Opinion: Need for a coherent 'game' of law and policy

One may make the mistake of classifying these challenges as separate and unconnected. Yet, the three challenges may be solved on the touchstone of a single core premise – that games of skill, unlike games of chance are legitimate business activities protected under the Indian Constitution.

This premise has been unequivocally and repeatedly reiterated by the Supreme Court and multiple high courts over the last seven decades. As per the Seventh Schedule of the Indian Constitution, betting and gambling fall under the legislative competence of the states. However, there is unequivocal constitutional jurisprudence that betting and gambling only relate to games of chance. Therefore, a game, the outcome of which is predominantly dependent on skill, is classified as a game of skill and stands differentiated from a game of chance. While some states have banned skill games, the respective High Courts have struck down such attempt by reiterating that such games fall outside the legislative competence of the states and are protected under the Constitution.

The necessary corollary is then that the Union Government has the power to regulate online games of skill. The amendment to the IT rules in 2023, creating a self-regulatory mechanism for the regulation of online gaming intermediaries is based on this corollary. Certain reports suggest that the Ministry of Electronics and IT (MeitY) may have delayed the implementation of these rules as there are concerns about the independence of the self-regulatory bodies (SRBs) - which brings us to the first challenge.

A perusal of the rules in the context of the skill-chance differentia can offer a solution to this challenge. MeitY may further amend the rules to include a third tier of Government oversight.

This body can also provide a comprehensive framework that may be implemented by the SRBs without leaving room for subjectivity in the hands of such SRBs. This framework must enforce a mechanism to differentiate between games of skill and games of chance based on the definition provided by the courts and can use objective statistical tests to bolster the differentiation.

Additionally, the framework may list strict measures for KYC, consumer rights, responsible gaming, financial safety, and platform integrity. Once a detailed framework is notified by MeitY, the SRBs may only implement the same under the supervision of the government nominee sitting on the board of directors of the SRBs.

The second challenge of the online skill gaming industry revolves around GST show cause notices with claim amounts of more than INR 1 lac core.

These notices argue that games of skill when played with money qualify as betting. This rationale stands foul of the GST law that stood before 1 October 2023, as actionable claims in relation to games of skill were exempted from the definition of ‘supply of goods/services’ under Schedule III, entry 6 of the GST Act.

Actionable claims of only betting, gambling and lottery may be taxed under the erstwhile law. It is also necessary to note that the amount claimed in the show cause notices is 5 to 10 times the lifetime revenues of the companies. Thus, these notices not only defeat the skill-chance differentia but cannot possibly be paid by the industry.

The new GST regime is attracting INR 12 hundred core a month in GST collection which is close to 1 per cent of the total national GST collection. In light of such a significant contribution, the risk posed by the show cause notices is being evaluated in the Supreme Court of India. The industry must depend on the skill versus chance precedents in the court to face this challenge in court.

The third challenge of the online gaming industry is also a challenge to national security and user safety. There is a significant menace of illegal offshore betting and gambling websites prevalent in India. Such offshore operators have no presence domestically and are offering gambling services in all states even where such activities are a criminal offence. They are using nefarious financial channels and dubious methods to reach unsuspecting users by luring them with the promise of no taxes.

The situation poses a threat to user safety and may also result in a risk to national security. Hence, there is an immediate need to devise a system that allows users, LEAs, financial service providers and other businesses to recognize illegal gambling websites.

The solution lies again in the skill-chance difference. If the government implements the regulatory regime under the IT rules, all legitimate games of skill will be verified by the SRBs and receive an identifiable visible mark as per the rules. This will help all stakeholders in distinguishing between safe skill games and illegal gambling offerings.

Answering the policy and regulatory challenges for a nascent sector such as online gaming is a complex task for policymakers. Especially, when different wings of government approach such issues with differing priorities. The long-standing legal jurisprudence around games of skill and chance may just prove to be the factor that informs a coherent policy response that allows innovation and growth of the industry within four corners of national interest and consumer safety.