Bad regulations could play spoilsport for online gaming

By Rameesh Kailasam

The year 2021 has catapulted Indian start-ups in a big way, churning out unicorns, apart from triggering innovations across sectors. Wealth creation is beginning to show a positive trajectory, and with massive investments coming in and IPOs under way, India seems poised to take a giant leap forward. However, it is equally critical that adequate attention is given from an enabling regulatory standpoint to start-ups beyond what is given today, as they are spread across sectors from retail, travel, mobility, finance to delivery, education, healthcare, social media, gaming and crypto.

Online gaming is a fast-emerging space. Prime minister Narendra Modi had stated last year that India should tap the huge potential in the digital gaming arena by developing games that are inspired by the country’s culture and folk tales, and the focus should be on use of technology and innovation that meet global standards.

Online gaming companies have become unicorns, attracting mammoth investments, and have even started to list on Indian exchanges. Their gaming formats and models, which involve skill and money, have been considered legitimate by multiple high courts and the Supreme Court as well; yet, state regulations still need to catch up with these interpretations to ensure they do not end up trampling on court rulings as well as legitimate skill-based online gaming platforms in their earnest desire to go after online gambling and betting.

The online gaming space in India is of different types, including e-sports, online fantasy sports, online skill-based casual games & sports (the likes of carrom, chess, billiards, ludo, scrabble, Sudoku, quiz and so on, apart from few types of card-based games). Many of these are predominantly skill-based, while some can become skill-based by adding necessary changes to formats.

Despite multiple court decisions, certain state governments have, quite unfortunately, ended up banning them while going after online gambling and betting. Karnataka, with its reputation of being start-up and industry-friendly, recently joined this bandwagon, but the industry hopes that the state government will issue necessary clarifications and rules that will grant them the much-needed relief.

Another area on which this industry needs clarity is GST. The GST Council, in 2019, decided to create a Group of Ministers (GoM) to decide GST on casinos, race courses and online gaming, again speaking of all of these, quite unfortunately, in the same breath. In 2021, the GoM was formed to draw up recommendations for deciding tax rates and applicability of GST.

The online gaming world does involve money, and the contest entry amount (CEA) comprises of two components, viz. gross gaming revenue (GGR) or platform fees and prize pool. While GGR or platform fees is the gross amount of fee that the technology platform earns for providing the service as an online technology platform, prize pool is the amount that may be held in a clearly demarcated form or account that may include, but is not limited, to an escrow account/ separate bank account, or the money is held in separate electronic ledgers by third-party service providers and payment gateways (PGs), wallets, etc. This amount is distributed to the users depending on their winnings or rankings at the end of each game, which is decided by the game format.

GGR/platform fees can range anywhere from 1% to 20%, depending on gaming formats and platforms. Currently, GST is paid at the rate of 18% on the GGR or platform fee as a fee charged for service. The technology platform owner has no right, title or interest over the prize pool amount. In some cases, this amount is received and held by a third-party/independent custodian for and on behalf of players. The mandate of such third-party/independent custodian is to fully distribute the prize pool amount to winners as per predetermined rules of the game. In certain cases, the third-party may not be a custodian but may merely be a service-provider, facilitating transactions and charging a commission for the same, purely like a bank, PG, wallet, etc. Therefore, the prize pool does not form part of the value of services provided by the platform, and hence no GST is applicable as the platform has no right over the money.

Further, Rule 31A of CGST Rules 2017 deals with valuation of supply of actionable claim in cases of lottery, betting, gambling and horse racing, so as to fall within the rigours of Rule 31A which applies only to activities involving “chance to win in betting, gambling or horse racing.” Since Rule 31A uses the word ‘chance’, it is clear that the rule is intended to apply only to activities and contest based on chance and does not cover online games based on skill. It is important that the GoM and the GST Council issue a suitable clarification that Rule 31A is not intended to cover games of skill and therefore is not applicable to any form of online gaming where there is a preponderance of skill over chance. Also, prize pool amount being an actionable claim, any activity or transaction pertaining to such actionable claim can neither be considered as supply of goods nor supply of services, and, hence, it is clearly exempt from the levy of GST. For ensuring this sunrise sector does not face an imminent sunset, enabling regulations and regulatory clarity are important.

CEO, IndiaTech.org