“Online Games” - Current Regulatory Climate

Online Games (real money games) are taxed at 28%, right? Oh, wait, they (video games) are also taxed at 18%. If you think “Online Games” as a category existing in two GST brackets is a recipe for disaster, then I have news for you. It already is a disaster as blanket regulations have become a norm. 

Before deconstructing the new present regulations, there are a few important moments from Indian history that need to be understood first. Post-independence, the Indian constitution empowered State governments with the exclusive authority to regulate betting and gambling within their jurisdictions. This regulatory framework set the stage for future legal battles and legislation. 

A couple of years went by and a businessman by the name of R.M.D. Chamarbaugwala (RMDC) started hosting competitions where people had to pay an entry fee to compete in crossword and puzzle games to win cash prizes. This competition format caught fire and became hugely successful, but led to taxation and legal troubles when the then-Bombay state government categorized these activities as gambling, possibly for taxation purposes.

RMDC contested this classification in several courts, arguing that the outcome of these competitions was predominantly based on skill rather than chance and hence could not be classified as gambling. The resulting Supreme Court rulings created the now famous doctrines of “Game of Skill” and “Game of Chance” where games of skill were not considered gambling and thus were exempt from gambling-related regulations and taxes.

“Online Games” - What’s the Problem with this Term Anyway?

“Online Games” - How This Problematic Term Came to Be

Before the implementation of GST, state governments used gambling and gaming as a significant revenue source through taxes. As discussed in our previous article, the 21st-century digital revolution transformed gambling and gaming into online activities. The Information Technology (IT) Act and Rules of India, which regulate internet activities, lacked provisions for digital gambling and gaming, leading to two decades of unregulated growth in this sector, necessitating changes.

To fully grasp the complexities of this issue, it is essential to refer to our previous article, "Online Games: What’s the Problem with this Term Anyway." This piece highlights the complications arising from lumping video games and real money games into a single “Online Games” category. Understanding the context of that article is crucial before delving into this current analysis. 

In this third installment of our “Online Games” series, we will dissect the new regulations and legislative measures to understand the evolving regulatory landscape and the reasons behind these changes.

Regulation #1 - Amendments to the IT Rules, 2021 in Relation to Online Games

While betting and gambling are State subjects, the internet is squarely the domain of the central government and by extension, online betting/gambling as well as real money games come under the supervision of the central government too. In January 2023, the Ministry of Electronics and Information Technology (MeitY) released the draft amendments to the IT Rules, aimed at regulating “Online Games.” This amendment officially defined “Online Games” and sought to create a safe environment for Indians engaging with real money games, addressing issues inherent in the digital format.

In physical casinos, players can observe the game directly, reducing the risk of manipulation. But in an online environment where software is managing the flow of the game, there’s a strong possibility of malicious exploits using bots or Random Number Generator (RNG) manipulation. For example, the way cards are dealt to players can be controlled in specific ways to ensure “the house always wins,” and players may unknowingly compete against bots. Additionally, software mechanisms can also be scripted to create an addiction loop, initially allowing users to win to hook them before altering the algorithm to cause losses.

Playing a Real Money Game (despite it being a game of skill) comes with the inherent risk of financial loss and habit formation. This is why RMG companies are required to disclose these dangers in all their marketing material. Offshore betting & gambling platforms pose an even greater threat as they fall outside Indian jurisdiction and regulations and pose money laundering and national fiscal security concerns

There is a documented history of players using real money to play getting into severe financial distress, leading to family issues and, tragically, even suicides.  To address these concerns, the government introduced several regulatory measures for online games:  

• RNG and No-Bot Certification: Games need to acquire a Random Number Generator Certificate and No-Bot Certificate from authorized and independent third-party agencies to ensure there is no malicious software at play.
  

• eKYC measures: Games must ensure that they aren’t accessible to users under the age of 18.
  

• Grievance Redressal and Compliance Officers: Companies must hire a Grievance Redressal Officer to promptly close all user grievances and a Compliance Officer to ensure the business complies with all the regulations of the Act.
  

• Self Regulatory Body (SRB): An industry-led SRB that will review, certify and permit only those games of skill that have implemented the rules mentioned above. 

While this is great for promoting safe and responsible real-money gaming, what does any of this have to do with video games? Nothing, but video games got caught in the crossfire when these amendments were first introduced for public consultation (remember when I first mentioned how the universal term ‘Online Games’ could be problematic?).

In its original form, these amendments ended up applying all of the above-mentioned rules on video games too, what many call ‘blanket regulation’. Evidently, this is an existential threat to India's nascent video games industry. 

To illustrate this, imagine a hypothetical scenario where a small indie game development studio from India launches a hit video game called “Starbound Adventures”, a simple, point-and-click game with no elements of real-money gaming or gambling. The studio, operating with a tight budget and a small team, relies heavily on the global reach and accessibility of its game to sustain their business.

However, due to the new regulations initially introduced for online real-money games, “Starbound Adventures” falls under the same stringent regulatory requirements intended for gambling apps. To comply, the studio must now secure a Random Number Generator Certificate and a No-Bot Certificate, despite their game not utilizing these systems. Furthermore, they're required to implement eKYC measures, blocking any users under the age of 18, which cuts off a significant portion of their audience. They also need to hire a Grievance Redressal Officer and a Compliance Officer—roles that are not only unnecessary for their type of game but also financially burdensome given their limited resources.

Caught in the blanket regulation, the studio would face an existential threat. The costs and operational demands imposed by these misplaced regulations could drive them out of business, despite having a popular and ethically sound product. 

This was a scenario that was entirely possible if these prescribed compliance and regulatory measures were implemented. So, following this initial draft, about 45 video game companies rallied against the blanket regulations and successfully got video games somewhat carved out from the ambit of these rules. 

So, technically video games are not regulated in any form whatsoever in India at the moment and all regulatory measures are squarely aimed only at real money games (some lawyers seem to have a different take on this, but when have lawyers ever agreed with one another, or anyone, for that matter).

Regulation #2 - GST Amendments

In mid-2023, the Central Government moved “Online Games” to the 28% GST bracket. This time around, the Government was clear not to impose blanket regulations so they moved only real money games to the 28% GST bracket and video games remained in the 18% GST bracket. However, the government’s oversight in categorizing both under “online games” resulted in the term existing in two GST brackets which in turn caused a domino effect of ramifications as discussed in the previous article. 

The rationale for the 28% GST bracket classification was on moral grounds. Typically, the 28% bracket is assigned only to products and services that are either an “indulgence in luxury” or categorized as “sin” as in they pose a threat to public order or individual health. It’s why some refer to the 28% tax category as the “sin tax”.

Regulation #3 - Tamil Nadu Prohibition of Online Gambling and Regulation of Online Games Act, 2022

According to our data, internet and smartphone penetration is higher in South India, and users with a higher propensity to pay for games are also from here. Naturally, there were many victims of betting/gambling and real money games from here, so Tamil Nadu (TN) decided to ban them altogether. The Madras High Court opposed the ban as Rummy and Poker could be considered as games of skill and could not be treated as games of chance if relying on the reasoning of the Supreme Court in many cases (remember businessman RMDC and his case?). The TN State Government then just instead passed an act to regulate them (whether or not this was and is constitutional is another discussion altogether). There are two problems with this Act: 

1. It views video games and real money games as a singular subject and applies blanket regulations; and
   

2. Regulating digital business at a State level is nigh impossible as the internet is borderless and compliance measures can be easily bypassed by VPNs.

TN-based video game companies have repeatedly emphasized that legislation targeting betting and gambling platforms, as well as real money games, should not be used to regulate video games. These companies argue that such blanket measures are inappropriate, especially since neither other State Governments nor the Central Government of India currently seek to regulate video games. 

The TN government had established a special statutory body known as the ‘Tamil Nadu Online Gaming Authority’ tasked with executing the Act. This body suggested that video game companies in the State pursue amendments that would create a set of exemptions for them. The future course of action remains uncertain as stakeholders are planning more representations. 

It can be said that the matter of ‘Real Money Games’ is taken care of to a certain extent. When one notices the marketing of such games, the messaging has clearly changed from “play our game and earn big” to “our games are very safe and secure”. 

But video games? Well, it seems to remain unregulated for the foreseeable future but despite this, the video games industry can benefit a lot from better policy frameworks that can legitimize and boost it. But what sort of policy frameworks? That's the story for the next and the last article in this series. Stay tuned for that one. 

Disclaimer:

The information provided in this article is intended for educational purposes only. The views expressed are those of the author and do not constitute legal advice or opinions. Readers are encouraged to consult with legal professionals for specific advice regarding their individual circumstances.

This article does not endorse or promote gambling in any form. Any references to real money games are for comparative and illustrative purposes only, only highlighting the need for distinct regulatory approaches.

The author and publisher assume no responsibility or liability for any errors or omissions in the content of this article. The information contained herein is provided on an "as is" basis with no guarantees of completeness, accuracy, usefulness, or timeliness.

This article is protected by domestic and international copyright law. Unauthorized use and/or duplication of this material without express and written permission from the author and/or owner is strictly prohibited. 

This article may contain references to third-party content, which is the property of its respective owners. The inclusion of such references does not imply endorsement or affiliation.

from AFK Gaming https://ift.tt/oyf5pLJ