlling the outcomes of the games which was rejected by the court for being too far fetched without any reasonable possibility. Moreover, since the games were legalised in the offline mode, the mere apprehension of online gaming being addictive or regulated could not reasonably lead to it being covered under the stringent gambling laws. Moreover, it was noted by the court that in case the state notices any ambiguity or illegality in the operation of the games, nothing would hamper the power of state to regulate it.
In light of the arguments presented which were thoroughly scrutinized by the Hon’ble Court, it was held that the blanket ban upon the online gaming sector was ultra – vires and invalid in the light of the constitution. It upheld the Act while clarifying its applicability did not cover games of skill. Moreover, while negating the entire impugned act as ultra vires, the court also allowed the respective Central and State governments, as the case may be to make positive provisions in the interest of the citizens of the country, public policy and morality in order to regulate the age restrictions, time limits and other provisions for the safety of the public. It allowed the petitioners to withdraw the case as the ordinance has yet to be notified
Pending petition before the SC: Casting shadows and dashing hopes
Taxes have been a hindrance for online gaming companies for a while. Companies have been disparaged by the concerns around ambiguity of tax provisions, lack of clarity around applicability and general apprehension around the uncertainty of the attitude of the tax authorities towards such companies.
In the wake of the 50th and 51st GST Council meetings held recently, online gaming bets placed by the user will now attract 28% GST tax on the amount paid, payable or deposited at the entry level,[6] irrespective of whether the game is skill based or chance based.[7] This new tax slab of 28% will only apply to certain actionable claims, i.e., claims to any debt owed in online money gaming including those involving virtual digital assets. Therefore, in-app purchases or any other transaction not concerning such actionable claims, will not attract this slab of 28% tax.
Moreover, the users of such online money gaming platforms will now be subject to a new regime of income tax next year. Currently, the Tax Deductible at Source (“TDS”) on winnings stands at 30% on winnings above Rs. 10,000. This is about to change in the next financial year (FY 2024-25) as the Finance Act, 2023 seeks to remove the Rs.10,000 threshold and bats for uniform applicability of TDS on winnings, irrespective of their value.[8]
A recent decision by the government to retrospectively tax a company with 21,000 crores for games involved with stakes has raised some eyebrows, considering the tax was more than 95% of its total revenue. The SC has refused to restrain the recovery proceedings.[9] It stayed the order of the Karnataka High Court judgement,[10] quashing the tax demand notice of the government, in response to an appeal by the Finance Ministry. The Apex court is yet to delve into the merits of the case, and has passed an interim order with the assurance that ‘nothing will happen to the company’.
The conduct of the Ministry signifies a continuing problematic pattern, aside from not clarifying how the applicability of GST was retrospective, wherein its acknowledgement of the growth potential of the online gaming industry starkly contrasts with its predatory targeting of gaming companies with unreasonable tax demands.
Furthermore, there are lacunae within the Apex court’s judgement. By siding with the GST department, the SC has implied that it is in agreement with the department’s justification of the tax notice, i.e., online games of rummy and poker are betting games and therefore, subject to 28% GST under betting. Despite judgements from the same court holding games like online rummy as games of skill not chance, the Apex court has created a legal conundrum while dealing with matters of tax. It remains to be seen how the GST Council will reconcile the settled law on game of skill with its questionable policies, but the end to this debacle with a prompt resolution will prove essential for the survival of the Indian gaming industry.
Co-authored : Vatsal Gaur, Akshay Vasantgadkar, and Krishnan Sreekumar
Footnotes
[1] H.C Arora v. UOI, 2019 PHHC 148419-DB.
[2] Press release by Ministry of Electronics & IT dated 2nd September 2020.
[3] RMD Chamarbaugawala v. Union of India, AIR 1957 SC 628.
[4] State of Andhra Pradesh v. K. Satyanarayana & Ors, AIR 1968 SC 825.
[5] Junglee Games India Private Limited and Ors v. State of Tamil Nadu, 2021 SCC OnLine Mad 2762.
[6] Rule 31B, Central Goods and Services Tax (Third Amendment) Rules, 2023.
[7] Notification No. 11/2023 – Central Tax (Rate), dated the 29th September, 2023.
[8] Clause 54, Finance Act, 2023.
[9] Directorate General of Goods and Services Tax Intelligence and Ors v. Gameskraft Technologies Private Limited and Ors, Special Leave to Appeal (C) No(s).19366-19369/2023.
[10] Gameskraft Technologies Private Limited v. Directorate General Of Goods, 2023 SCC OnLine Kar 18.