Aruna Sharma, Practitioner Development Economist and Former Sec at GoI provides her insight into the Indian igaming market as a key period of decisions awaits for the region’s regulators.
Igaming is currently regulated through a dual mechanism of central and state regulations in India. Under the Indian Gambling Act of 1857, the state issued licences to legal and authorised entities involved in gambling activities, thereby establishing a regulatory regime for ‘games of chance’ – both online and offline.
Now, skill-based games, a developing pillar within igaming, that includes esports and fantasy sports, are set to be regulated under the rules of the IT (Amendment) Act of 2000, following an April 2023 notification from the central government.
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 whether 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 their ideas to the MeiTY (Ministry of Information Technology) to formulate distinguishing parameters between games of skill and chance.
Focusing on the taxation front, the igaming industry is already liable to 30 per cent TDS on winnings and earnings of gamers and developers respectively under the direct tax regime, upon which the increased and onerous tax of 28 per cent GST has shaken the industry.
The October 2023 announcement by the central government not only imposed 28 per cent 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 in a way that can bridge the digital divide. The opportunity is immense. With the penetration of smartphones in the hinterland and 60 per cent of 100 million mobile phones being smartphones, numerous sprouting igaming platforms, both paid and unpaid, have garnered increased interest and users amongst the youth of the country.
Thus, the opportunity that the igaming industry brings for a youth-dominant country like India is significant in terms of attracting investments and encouraging technological innovations by developers and startups. An EY report titled ‘New Frontiers: Navigating the Evolving Landscape for Online Gaming in India’ (December 2023) projected an abysmally low CAGR of 15 per cent till FY2028 compared to 28 per cent 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 R8,350m in FY 2023, down from a peak of R127,400m in FY22, attributed to global macroeconomic challenges, as per a report from EY.
As such scenarios unfurl, the 28 per cent GST on deposits is the world’s most onerous regime, which could wipe out $2.5bn 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 the six months beginning October 1, 2023. It is important for the GST Council to make sure 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 various business operations to grey 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 foundation 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 games and the rising interest and inclination towards esports is another area that ensures attractive investment opportunities for tech firms, 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 curb the spread of misinformation or nefarious practices. Moreover, abiding by the taxation laws and using digital payments and KYC documents provides better analytics to curb illegal activities and fraudulent practices.
