Bad regulations could be spoilers for online gaming
By Rameesh Kailasam
The year 2021 has catapulted Indian start-ups in a big way, producing unicorns, in addition to triggering innovations in all sectors. Wealth creation is starting to show a positive trajectory, and with massive investments coming up and IPOs underway, India looks set to take a giant leap forward. However, it is equally essential that adequate attention be given from a regulatory perspective favorable to start-ups beyond what is granted today, as they are spread across sectors ranging from sales to retail, travel, mobility, finance to delivery, education, healthcare, social media, gaming and crypto.
Online gambling is a booming space. Prime Minister Narendra Modi said last year that India should harness the enormous potential of the digital gaming arena by developing games inspired by the country’s culture and folktales, and the focus should be on on using technology and innovation that meet global standards.
Online gaming companies have become unicorns, attracting gigantic investments, and have even started to be listed on Indian stock exchanges. Their formats and models of play, which involve skill and money, have been considered legitimate by several high courts and by the Supreme Court; Yet state regulations have yet to catch up with these interpretations to ensure that they don’t end up trampling court decisions as well as legitimate skill-based online gaming platforms in their sincere desire to take on gaming. and online betting.
The online gambling space in India is of various types, including e-sports, online fantasy sports, casual games, and online skill-based sports (like carrom, chess, billiards, ludo, scrabble, sudoku, quizzes, etc. of some types of card games). Many of these are primarily skill-based, while some can become skill-based by adding the necessary changes to the formats.
Despite multiple court decisions, some state governments have unfortunately ended up banning them while tackling online gambling and betting. Karnataka, with its reputation as a start-up and industry-friendliness, recently joined this movement, but the industry hopes the state government will issue the necessary clarifications and rules that will give them the relief they claim. need so much.
Another area where this industry needs clarity is the GST. The GST Council, in 2019, decided to create a Group of Ministers (GoM) to decide on the GST on casinos, racetracks and online games, again talking about it all, unfortunately, in the same breath . In 2021, the GoM was formed to make recommendations to decide on tax rates and the applicability of the GST.
The world of online gambling involves money, and the Contest Entry Amount (CEA) has two components, viz. gross gaming income (GGR) or platform fees and jackpot. While the GGR or platform fee is the gross amount of fees that the technology platform earns for providing the service as an online technology platform, the jackpot is the amount that can be held in some form. or a clearly delimited account which may include, but is not limited to, a separate escrow / bank account, or the money is held in separate electronic records by third party service providers and payment gateways (PGs) , wallets, etc. This amount is distributed to users based on their winnings or ranking on the end of each game, which is decided by the game format.
GGR / platform fees can range from 1% to 20%, depending on game formats and platforms. Currently, GST is paid at the rate of 18% on GGR or platform fees as a fee charged for the service. The owner of the technology platform has no right, title or interest in the amount of the jackpot. In some cases, this amount is collected and held by an independent third party / custodian for and on behalf of the players. The mandate of this third party / independent custodian is to distribute the prize pool in full to the winners in accordance with the predetermined rules of the game. In some cases, the third party may not be a custodian but simply a service provider, facilitating transactions and charging a commission for them, much like a bank, PG, wallet, etc. . Therefore, the prize pool does not form part of the value of the services provided by the platform, and therefore no GST is applicable as the platform has no claim on the money.
In addition, rule 31A of the CGST 2017 rules deals with the evaluation of the offer of an actionable claim in the cases of lottery, betting, games of chance and horse racing, so to be relieved of the rigors of rule 31A which applies only to activities involving “a chance to win by betting, gambling or horse racing.” Since rule 31A uses the word “luck”, it is clear that the rule is intended to apply only to activities and contests based on chance and does not cover online games based on skill. It is important that the GoM and the GST Council appropriately clarify that Rule 31A is not intended to cover games of skill and therefore does not apply to any form of online gambling where there is a preponderance of skill on chance. In addition, the amount of the jackpot being a claim that may be the subject of an action, any activity or transaction relating to such a claim that may be the subject of an action cannot be considered as a supply of goods or as a supply of services and, therefore, it is clearly exempt from the levy of the GST. To ensure this sunrise sector does not face an impending sunset, enabling regulations and regulatory clarity are important.