The online Gaming sector in India has been thriving with activities lately. This sunrise sector has already witnessed exponential growth in its user base, especially during the COVID-19 lockdown constituting an average growth of about 28% on a year-on-year basis.
The lucrative Indian Gaming Industry, now being in top five gaming markets globally, is fairly envisioned to provide vast potential in time to come, given the fervour in Indian youth, the proliferation of smartphones along with cheap data plans, and the ease of digital payments.
According to a recent study by EY & Assocham, the online gaming industry presently contributes over Rs. 2,200 crores of GST and is expected to grow to a whopping Rs. 29,000 crores by 2024-25 from Rs. 13,600 crores in 2020-21, revealed a KPMG report.
Indian skill gaming sector, which is around Rs. 79 billion in FY 2021-22 and may rise to Rs. 150 billion in FY 2023-24, has contributed Rs. 15 to 20 billion in 2020 to the Government Exchequer and is anticipated to reach Rs. 35 to 50 billion by 2025, claimed another survey.
However, the nascent Gaming Sector in India has been facing numerous regulatory and legislative hurdles in recent times with various State Governments banning some games within their territories and the imposition of higher taxes with the Central Government tweaking the tax rates and allied provisions.
The separation of power between the Centre and the States to legislate has been envisaged by virtue of Schedule 7 of the Constitution of India. Betting and gambling in all forms fall in the domain of the legislative powers of the States.
THE LEGISLATIVE FRAMEWORK PERTAINING TO ONLINE GAMING
I. Public Gambling Act, 1867
The Public Gambling Act, 1867 (hereinafter referred to as “PGA”), a colonial-era legislation essentially modelled on pre-independence enactments, primarily contemplates “games in the sense of those being played in a ‘common gaming house’ i.e., physical space or enclosure”.
Section 12 of the PGA unequivocally provides for non-applicability of the constraints stipulated therein on any game purely of skills. The PGA is even though not sufficiently equipped to deal with modern forms of gaming; several states including Punjab, Madhya Pradesh, Haryana, and Uttar Pradesh have adopted the statute in its original form.
On the other hand, some other states have either enforced the PGA with fitting modifications to suit the prevailing conditions or enacted their own piece of legislation though widely structured in line with the PGA in order to regulate gaming/gambling activities.
II. Indian Contract Act, 1872
Section 23 of the Indian Contract Act, 1872 (hereinafter referred to as “ICA”) enumerates that “the consideration or object of an agreement is lawful, unless, it is forbidden by law; or, is of such a nature that, if permitted, it would defeat the provisions of any law”.
Further, an agreement by way of a wager is considered to be “void and unenforceable” in light of Section 30 of ICA. Since such agreements are not per se unlawful; they cannot simply be dubbed as illegal merely on being entered into however such agreements can also not be enforced by bringing a suit in the Court of law.
Therefore, gambling debts even if arose vis-à-vis online agreements generally are considered to be unenforceable in India.
III. Foreign Exchange Management Act, 1999
In view of the relevant provisions of the Foreign Exchange Management Act, 1999 (hereinafter referred to as “FEMA”), read with the Foreign Exchange Management (Current Account Transaction) Rules, 2000 (hereinafter referred to as “Current Account Rules”), remittance “(i) out of lottery winnings (ii) of income from racing/riding, etc. or any other hobby and (iii) for the purchase of lottery tickets, banned/ prescribed magazines, football pools, sweepstakes, etc. is prohibited”.
The Foreign Direct Investment (FDI) policy that governs the flow of FDI in India prescribes both – “Foreign Direct Investment” as well as “investment by a person resident outside India”- in companies that are engaged in the business of “lotteries, including online lotteries, gambling, and betting, including casinos.”
Likewise, collaborations using foreign technology in any form for the purpose of gaming or betting are not allowed at any given point of time.
IV. Prevention of Money Laundering Act, 2002
The Prevention of Money Laundering Act, 2002 (hereinafter referred to as “PMLA”) interdicts the activities related to money laundering. Those entities which are engaged in the business of games played for cash or kind are classified as “reporting entities” and are also required to comply with the provisions of the PMLA.
Additionally, it is also indispensable for such entities to maintain requisite documents and transaction history manifesting the identity details of their clients.
V. Information Technology Act, 2000
The Information Technology Act, 2000 (hereinafter referred to as “IT Act”) is a key legislation that regulates the content on online platforms.
The Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Rules, 2021 (hereinafter referred to as “2021 Rules”) notified under IT Act prescribes that the intermediaries facilitating online platforms and allied services are obligated to adhere to specified standards of diligence over and above the bar on hosting certain type of content on their platform and mandate to notify their users about such forbidden content.
The 2021 Rules by virtue of recently amended Rule 3(1)(b) further necessitate an intermediary to employ plausible efforts to prevent its users from storing, hosting, modifying, displaying, updating, sharing, transmitting, uploading, or publishing any information that may underpin activities related to gambling or money laundering or contravenes any prevailing law as a consequence.
VI. Tax Laws
According to the Income Tax Act, 1961, any gains from winning a lottery or a card game or a crossword puzzle or any other kind of game in any form that exceeds the minimum threshold limit of Rs. 10,000 “is subject to a withholding tax of 30% (exclusive of applicable surcharge and cess)“.
In the scenarios where the earnings from such wins are either wholly in kind or partly in cash and partly in kind and the cash component is not sufficient enough to trigger the statutory requirement of withholding tax; the payer shall assure that the tax liability at the stated rate be discharged before the release of the whole amount to the payee.
Under the 2017 Goods and Services Tax (GST) legislation, if a gaming activity does not qualify as betting or gambling i.e., purely in nature of a game of skills then GST might not be levied however tax at the rate of 18% would be leviable on the platform fee, also known as Gross Gaming Revenue (GGR), for the supply of services herein in form of facilitating the gaming platform to participate, compete and win.
This blog is an introduction to the Gaming Laws and the Legislative Frameworks thereunder. The Part II of the series shall discuss the judicial precedents and the need to regulate the Online Gaming Sector.
– Team AMLEGALS assisted by Mr. Saurin Thakkar (Intern)
For any queries or feedback, please feel free to get in touch with chaitali.sadayat@amlegals.com or aditi.tiwari@amlegals.com.
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