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How the regulatory flux is spooking the online gaming industry of India

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By Vidushpat Singhania, Managing Partner, Krida Legal

Online gaming as an entertainment, has grown in India due to availability of affordable smart phones and cheap internet. The numbers go on to represent this, with the total revenue generated clocking in at $3.1 billion in FY23 which marked a 19% increase from the preceding annual tally .

However, the industry which was set to boost the Indian economy has hit a lull. The regulatory challenges have proven to be the main reason for it. These stem from a lack of clarity on what games are allowed, to the implementation of prohibitive tax rates.

Since 2005, the online gaming industry was largely state regulated with games of chance being licensed by the state and games of skill being excluded from the ambit of gambling and regulation. While this system posed logistical and managerial issue, gaming companies could still offer online games of skill for stakes, almost pan India, with a few exceptions. Some states subsequently started imposing bans on games of skill for stakes, which led to various challenges in the High Courts, creating a policy flux.

In order to overcome this flux, the Ministry of Electronics and Information Technology (MeitY) in 2023, was appointed as the nodal ministry of ‘online gaming’. This was considered a welcome change, as it signified the establishment of a central system of governance for the online gaming industry . The gaming industry hoped that this would considerably reduce the state by state compliance burden when offering their services, a large part of which involved identifying the games and territories, in which their services needed to be restricted.

As a part of their mandate to regulate online gaming, the MeitY amended the Information Technology (Intermediary Guidelines and Digital Media Ethics code) Rules, 2021 (“IT Rules”). A salient feature of this amendment requires the online gaming industry to set-up ‘Self-Regulating Bodies’ (“SRB”), which would approve permissible online games, with no specific distinction between games of skill vs chance. This was seen as yet another welcome change, as these SRBs, would be entities who understood the practical and theoretical sphere of gaming. Over eight months having since elapsed from the notification of the amended IT Rules, but no SRBs that have been recognised yet, which is creating ambiguity and hampering the growth of the gaming industry.

Low and behold the next blow to the gaming industry came in the form of the new taxation regime for online gaming in India. It came through the GST Council’s decision to levy 28% on online gaming, casinos, and horse racing, with a two pronged approach. While from 1st October 2023, the incidence of tax would be on the first time deposit value (first prong), but from 2017 till October 2023, the GST department has sought to impose the rate of 28% tax on the full value of every bet (second prong), practically handicapping the industry . The hefty demand notices from the authorities with such retrospective application, have spooked the investors and has put the industry in wait and watch mode.

With various state governments initiating plans to promote game development and with the Animation, Visual Effects, Gaming and Comic (“AVGC”) sector, being touted as India’s trump card for revenue generation, these unresolved issues have led to investors in the gaming industry, being confused about the direction in which the government policies are going. At one hand, there are encouraging signs and subsidies on game development and the likes, while on the other side there are regulatory delays and prohibitive taxes.

The online gaming industry hopes that in the coming few months, the ambiguities are cleared and the online gaming community is given a chance to be a world leader. India has an enviable talent pool in this industry and with a bit of help, the online gaming industry could become another strength sector of the Indian exports.

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