India’s $4.5 billion online fantasy sports industry is finding itself on shaky ground once again. Taxation woes are threatening the industry’s strong run rate, highlighting the need for a national policy that can offer it stability.
On May 18, an empowered group of ministers (GoM) headed by Meghalaya Chief Minister Conrad Sangma unanimously proposed a flat 28 percent Goods and Services Tax (GST) on online gaming, casinos and racing.
This effectively means the GST rate on online fantasy sports — a crucial subset of the online gaming industry — will not just rise substantially from the current 18 percent but will also see no distinction from online games that involve betting and gambling, or games of chance.
For an industry that has been battling for a clear demarcation between games of skill and games of chance, this is far from good news.
Young India drives fantasy sports
The boom in online fantasy sports in India over the recent years is a testament to how India’s young demographic profile is fuelling the demand for digital services including sports and entertainment.
In just six years, 130 million Indians — 10 percent of the country’s population, have taken to the digital gaming format where matches take place in real time. Users create virtual teams modelled on real players participating in a live match, and compete on the basis of the real-world statistical performances of these players.
Today, India has the largest fantasy sports market in the world. At an estimated Rs 34,600 crore, the online fantasy sports industry is already half the size of India’s TV broadcasting sector, which attained formal status in the early 1980s.
On the back of a 38 percent compound annual growth rate (CAGR), it is estimated to grow to Rs 1.65 lakh crore by 2025, according to a report by consultant Deloitte and the Federation of Indian Fantasy Sports (FIFS).
While online fantasy sports’ nascence may afford it the label of a “sunrise sector,” its contribution to the economy is of immense significance. Generating direct revenue of Rs 5,200 crore and indirect revenue of Rs 5,500 crore in FY21, the sector contributed nearly Rs 930 crore in GST and more than Rs 250 crore in corporate tax.
The industry has attracted over Rs 10,000 crore in foreign direct investment (FDI) so far and is estimated to rake in another Rs 15,000 crore in the next three years.
On the job front, around 9,000 people are hired directly by Fantasy Sports Platforms (FSPs) or by ancillary industries providing tech and financial support to them.
Online fantasy sport has a wider impact on the sporting ecosystem as a whole and would largely determine India’s position on the world stage. A report by Kantar and FIFS states that 59 percent of fantasy sports fans have started following new sports such as kabaddi, football, and hockey; while 48 percent now watch almost every sport, agnostic of team or country.
This increase in viewership has opened up more possibilities to monetise sports and attract fresh investment. Besides, it is endorsing the development of sports infrastructure beyond cricket, paving the way for a healthy, multi-sporting culture in India.
As is the case with all emerging technologies, however, the sector is embattled by misinterpretation and classification of fantasy sports as “gambling or betting”. This has, in turn, led to debates on morality and concerns over addiction to gambling and allied social evils.
Considering online fantasy sport involves real-money stakes, legitimate concerns must be addressed. Any overreach in policy-making due to a moral bias will disallow the sector from playing to market forces, distort the pricing ecosystem, discourage much-needed investments and derailing the sector’s strong growth trajectory, a situation states can ill-afford.
A sensitive but intelligent approach to policy-making, one that carefully balances the country’s moral, social and economic interests, is urgently required.
This has proven to be far from easy. The judiciary has long made its stance on online fantasy games clear and the central government is openly batting for wider adoption of e-gaming, but betting and gaming are state subjects. As such, there is a wide chasm between the adoption and regulation of fantasy sports across states.
While states such as Assam, Odisha, Andhra Pradesh and Telangana have imposed blanket bans on online games – be it ‘games of skill’ (chess, carom, rummy and fantasy sports) or ‘games of chance’ (roulette) – others such as Goa, Sikkim, Meghalaya and Nagaland have progressive regulations on online gaming.
Various high courts (HCs) have declared that online fantasy sports fall in the ambit of “games of skill”, where a winning outcome depends predominantly on participants’ skill and knowledge and not on the element of chance.
The Rajasthan and Bombay HCs have added that a “game of skill” is a legitimate business activity protected under Article 19(1)(g) of the Constitution. This view was endorsed by the Supreme Court (SC) in 2021 and received another shot in the arm when the Karnataka HC struck down key provisions of the state government’s ban on online gaming in February.
The Centre and the judiciary’s endorsement, however, are not enough if the fantasy sports industry finds itself out of sync with state governments.
Centralized policy framework needed
To this end, NITI Aayog, the apex public policy think tank, in a 2020 paper titled “Draft Guiding Principles of Uniform National Level Regulation of Fantasy Sports in India,” has recommended a “light-touch regulatory framework” along with the recognition of a single, national-level self-regulatory organisation for fantasy sports.
The primary objective of such a policy would be to clearly demarcate between ‘games of skill’ and ‘games of chance’ by judging whether skill or the element of chance is the predominant factor in achieving a favourable outcome.
With this in place, a central policy would ensure a model framework bringing uniformity in services offered by fantasy sports platforms, compliance with regulations and dispute redressal across the country and providing much-needed assurance to all industry stakeholders.
The continued absence of such a top-down approach would give further impetus to fly-by-night operators who would drive activity underground, delegitimise the ecosystem and could result in market failure of an economic model that has the potential to become a shining illustration of the central government’s ‘Digital India’ programme.
National-level policy apart, the introduction of a parent ministry, as pointed out in think tank The Dialogue’s research white paper on “Regulation of Fantasy Sports Platform’ in India, is also crucial.
“Discussions with stakeholders pointed out the importance of central support via a Ministry, such as the Ministry of Electronics and Information Technology (MeitY) and/or the Sports Ministry, which will not only provide a welcome push towards a central legislation but will also help increase the legitimacy of the sport. Efforts by the government will pave the way for central guidelines to be issued and bring about regulatory clarity in the short-term,” says the paper.
Unravelling the GST quagmire
A favourable national policy is also crucial to provide much-needed clarity on the GST conundrum plaguing the sector, laying out a clear GST levy mechanism which defines the rate and the value on which GST is to be levied.
As matters stand today, the GST implications on the sector have the potential to derail the sector’s strong growth trajectory. If the GST council concedes taxing fantasy sports at the highest slab of 28 percent, it will make gaming costlier for users. Overturning the industry and the judiciary’s efforts to draw a clear distinction between games of skill and games of chance could lead to significant disruption in the sector and its offerings.
Presently, most online gaming platforms pay 18 percent on the rake fee/platform fee, a nominal charge applied by the platform to facilitate play between users. This is 28 percent in the case of games that involve betting or gambling. In the case of horse racing, a GST of 28 percent is levied on the total bet value.
The industry has also taken concerted efforts to seek an exemption on the application of GST on the prize pool amount. In their representations with the finance ministry, top industry players have argued that gaming platforms have no ownership on the prize pool amount, which is held by a third-party, and therefore this amount is an actionable claim, and one that does not fall under the purview of Rule 31(A) of the central GST rules which are strictly enforceable on actionable claims that arise from lottery, betting, gambling and horse racing. Such an actionable claim arising from online skill-based gaming is not subject to the levy of GST.
Education and awareness: the way to go
All said, even as dialogues continue with regard to implementing a national-level policy, online fantasy sports operators must constantly engage with state governments and educate them on the economic upshifts that can be made by embracing emerging technologies and the need to keep moral governance to the bare minimum.
They must remain committed to the self-regulation charter that they have agreed upon that include checks and balances to ensure addictive behaviour is picked up by the system, enhancing safeguards to protect users against financial risks and ensuring data privacy, among others.The impressive growth of fantasy sports in India is testament to the power of emerging technologies to create real opportunities and seismic shifts on ground. It’s now incumbent upon the country’s policymakers to give these technologies their best shot at winning.