“Government is an art, not a science, and an adventure, not a planned itinerary,” Donald Creighton, a Canadian historian, once said. Creighton could not have been more correct. Part of the art is the creation of regulations which would aid in the sustenance of industry and adventure is all about implementing those and seeing the industry navigate its way around. Yet in India, the online gaming industry currently remain unregulated with a lack of policy. “The current legal and regulatory framework doesn’t adequately distinguish between legitimate and illegitimate activities. Due to this lack of regulatory oversight along with the limited scope of the Public Gambling Act, 1867, online betting and gambling platforms frequently facilitate additional illegal activities, including money laundering. These rogue players siphon money out of our economy, leaving a trail of financial instability, thereby fuelling criminal activity. As these activities often operate outside the jurisdiction of national laws, they exploit regulatory loopholes, creating a complex web of challenges,” Colonel Nidhish Bhatnagar, chief mentor, School of IT, Artificial Intelligence and Cyber Security (SITAICS), and MD, Security and Scientific Technical Research Association (SASTRA), Rashtriya Raksha University stated in a recent report titled Curbing Betting and Gambling in India.
While, last year, the government took a few step towards regulating the industry, but it all seems moot now. For example, in April 2023, India introduced a new legal regime for operators of online games by introducing amendments to the Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Rules, 2021 (“Intermediary Rules”) (amendments are referred to as “Gaming Amendments”). At the time, the draft gaming rules proposed enabling co-regulatory compliance framework where fundamental compliance obligations, such as user validation and grievance redressal are prescribed under the Draft Gaming Rules themselves, while more granular and game specific operating frameworks, including validation for compliance with law, age gating, and protection against addiction, are left to be prescribed and administered by one or more registered self-regulatory bodies. However, in February 2024, the government said that it will act as a regulator for the online gaming sector rather an industry-led self-regulatory organisation (SRO). The Ministry of Electronics and Information Technology (MeitY) would prepare a framework for permitting and certifying online games which involve money, officials at the time had said.
The rise of unregulated!
While India registered online gaming companies continue to pay goods and services tax at a rate of 28% and follow the rules laid by the government, illegal betting and gambling websites operate outside the jurisdiction of the country where their users reside. This makes it difficult for local authorities to regulate them and enforce laws designed to protect consumers. Furthermore, these websites may not adhere to stringent security standards, increasing the risk of personal and financial data breaches, stated the report. Moreover, without proper regulatory oversight, illegal betting and gambling operators offer services under no obligations of platform fairness or integrity. Users may be defrauded, be offered games which do not meet standards of fairness and randomness or be wrongfully deprived of their winnings. “The rise of offshore betting platforms in India has several significant implications for the industry. Firstly, they divert income from locally licensed operators, causing economic drain and hindering the growth of local businesses. Concerns over fair practices, data security, and consumer protection arise, potentially leading to addiction and financial losses, damaging the industry’s reputation. The unregulated nature of these platforms allows for misuse of data, posing further risks to users. Additionally, offshore platforms increase the risk of money laundering through illicit money transfers, which could potentially harm both local businesses and the broader economy,” Shalabh Saxena, partner, Grant Thornton Bharat, said.
The offshore sports betting market receives an estimated Rs. 8,20,000 crore ($100 billion) per annum in deposits from India and has been clocking growth of 20% per annum in the last three years post the pandemic, as per a report by Think Change Forum (TCF), an independent think tank, titled ‘State of the Betting and Gambling Industry in India’. According to the report at a baseline estimated deposits of Rs 8,20,000 crore ($100 billion), being received from India, at the current GST rate of 28%, India is losing a GST collection of Rs. 2,29,600 crore, per annum. In addition is TDS on player earnings which are estimated to be 90% of post GST deposits. This works out to another Rs ,59,408 crores in tax, making the total tax loss stand at Rs 3,89,008 crore. This does not include tax loss from corporate taxes and taxes on foreign entities. “Currently, the lack of a regulatory body means both types of operators are functioning without formal licenses, with onshore registrations only for tax purposes. Offshore operators, however, face no regulatory obligations to register and pay taxes, creating an uneven playing field. India urgently needs to establish clear parameters distinguishing games of skill from games of chance. Equally important is the requirement for all online gaming operators, both onshore and offshore, to register and obtain a license,” Aruna Sharma, policy advisor, practitioner development economist, and former secretary, Government of India, explained.
Other than banning 138 offshore apps, the government of India had made it clear that if offshore players want to operate within the country, they need to register themselves, yet any formal steps haven’t been taken? “A tragic example is the recent case of a student in Hyderabad who took his own life due to financial losses incurred allegedly from using an illegal offshore gambling app. This incident highlights the urgent need for stricter enforcement to protect vulnerable individuals from the dangers of unchecked offshore platforms. This has also been the case with countries like Sweden, Denmark, and Poland who saw a rise in the use of offshore platforms when high taxation was imposed on the domestic gaming industry,” said an industry anaylst, on the the condition of anonymity.
The distinction and regulation
The Indian judiciary system has created a clear distinction between a ‘game of chance’ and a ‘game of skills’. In simple terms, success largely depends on the player’s skill (game of skills) and player’s luck (game of chance) are two separate categories. Drawing on the Supreme Court’s judgment in State of Andhra Pradesh vs. K. Satyanarayana & Ors, as well as other notable judicial rulings, the elements that define a ‘game of skill’ may be delineated such games are predominantly reliant on skill, albeit they may involve an element of chance, besides success in these activities is largely determined by the user’s advanced knowledge, skills, and strategic approach. Players can enhance their chances of success through deliberate practice and accumulated experience. “Referring to game of Ludo, while the outcome of moving tokens is influenced by dice rolls, which introduces an element of chance, players strategically plan their moves and make decisions that significantly influence the game’s outcome. Thus, the pivotal factor lies in assessing the degree of skill predominance. It is crucial to assess each game individually to determine whether it qualifies as a ‘game of skill’ or ‘game of chance’, considering factors such as the extent of skill required, the impact of chance elements etc. However, in light of recent GST amendments, the difference between games of chance and games of skill no longer holds significant importance in the context of GST applicability,” Krishan Arora, partner, Grant Thornton Bharat, noted.
The report titled, ‘Curbing Betting and Gambling in India: A National Security Imperative’ suggested that as part of regulation MeitY can create a nodal authority to register and regulate online real money games. This authority would be responsible for creating a whitelist of legitimate online real money gaming platforms authorised to operate in India. A comprehensive registration mechanism for these platforms is central to the proposed framework. To be included in the whitelist, these platforms must meet specific criteria, including robust consumer grievance mechanisms and mandatory registration under the Central Goods and Services Act, 2017 (GST Act). Registration under the GST Act would require them to have physical presence in India, which would facilitate enforcement action against them in cases of non-compliance.
Furthermore, a comprehensive database of legitimate online real money gaming operators would enable users to identify lawful operators, enhance regulatory oversight and ensure adequate consumer protection. Applications by online real money gaming operators for registration would require disclosure of information such as wwnership structure. It is belived that transparency in ownership is crucial. The application should disclose the ultimate beneficial owners of the operator. The ownership structure would facilitate regulatory action and reduce chances of money laundering and other financial crimes, the report stated. Moreover, information regarding any relevant licenses held by the legitimate online real money gaming platforms should be submitted. Also, a comprehensive list of games available on the platform needs to be provided. This will allow the regulator to assess the potential risks associated with each game type and ensure compliance with any game-specific regulations.
The regulatory body then can utilise this information to identify non-compliant entities. This means discrepancies between registered information and actual operations – such as unlicensed games or inadequate KYC procedures – can flag noncompliant operators. This enables prompt intervention and potential enforcement action, stated the report. Furthermore,in the event of suspected illegal activity, registration details become a vital investigative tool. Regulators can compare this data against platform operations to identify potential violations, such as indulging in unlicensed gambling activities, money laundering, deficiency in services or fraudulent conduct by the operator. Further enforcement agencies and advertisers can easily identify whether a service is legal or not by checking whether they have a certification or not. “Looking ahead, the government may implement additional measures to enhance the legitimacy of offshore gaming platforms and combat tax evasion practices. These initiatives may involve integrating data from multiple sources, leveraging analytical tools and AI, and conducting drives to verify GST registrations of offshore gaming platforms. Such efforts should be designed not only to formalize operations under Indian tax and regulatory laws but also to enhance user protection and fortify the legal frameworks governing online gaming activities,” Arora stated.