Online Gaming At Crossroads, 2022 May Be Decisive Year For An Anxious Industry – 2021 In Review

The year 2021 was marked by a gradual economic recovery with most sectors limping back to normalcy especially towards the latter half of the year. However, one sector that was a topic of considerable debate and discussion, both in the media, in the courts, in parliament and state legislatures was online gaming. (More Sports News)

Given its sheer rise in popularity and consumption, the impact of online gaming on Indian society was a matter of argument as some states and operators seemed to be on different pages.

Proponents of the industry highlighted the contribution of the industry to the economic, employment and growth of the technology services industry while many others, including those in Parliament and media, questioned the industry’s close connection to gambling and betting as well as propensity to cause addiction, health-related issues and financial losses.

Notwithstanding this polarising debate happening in various fora, by all estimations, the online gaming industry has seen impressive growth over the last few years, especially post the Covid-19 pandemic.

GROWING DAILY

As per a recent KPMG report, the online gaming industry is worth Rs 13,600 crores as of Financial Year (FY) 2020-21 and the industry is expected to more than double within the next four years to reach a total market size of Rs 29,000 crores by FY 2025, with a compounded annual growth rate of around 21 per cent.

The report estimates that the total number of users of online gaming apps in India are around 43.3 crores, which is almost 50 per cent of the total population in the 15-64 years age bracket.

The consulting firm’s analysis also indicates that more than 50 per cent of the contribution to the revenues of the online gaming industry currently is from real money card or fantasy games. These are online games where users have to stake or put his own money and play against other users for cash prizes.

REGULATORY TURBULENCE

Despite the meteoric growth of online real money games and aggressive advertising on television as well as through sports sponsorships, the online skill-based real money gaming industry has faced turbulence over the past couple of years, with state governments increasingly taking note of the potential problems of addictiveness and financial losses caused due to online games.

The issue of online games and its impact on the youth has been raised multiple times in Parliament. In the Rajya Sabha, earlier this month, BJP MP and former Bihar deputy chief minister Sushil Kumar Modi raised the issue in Zero Hour. Modi noted that uniform taxation and regulation of online games was the need of the hour.

Twenty-one other MPs across parties and regions agreed and associated themselves with the matter, with Vice-President M. Venkaiah Naidu (who was presiding the proceedings as Rajya Sabha Chairman) intervening and asking Union Information Technology Minister Ashwini Vaishnaw to look at the issue.

AGAINST ADDICTION

Several other MPs have also raised similar questions on various occasions in both Houses of Parliament. Although the central government has maintained a consistent stand that individual states have the power to their own policy and legislative framework on online games and gambling/betting, there is an increasing clamour for uniform regulations and policy framework to be issued by the central government, since such online gaming activities transcend state, and at times national boundaries. It is pertinent to mention that PM Narendra Modi has expressed his displeasure at anything that buoys ‘addiction.’

At the state level, over the last year and a half, Andhra Pradesh, Tamil Nadu and Karnataka passed legislations to ban all kinds of online games for stakes or wager while Kerala, through a notification, has effectively banned the game of online rummy played for stakes. Other states like Rajasthan, Maharashtra, Uttar Pradesh and Gujarat are also mulling similar legislations.

COURT RELIEF, BUT …

Notably, the bans imposed by the Tamil Nadu and Kerala governments were quashed as being unconstitutional earlier this year by the respective state High Courts, while legal challenges to the legislations passed by Andhra Pradesh, Telangana and Karnataka governments are still pending in courts.

The Tamil Nadu government has however preferred to file an appeal against the order passed by the Madras High Court striking down the amendments to the Gaming Act that had banned all kinds of online games played for bet, wager or other sake.

The matter is likely to be listed for hearing in the Supreme Court next month, with any decision of the apex court likely to have an impact on other similar legislations that have been passed by other states.

An authoritative ruling by the apex court on whether the outright ban on online games for stakes imposed by the Tamil Nadu government is constitutional; whether companies running online real money games enjoy the fundamental right to trade and commerce and whether states have the power to regulate online gaming or the subject lies within the domain of the central government will have far-reaching consequences on the manner in which online real money games will be treated by the central and state governments.

HIGHER TAX INEVITABLE?

Apart from existential issues of whether the online real money gaming industry should be regulated or banned, another issue that is likely to see a decision in the coming year is the manner and rate of payment of GST on the online gaming industry. Currently, online gaming companies pay 18 per cent GST on the platform fees or margin/commission retained by them.

However, the revenue department is claiming tax at the rate of 28% on the entire contest fee or entry amount that every player stakes. The industry believes that such a manner of computing taxes would be illogical and spell the death-knell for most companies operating in the sector, and few High Courts have supported the interpretation of the online gaming companies while directing the authorities to not take any coercive action.

In May 2021, the GST Council formed a Group of Ministers (GoM) to look at issue and any changes in rules. Although the GoM had to submit its report within six months, it has not done so yet. It is expected that the GoM will present its recommendations and the GST Council may decide on the issue within the next few months, with a higher rate of tax possibly being recommended for the industry.

ROCKY COURSE

One can expect the ride for online real money gaming companies to be rocky until courts, government and taxation authorities can make up their minds on the true nature of the games and the regulatory framework around it.

The Supreme Court providing a decisive ruling on whether the centre or states has power to regulate or ban the industry and clarity on the manner and rate of taxing online gaming will go a long way in providing certainty and stability to this fast-growing industry, where marquee foreign and domestic investors have pumped in billions of dollars and tens of thousands of jobs are at stake.

The next couple of years will be crucial and decide the fate of the online real money gaming industry on multiple fronts.

(Jay Sayta is a technology and gaming lawyer based in Mumbai. Views expressed are personal).