Online Gaming Sector

The Supreme Court has recently stayed the Union government’s order demanding retrospective GST on the online gaming sector accounting ₹1.12 lakh crores highlighting the need to deregulate the online gaming sector.

About Online Gaming Sector

Online gaming refers to playing video games or engaging in multiplayer experiences over the internet
Platforms: Online games can be played on a wide range of devices, from dedicated gaming consoles (PlayStation, Xbox, Nintendo Switch) to PCs, laptops, and mobile phones.
Examples:
- Massively Multiplayer Online Role-Playing Games (MMORPGs): World of Warcraft, Final Fantasy XIV, Guild Wars 2 etc
- Battle Royale Games: Fortnite, Call of Duty: Warzone, Apex Legends
- First-Person Shooters (FPS): Counter-Strike: Global Offensive (CS:GO), Valorant, Call of Duty: Modern Warfare
- Casual Games: Bingo, League of Legends.
Types:
- Skill-Based Games: The outcome is primarily determined by a player’s knowledge, strategy, and expertise rather than luck.
  - These games are recognized as legitimate forms of gaming and are exempted them from prohibitory gambling laws.
  - Examples:
    - Fantasy Sports: Platforms like Dream11 and MPL operate under the premise that users make strategic decisions to create virtual teams.
    - Chess: A game entirely dependent on intellectual and strategic prowess.
    - Rummy: Courts in India have categorized rummy as a skill-based game due to the need for strategy and memory retention.
- Chance-Based Games: These are also known as games of luck as the outcomes largely depend on randomness or uncontrollable factors.
  - In most parts of India, these games fall under the ambit of gambling laws and are subject to stringent regulation or outright prohibition.
  - Examples:
    - Lottery: A classic example of a game relying purely on chance.
    - Slot Machines: Predominantly found in casinos, their outcomes depend on random number generation.
    - Roulette: Players bet on numbers, colors, or other factors, but the results are entirely luck-driven.
Revenue Models:
- Real money gaming (RMG): The revenue includes revenue generated via online games wherein a user makes a deposit, in cash or kind, with the expectation of monetary rewards on that deposit.
- Social/casual Gaming Revenue: It includes revenue generated via online games that feature in-app advertising, in-app purchases (e.g. purchase of virtual items within the game) or through subscription services.
Gaming Economy: The Online Skill-Based Gaming Sector is a sunrise sector.
- Growth Potential: A PwC report pegs online gaming as among the fastest growing sectors in India, accounting for ₹33,000 crore in 2023
  - It is projected to reach ₹66,000 crore, growing at a CAGR of 14.5% between 2023-2028.
- The India Real Money Gaming (RMG) market accounted for a staggering INR 16,500 crore in revenue during 2023 and is expected to grow at a 10% CAGR from 2024 to 2028
- FDIs: Global investors have invested approx USD 2.8 billion (INR 23,000 crore) in investment over the past five years
Employment Opportunities: Online gaming could create an additional 2-3 lakh direct and indirect jobs in the next few years, in addition to the two lakh jobs already generated.
- The gaming industry is creating jobs in the fields of marketing, sales, data analysis, game design, technology, as well as ancillary jobs for live streamers, coaches, mentors, sport therapists, etc
Factors Shaping Growth of Online Gaming in India:
- Young Gaming Community: India is the youngest nation in the world with nearly 650 million smartphone users making it a hotbed of young gamers with a substantial gaming community, comprising 42.5 crore gamers.
  - Mobile users form 85 per cent of the industry with mobile games such as PUBG Mobile, Free Fire, Clash of Legends and Call of Duty Mobile serving as entry route.
- Cheap Data Consumption: India has the cheapest internet mobile data prices in the world instrumental in building the culture of data consumption for the purposes of entertainment and playing games.
  - In 2023, an average Indian citizen was consuming 24.1 GB of data per month an increase of 24% over 2022.
- Thriving Startup Ecosystem: The growing number of startups within the AVGC-XR ecosystem provides the much-needed indigenous support network to entrepreneurial ventures in gaming and e-sports.
  - Three India Gaming startups have already transformed into unicorns and raised an estimated USD 2.8 billion from domestic and global investors during the last five years.

Important Judgement on Game of Skill Vs Game of Chance

R.M.D. Chamarbaugwala v. Union of India(1957): The Supreme Court ruled that predominantly skill-based games are classified as games of “mere skill” and are protected under the Constitution of India as legitimate trade and business activities.
- The games where chance outweighs skill are classified as gambling and subject to regulatory prohibitions.
State of Andhra Pradesh v. K. Satyanarayana(1968): The Supreme Court addressed the legality of the card game ‘Rummy’ and held that although Rummy involves an element of chance it is the player’s skill in memorizing and strategizing which determines the outcome.
- This decision has been foundational in differentiating skill-based games from chance-based games in Indian law.
Manoranjithan Manamyil Mandram v. State of Tamil Nadu, (2005): The Madras High Court ruled that determining whether a game is a game of skill or chance is a “question of fact” that must be decided based on the specific circumstances of each case.
Varun Gumber v. Union Territory of Chandigarh & Ors. In 2017: The Punjab and Haryana High Court examined the legality of online fantasy sports and ruled that Dream11, a fantasy sports platform, operates games of skill, as participants must use considerable judgment, discretion, and knowledge to form their virtual teams
- The judgement was upheld by the Supreme Court.

Challenges For the Indian Gaming Industry:
- Regulatory Fragmentation and Uncertainty: Their is an absence of a comprehensive national regulatory framework for the online gaming sector which leads to uncertainties and boost negative growth and investor outlook
  - Several state governments have imposed blanket bans on all Real Money Games activities despite India’s well-established jurisprudence allowing games of skill.
- Non Functioning Self-Regulatory Bodies (SRBs): The government has not yet designated an Self-Regulatory Bodies (SRB) as mandated by the Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Rules, 2021
  - The SRBs have the authority to declare whether an online real-money game is permissible based on established criteria.
- Tax Terrorism: The 28% GST levy and the demand for retrospective taxes creates unpredictable liabilities, making long-term investment planning difficult and casting a chilling effect on the ease of doing business.
  - Example: The gaming industry hasn’t been able to attract any major foreign direct investment since the imposition of new GST rates.
- Illegal Gambling Sites and Advertisements: The unchecked spread of offshore online gambling platforms is exposing the Indian gaming community to fraud and other cybersecurity risks like financial laundering, personal information theft, ransomware attacks, DDoS attacks, system disruptions and data breaches.
- Availability of Skilled Human Power: To effectively integrate diverse technologies such as AI, high-fidelity twinning, wearable tech and XR, which is vital to design and deliver cohesive gaming experiences, is a challenge.

Regulatory Provisions for Online Gaming Sector

The online gaming sector in India is regulated by the Public Gambling Act of 1867 and the Information Technology Act of 2000.
- The Gambling Act: It serves as the central statute prohibiting betting and gambling, with certain exceptions for lotteries and skill-based games.
GST Rate: Online Gaming sector attracts a 28% GST by the Union and State governments
Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Amendment Rules, 2023: Developed by Ministry of Electronics and Information Technology (MeitY), the guidelines provided for self-regulation of online games,
- Definition: It defines an online game as a game offered on the Internet Source through a computer or intermediary
- Permissible Online Games: The guidelines only allow ‘permissible online games’ to be hosted and offered to users in India.
  - A Permissible Online Game is recognised only when it is not a real-money online game.
- A real-money online game has to be recognised by a self-regulating body (‘SRB’) under the Intermediary Guidelines.
The Income-tax Act, 1961:It provides for taxation at 30%, excluding surcharge and cess on the net winnings from online gaming.
- Tax Deducted at Source: The applicable rate of TDS shall be 30% at the time of withdrawal (without any threshold) of such winning amount.
The DPIIT has proposed 100% FDI in the online real-money gaming sector except gambling and betting.

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