Carrot or Sticks - How the Indian Government Plans to Regulate India’s iGaming Industry

iGaming, an umbrella term used for both skill and chance-based online games is currently regulated through a dual mechanism of central and state regulations in India. Under the Indian Gambling Act, of 1857 the states issued licenses to legal and authorised entities involved in gambling activities, thereby establishing a regulatory regime for ‘games of chance’ - online and offline. Now, to regulate skill-based games, a developing pillar within iGaming, that includes e-sports and fantasy sports, since the April 2023 notification of the central government is being regulated under the rules of the IT (Amendment) Act, of 2000.

Under these new rules, the central government aimed to acknowledge and list permissible online games along with the establishment of SROs, and industry-led regulatory or self-regulatory bodies. However, the stumbling block since the introduction of these rules is defining what online games are to be considered within the bracket of ‘permissible games’ that distinguish games of skill from that of chance.

As per the notified IT rules, the gaming industry until now has formed three major SROs and come up with a code of conduct and also submitted to the MeiTY (Ministry of Information Technology) their ideas to formulate distinguishing parameters between games of skill and chance.

Focusing on the taxation front, the iGaming industry already being liable to 30% TDS on winning and earning of gamers and developers respectively under the direct tax regime, upon which the increased and onerous tax of 28% GST has shaken the industry.

The October 2023 announcement by the central government not only imposed 28% GST on the full value of bets placed but also made it applicable retroactively for gaming companies to pay. Currently, the matter is sub-judice after various industry stakeholders filed petitions asking for relief and reconsideration by the judiciary challenging the arbitrariness of retrospective taxation. Now, they precariously sit on the edge, biting their nails awaiting the decision of the Supreme Court of India.

iGaming is not only developing as a tool for entertainment but also for learning and innovations in gaming that are suitable to the Indian context, and social folklore, thereby, facilitating learning through fun and one that can bridge the digital divide. The opportunity is immense. The penetration of smartphones in the hinterland and 60% of 100 million mobile phones being smartphones, with numerous iGaming platforms sprouting both paid and unpaid have garnered increased interest and users amongst the youth of the country.

Thus, the opportunity that iGaming industry brings for a youth-domineering country like India is significant in terms of attracting investments and encouraging technological innovations by developers and startups. According to an EY report titled ‘New Frontiers: Navigating the Evolving Landscape for Online Gaming in India’ (December 2023) that projected an abysmally low  CAGR of 15% till FY28 compared to 28% CAGR during the FY2020-23.

Although the iGaming segments have attracted consistent investments from both domestic and foreign investors between FY2020-24. Additionally, funding within the online gaming sector has dropped to Rs 835 crore in FY 2023, down from a peak of Rs 12,740 crore in FY22, attributed to global macroeconomic challenges, as per a report from EY. As such scenarios unfurl, the 28% GST on deposits is the world’s most onerous regime, which could wipe out $2.5 billion of existing investments and more than 50,000 high-skilled jobs.

Thus, when deciding on GST for online gaming, the GST Council mentioned it would review the decision at the end of six months beginning 01 October 2023. It is important that when the GST Council convenes to discuss this issue, the stark realities affecting the sector post-revision of the GST rates are understood, examined and appropriate rates devised.

International iGaming enterprises have consistently expressed their readiness to contribute taxes, operate within a regulated and transparent framework, generate employment opportunities, and invest in India and its populace. Consequently, they have persistently urged the government to enact suitable regulatory and taxation measures. However, the government's consistent choice to prohibit rather than regulate has inadvertently driven the various iGaming business operations to move to gray markets.

Additionally, owing to the lack of market regulation and detrimental policies, international iGaming firms are hesitant to engage with India, sending discouraging signals to numerous potential foreign investors. Moreover, these companies encounter unjust persecution and groundless legal actions from Indian authorities.
Clarity and consistency in regulations are necessary for business operations. Presently, numerous unscrupulous entities exploit Indians due to the absence of adequate regulatory measures. Through the regulation of the iGaming sector, the government can facilitate various positive outcomes, including enhanced tax revenues, economic expansion by attracting greater foreign investment, job creation, and improved consumer protection.

For 2024, post the general elections in India, it is expected that the government and GST Council through deliberations will set the floor right. The clarity in policy, and its consistency is the ground as the increasing smartphone population and technically enthusiastic developers and startups ensure the right ingredients for innovation and exploration in the iGaming segment.  The development of iGames and the rising interest and inclination towards e-sports is another area that ensures attractive investment opportunities for techies, startups and developers to further work on introducing safer iGaming mechanisms within the country. The role played by digital and KYC mechanisms in place further aims to ensure the safety and security of users and the opportunity for businesses to leverage this opportunity to curb the spread of misinformation or nefarious practices. Moreover, abiding by the taxation laws, and using digital payments and KYC documents provide better analytics to curb illegal activities and fraudulent practices.