2021 in online gaming: A roller coaster year amid regulatory scrutiny

The year 2020 has been remarkable for the Indian online gaming industry. Cheap access to smartphones, high-speed 4G internet, and pandemic-induced boredom made online gaming a go-to source of entertainment. This momentum continued in 2021 both in terms of subscriber numbers and investments.

As per the BCG-Sequoia report released last month, mobile gaming is expected to triple to a $5Bn+ market opportunity by 2025. Gaming is currently a $1.8Bn sunrise sector in India. Between 2017-20, the Indian gaming market grew at 38% CAGR compared to 10% and 8% in USA and China respectively. The report estimates that 46% of the Indian population has access to the internet and 22% of the population plays at least one mobile game.

Online real money gaming including card-based games and fantasy sports segments has seen an increased penetration in recent times. Billionaire investor Rakesh Jhunjunwala-backed Nazara Technologies Ltd became the first Indian gaming company to list on public markets, with its initial public offering (IPO) in March this year. Over the past year, Nazara has been on an acquisition spree having bought a 100 percent stake in Hyderabad-based skill gaming company OpenPlay for 186.5 crores in August. Their other real money acquisitions include the social quizzing app Qunami and Halaplay.

Last month, fantasy sports leader Dream11 raised $840 million in funding at an $8 billion valuation. Dream11 is now looking to enter real money gaming by offering rummy games. Esports and skill gaming start-up Mobile Premier League (MPL) in September became India’s second gaming unicorn, raising funds at a whopping $2.3 billion valuation in Series E financing.

New Laws and Court Cases

The meteoric of online real money games and aggressive advertising by the operators caught the eyes of the legislators. Southern states Andhra, Telangana, Kerala, Karnataka, and Tamil Nadu have banned real money games. While Telangana imposed the ban in 2017, Andhra in 2020, the remaining three southern states banned real money games in 2021.

The bans imposed by Tamil Nadu and Kerala (only rummy) were challenged in the respective state High Courts which quashed them as being unconstitutional. The Tamil Nadu government has preferred to file an appeal against the decision of the Madras High Court striking down the amendments that had banned all kinds of online games played for a bet, wager, or other stakes. The matter is likely to be listed for hearing in the Supreme Court after Christmas vacations.

The hearing in the challenge to Karnataka online gaming ban law was concluded last week and the judgement is currently reserved. The constitutional challenge to legislation passed by Andhra Pradesh, Telangana are still pending in the respective High Courts. A decision by the Supreme Court in the Tamil Nadu case may settle the long-standing questions on the scope of the state legislature to enact such gaming ban laws and the constitutional freedoms enjoyed by the gaming operators.

In September, the Supreme Court has upheld online fantasy gaming site Dream11’s fantasy sports format as a ‘game of skill’ by dismissing a Special Leave Petition (SLP) that alleged that the Online Fantasy Sports (OFS) format offered by Dream11 amounted to gambling, wagering, and betting and is not a ‘Game of Skill’

Gaming Addiction and Measures

The issue of online games and their impact on the youth has been raised multiple times in Lok Sabha and Rajya Sabha. 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 said that uniform taxation and regulation of online games are the need of the hour. “I would urge the Government of India (for) uniform tax for online gaming and I urge the government to come up with a comprehensive framework for the regulation of online gaming,” Modi said while speaking in the Upper House.

Twenty-one other MPs across parties and states associated themselves with the matter, with Vice-President M. Venkaiah Naidu who was presiding over the proceedings said the games are “kill games, not skill-games“. The Rajya Sabha Chairman asked the Union Information Technology Minister Ashwini Vaishnaw to look at the issue.

In an RTI response this June, the Prime Minister’s Office (PMO) has indicated that the ‘Draft Guiding Principles for the Uniform National-level Regulation of Online Fantasy Sports Platforms in India’ released by the NITI Aayog in December 2020 as well as the need for a central regulatory framework for online gaming in India may be deliberated upon by the Council of Ministers.

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The Union Ministry of Education this month has warned parents and teachers against rising online gaming addiction among children. Earlier, the Rajasthan government issued an advisory for parents and teachers suggesting measures to safeguard children from addiction to online gaming. The advisory issued by the Rajasthan Council of School Education details technical points which are helpful in monitoring the activities and involvement of the children in gaming. Whereas, Kerala announced digital de-addiction centers to curb online gaming addiction among kids.

GST Clarity for Gaming Sector:

In a major relief for the online gaming industry, casinos, and racecourses operating in the country, the GST Secretariat has asked the GST Council to provide clarity on the GST rate and the applicability of the levy on these services. This followed a recent directive dated September 29 from the Punjab Haryana High Court (PHHC) on the matter. The PHHC had directed the GST department to take no coercive action on an online gaming company against the demand notices until the Group of Ministers (GoM) constituted to examine the issues provides clarity.

The GST Council had constituted a 7 member GoM in May headed by the then Gujarat Deputy Chief Minister Nitin Patel to examine whether any change in legal provisions is required for valuation of services provided by online gaming, racecourses, and casinos. The GST Council had set four-point terms of reference for the GoM which includes examining the taxability of certain transactions in casinos. The GoM was later increased in June to 8 members with the addition of the Telangana finance minister. The GoM was supposed to submit its report within six months

In June, a Single Judge scrapped Rule 31A(3) of CGST Rules that imposed liability on the entire bet amount received by horse race clubs. The petitioners in the case were the Bangalore Turf Club and the Mysore Race Club. “The petitioners are liable for payment of GST on the commission that they receive for the service that they render through the totalisator and not on the total amount collected in the totalisator,” the order by Justice M. Nagaprassana read.

The Union of India has subsequently filed a Writ Appeal before a Division Bench of the Karnataka High Court against the Single Judge bench’s order striking down Rule 31A(3) of the Central Goods and Services Tax Rules, 2017 and the Karnataka Goods and Services Tax Rules. The Single Judge bench order was subsequently stayed by the division bench.

On Course to Clarity – 2022 with Expectations

We can expect some clarity on the games of skill and games of chance debate in 2022. The decision challenging the Karnataka online gaming ban law will be rendered in the first half of 2022. The appeal before the Supreme Court against the Tamil Nadu case will be heard soon. The GST issues are also expected to be resolved in 2022.

Optimistic.