The Sector has been Going through Turbulent Times
The debate over what to do or not do with online gaming seems to have reached all possible places – from the media it spilled over to state governments and legislatures, then to courts, and finally even to parliament, not skipping the GST Council as well. But even though forced to exist in a state of constant uncertainty and turbulence, the sector has been thriving.
Should states impose blanket bans on all online gaming including on games of skill, or would it be wiser if the Centre regulates online betting and gambling in a meaningful way? And how exactly should we tax this rapidly growing industry that creates so many jobs?
Sunrise Industry
Sunrise industry is an unofficial term for a rapidly booming sector of the economy that typically features high growth rates and lots of startups and VC funding. Indian online gaming is often called a sunrise industry due to its CAGRs (compound annual growth rates) of 37 percent for FY19 and 39 percent for FY20, as per a recent Sequoia and BCG study.
Moreover, the report projects mobile gaming in India to grow from the current $1.5bn to over $5bn by 2025. It also highlights the booming investor activity with $549mln raised just in Q12021, surpassing the $412mln attracted during the whole of 2020 and the $175mln raised in 2019.
At the same time, early investments in the sector by international gaming studios in the 2010s have led to a proliferation of talent with India now being home to an excess of 15,000 game developers. The number of gaming companies in the country has grown more than tenfold from 25 in 2010 to at least 275 in 2020.
State Legislatures and High Courts
The lack of proper legislation governing online gaming and the regulatory risks faced by the industry were clearly illustrated by the actions of several state governments which placed blanket bans on online gaming. Moved by the need to address issues of gambling addictions and occurrences of large financial losses by people, ??????? states imposed prohibitions that included online games of skill when played for stakes of any kind.
This forced gaming operators to block access of residents of these states to their platforms, while the prohibitions were challenged in the appropriate high courts. The bans imposed by the governments of Kerala and Tamil Nadu were found to unproportionaly infringe the fundamental right of free trade and were struck down as contradictory to the constitution. Similar litigations concerning gaming prohibitions in Karnataka, Telangana and Andhra Pradesh are still pending but will likely have the same result.
Supreme Court
The Tamil Nadu government has filed an appeal at the Apex Court against the verdict of the Madras high court that struck down the state’s prohibition on online gaming and a hearing is expected to be scheduled soon.
A ruling by the Supreme Court on the matter will be binding on a national level and would have the potential to bring clarity on how state governments and the Centre should treat online gaming.
Parliament
On a number of occasions, MPs have raised the issue of online gaming both in the Lok Sabha and in the Rajya Sabha. Most notably, RS member from the BJP Sushil Kumar Modi talked about the danger of the spreading of gaming addictions during Zero Hour. Modi highlighted the failure of state governments to tackle the problem with outright bans that dont survive court scrutiny and pointed out that a national-level regulation and a licensing regime are the need of the hour.
Licensed sites that offer online cricket betting or casino or other real money games will be required to employ various responsible gaming mechanisms the way they are prescribed by the law. Contemporary responsible gaming systems are designed in such a way as to protect consumers from the risks associated with betting and gambling, including problem gaming and addictions, excessive losses and unfair practises of operators.
GST Council
Besides the matter of legality, taxation is another question that brings uncertainty and risk for the online gaming industry. In May 2021, the GST Council formed a Group of Ministers (GOM) tasked to analyze existing legislation and court orders and come up with recommendations on applicability and rate structure of GST for online gaming platforms, casinos and lotteries.
Currently games of chance are levied with a 28 percent GST, while skill-based game operators charge 18 percent GST over their fees. Thus, the stake amount remains free of GST, but winnings are chargeable with 30 percent income tax plus Cess.
The GOM has not delivered its recommendations yet, but reports have suggested that the thinking is towards a uniform rate for all games of 28 percent to be charged on the full stake or entry amount. Industry stakeholders fear such an approach would have a devastating effect over companies in the sector similarly to what happened with the horse racing industry.
The introduction of a 28 percent GST on the whole turnovers of turf clubs and not just rake fees led to a three-fold drop in revenues and tax collection, while the price increase brought by the new tax levy led to a rise in black market gambling.
Disclaimer:
- As per the Public Gambling Act of 1867, all Indian states, except Goa, Daman and Sikkim, prohibit gambling
- Land-based casinos are legalized, with certain guidelines, in Goa and Daman, as per the Goa, Daman and Diu Public Gambling Act 1976
- Land-based casinos, Online gambling and E-gaming (games of chance) are legalized in Sikkim under the Sikkim Online Gaming (Regulation) Rules 2009
- Only some Indian states have legalized online/regular lotteries as per and subject to the conditions laid down by state laws. Kindly refer to the same here
- Horse racing and betting on horse racing, including online betting, is permitted only in a licensed premise in select states. Kindly refer to the 1996 Judgement by the Supreme Court Of India here and for more information
- This article does not endorse or express the views of Qrius and/or any of its staff.