Is India Killing Its Gaming Industry?

India has a Gaming Problem

‘Gaming’ is perhaps one of the most confusing terms out there today and has a wide variety of meanings depending on who you ask – is Gaming video games played on computers and game consoles? Does it refer to online Rummy, Poker and the like that sometimes lure you in with the promise of winning big? What about something like Candy Crush on your phone or even PUBG, I mean, BGMI, on mobile phones? Then there’s talk about games of ‘skill’ and games of ‘chance’, and more recently, talk about a 28% Goods and Services Tax and how it’s killing India’s Gaming industry with big tax notices from the authorities. GST, SRBs or even MeitY, what does all of it mean? This is [smarter in conversation] powered by our friends over at [Bridge Legal] and do stick around if you want to understand everything that’s been going on in relation to ‘Gaming’ in India of late. We’ll start with some of the basics (that aren’t actually that basic) and move on to the current developments and what they mean.

Gaming or Gambling?

Are Gaming and Gambling the same thing? It’s quite likely that you’ll get a different answer depending on who you ask, but let’s keep in mind that both terms are informal and these days quite interchangeable – to many, the main difference between the two is the involvement of money – when you think ‘Gambling’, you probably think chips at a Poker table, bets and cash stakes; when many think of ‘Gaming’ and ‘Gamers’, they think more on the lines of playing Counter-Strike, FIFA or even fighting games like Mortal Kombat and Tekken – you pay to play the game, but you don’t really play to win money (unless we’re talking about eSports tournaments which we’ll talk about on a separate note). From a legal and regulatory perspective, though, the two terms are used quite interchangeably, with the overall term of ‘Gaming’ used to cover every game, whether played for money or not. Many in the industry therefore like to refer to games played with money as ‘real-money games’ or RMGs and refer to such RMGs as a subset under the broader umbrella of ‘Gaming’. The term ‘gambling’ isn’t really preferred due to the negative connotations, and everyone’s just gone with the broader, larger term of ‘Gaming’ for everything, much to the annoyance of the video-gaming community that has enough problems to deal with already.

Game of Skill or Game of Chance?

Ah, now this is where things get a bit interesting – as you may know, India has a quasi-federal structure, with a primary Central Government and State Governments – the Centre gets to legislate on certain subjects and so do the States – the subjects on which each can pass laws on is split into lists under the Indian Constitution (there’s also a list containing subjects on which both the Union and the States can legislate on, but that’s not relevant in the present case) – what is relevant, is that ‘Gambling’ is a State subject, meaning that the States get to pass laws on it and more importantly, collect the taxes and the revenues. There’s a central model law called the Public Gambling Act in India (a very old Act from 1867 that didn’t conceive of cell phones much less the internet) but most States have their own laws, many modelled on the Public Gambling Act but customised to their own requirements –  it’s why States like Goa and Sikkim are known to be more conducive towards gambling than, say, Tamil Nadu or Karnataka – the States get to decide Gambling policy.

So where does the game of skill and game of chance distinction come in and why is it relevant? At the risk of oversimplification, the Indian Supreme Court more than a half century ago passed a judgment that in essence distinguished between games of skill and games of chance, holding that only games of chance constituted gambling since games of skill involved, well, skill and not just luck.

Again, why is the distinction relevant? Because States can only pass laws on gambling, and the Supreme Court in essence removed games of skill from the purview of gambling in the first place, meaning that States can’t really pass laws or regulate games of ‘skill’.

Then the Internet Happened

States weren’t too happy with the games of skill and chance distinction in the first place, but the internet brought forth a new revolution in the form of online betting and gambling, or gaming, whatever you want to call it. Coupled with a very wide penetration of mobile phones and cheap data, the Indian public took to a lot of online apps like fish to water, earning massive revenues for companies in the space. State governments like Tamil Nadu and Karnataka decided to update their gambling laws or pass new ones to ban online games irrespective of whether they were games of skill or chance, gaming companies fought back and won judgments at their High Court levels, and the same States appealed these decisions which are now all pending at the Supreme Court of India. It’s this legal uncertainty that had and has everyone at the edge of their seats, and no one can predict how the Supreme Court is going to rule – is it going to stick to case law from half a century ago as it should, because India is a Common Law jurisdiction, bound by judgments from earlier, or will it take a new route given that a lot has changed since the age before the internet and even cell phones! The outcome is hard to predict, but most lawyers lean towards established case law, and the fact that the State High Courts also recognize the distinction between games of skill and games of chance is another point in favour of real-money gaming companies that argue that their games involve skill and not merely luck.

The Double Barrel Strategy

Business continued as usual for RMG companies pending the Supreme Court hearing the appeals of the State Governments, and the idea was that this would get resolved eventually and would be a potential problem for later. India, like many other countries, has different taxation slabs for different activities, and RMG companies paid Goods and Service Tax (GST) of 18% for all the ‘platform fees’ that they collected. If you deposited Rupees 100, doubled your money to Rupees 200, and had to pay the RMG company 10% of your winnings or Rupees 10, the companies just paid 18% on the Rupees 10, not on Rupees 200.

Two things then happened this year, coming from two different ministries in India – the Ministry of Electronics and Information Technology (MeitY) and the Finance Ministry by way of its GST Council. Now keep in mind that these are both ministries at the Central level.

First, the government came out with a notification stating that ‘online gaming’ would now come under the purview of the MeitY, while eSports would come under the purview of the Ministry of Youth Affairs. The MeitY, in record time, came out with an amendment to its Intermediary Rules under India’s Information Technology Act, effectively stating that no online games involving money would be permitted unless certified by self-regulatory boards (SRBs) that it would soon appoint after taking applications. Games that didn’t accept any deposits in cash or kind like video games were and are still covered for things like user harm and sovereignty issues (don’t ask me what that means), but not to the extent that RMG games are covered. This was, in my opinion, one of the cheekiest and clever strategies ever employed – the Central Government knew that the RMG companies and the State Governments were fighting things out at the High Courts and Supreme Court, but it swooped in and claimed power by regulating the source of all online gaming itself – the internet. The internet was not something conceived by the Indian Constitution, and this was, by all accounts, a masterstroke. But still a masterstroke that RMG companies could live with – they could always comply with the new rules as long as they were certified by SRBs as offering games of skill and not chance.

Then came the second, more powerful whammy, and this came from the GST Council in July this year, that held (or clarified, this bit isn’t clear) that gaming activities irrespective of skill or chance would attract the ‘sin tax’ bracket of 28% GST, and not just over the platform fees, but over the entire, full-face value of bets. Remember when we talked about the 18% tax on just the platform fee of Rupees 10? That just became a 28% tax on Rupees 200 (or Rupees 100, depending on who you ask, in either case, still very, very bad). RMG companies said that this would effectively kill the industry, making it unprofitable, but these complaints fell on deaf ears.

Shots Fired

Okay, so at this stage RMG companies are trying to figure out their way forward – they need to get certified by SRBs in due course but those applications are on their way, and they need to make the numbers work to deal with the 28% GST on not just the intermediary fee value. One company filed a case, won it, but then got taken to appeal at the Supreme Court level, which is again, pending, but then came the pre-show cause notices from the Directorate General of GST Intelligence (DGGI) – but what’s special about these tax notices? Sources speculate that combined, the DGGI’s notices amount to a 1.5 trillion Rupee demand, because it’s of the opinion that the GST Council’s recommendations in July to levy 28% GST on not just the platform fees charged, was just a clarification of a fact that always existed – RMG companies always had to pay the higher amounts which they didn’t, and now had to answer for. Some called this a retrospective application of a higher tax bracket that was already flawed in the first place, since the 28% bracket is actually for gambling, which games of skill are arguably not, and herein lies the rub. A big rub, because some of the tax notices are much, much larger than the revenues and net worth of the RMG companies themselves. Stock prices of some companies like Delta Corp crashed, other companies have vowed to take this to court as well, but practically, on ground right now, the industry is in crisis mode trying to deal with not just a higher tax bracket, but pending dues that will most certainly run them to the ground if not quashed.

SRBs? What SRBs?

A very important argument again is that games of skill aren’t gambling and aren’t supposed to be taxed at 28% and were never meant to be – this argument was and is very important for RMG companies to not only fight the Supreme Court cases against the State Governments, but also to fight the new taxation burden. And who was meant to certify that certain online games are games of skill and permissible – the SRBs given the green light by the MeitY. Except, the MeitY earlier this week said that it was going to put the SRB structures on hold since the applications didn’t seem to be independent from the gaming lobbies – it subsequently gave another reason, stating that it would wait for the other ministries to have more harmonised views on the subject – no doubt, primarily referring to the Finance Ministry and the GST Council and by extension, the DGGI and its massive tax notices sent to the RMG companies.

What Now?

So, what’s going to happen next? States like Karnataka just implemented the GST Council’s recommendations a few days ago, the pre-show cause notices are set to become show cause notices and proceedings, and the Supreme Court of India needs to take a call on things quickly – in the meantime, RMG companies are between a rock and a hard place, probably needing to deposit a huge amount of money with the government as an advance deposit till the dust settles. Video game companies don’t have much to worry about right now, but some of us think that the term Gaming is used a bit too loosely, and with creative monetisation rampant in the industry as well as a lot of investment from India’s second favourite country China, things may go south but that’s a problem for later. For now, the Indian government has its eyes set on the real-money gaming industry, and now you know why and how and that’s our cue to sign off – do let us know your thoughts in the comments section below, like and subscribe if you’d like to never miss updates like this and as always, stay smart!