The Constitution of India lays down the division of powers between the union government and state government to legislate on entries enumerated under Schedule VII of the Constitution. Pursuant to this segregation of powers, ‘betting and gambling’ form part of the ‘state list’, and therefore each state legislature (and not the central or federal parliament) is entitled to make its own laws regarding betting and gambling.
Prior to the promulgation of the Constitution, the Public Gambling Act, 1867 (PGA)was the central act concerning betting and gambling. The main objective of the PGA was to prohibit and penalise the act of gambling and the running of a common gaming house: that is, any establishment in which instruments of gaming are kept or used for profit or gain by any person. While the terms gambling and gaming have not been specifically defined under the PGA, the Supreme Court of India has opined that gambling is payment of a price for a chance to win a prize, and that games in which parties can pay a price to win a prize may be games of chance or of skill, or of skill and chance combined. [1]
Subsequent to the Constitution coming into effect, most states adopted the PGA (or a version similar to it) as their state legislation regarding betting and gambling, and some states enacted distinct state legislation on the subject. Accordingly, the legislation adopted or promulgated by a state regarding betting and gambling is the law applicable for that particular state.
One noteworthy aspect of the PGA was that it included an exception with respect to games of mere skill. Accordingly, games of mere skill were excluded from the applicability of, and the prohibition mandated under, the PGA. However, neither the PGA nor the state gambling or gaming legislation define the term mere skill or elaborate upon the principles that are consistent with games of skill.
Generally speaking, for a game involving monetary stakes to be considered outside the scope of gambling, it needs to constitute a game of skill: that is, despite there being an element of chance involved (as is the case in most games), the outcome of such game must depend predominantly on skill. In the absence of a statutory definition of games of skill under various pieces of legislation, it becomes important to analyse what constitutes a game of mere skill and what constitutes a game of chance as the basis for judicial precedents.
The Supreme Court of India has defined games of skill as: ‘A game of skill, on the other hand – although the element of chance necessarily cannot be entirely eliminated – is one in which success depends principally upon the superior knowledge, training, attention, experience and adroitness of the player.’ [2] In another instance (Satyanarayan case), the Supreme Court of India further interpreted the expression ‘mere skill’ to mean ‘a substantial degree or preponderance of skill’. [3]
Therefore, the Supreme Court of India has clarified that:
Given that the PGA and most state-specific gambling and gaming legislation were enacted long before the conception of online gaming, such legislation does not make express reference to games played over an online forum. By applying a purposive interpretation (as is typically done by courts), it is a generally accepted principle that courts in India are likely to test the business of online platforms against the provisions of such legislation.
However, certain states such as Assam, Andhra Pradesh, Telangana and Odisha have not recognised this game of skill exception, thereby disallowing all real money games. Further, the high courts (HCs) of certain states have declared skill-based card games, when played with stakes, as gambling and therefore illegal under the respective state’s legislation. Finally, certain states such as Nagaland and Sikkim have prescribed a licensing regime for organising real money games.
Both Nagaland and Sikkim have a licensing regime pursuant to which online gaming operators require a licence and need to meet the various regulatory conditions before offering or exhibiting online real money games in these states.
The gambling laws of Andhra Pradesh, Telangana, Assam and Odisha do not contain the games of skill exception and accordingly do not allow any game to be played for monetary stakes. In view of this, most online gaming companies restrict users based in these states from accessing real money games on their platforms.
While the Supreme Court categorised rummy as a game of skill in the Satyanarayan case, a sentence in the judgment has resulted in the HCs in certain states taking a contrary position while deciding on the question of whether rummy, when played for stakes, falls within the purview of the prohibition imposed by the state-level anti-gambling regulations. Certain state HCs (of Tamil Nadu, Kerala and Gujarat) have passed judgments that place the game of rummy (when played with stakes) within the risk of being considered illegal under the respective pieces of state legislation that prohibit gambling and betting.
While, in part, these judgments are motivated by a moralistic view taken by the courts regarding the ills of betting and gambling, judges of the HCs also place reliance on the following observations of the Supreme Court in the Satyanarayan case: ‘Of course, if there is evidence of gambling in some other way or that the owner of the house or the club is making a profit or gain from the game of Rummy or any other game played for stakes, the offence may be brought home.’
Therefore, HCs often read into this sentence, while disregarding the ratio decidendi of the Supreme Court decision in the Satyanarayan case (that rummy is a game of skill and therefore beyond the restrictions prescribed under the relevant anti-gambling regulations), that where there exists an element of the house making profit while offering games of skill, the same is prohibited.
It is pertinent to note that while the decisions passed by the HCs of Tamil Nadu, Kerala and Gujarat are in relation to physical card games being played with stakes, such decisions have caused there to be an element of risk associated with hosting online real money skill games in these states. Note that notwithstanding the judicial approach to real money gaming, most online gaming companies allow users based in these states to access real money games on their platforms.
As evident from the discussion above, in the event that the real money gaming business (gaming business) of any company qualifies as gambling, the conduct of such business per se would be considered illegal in the vast majority of states, depending upon the legislative framework prevalent in such states. Furthermore, India also prohibits foreign direct investment in ‘gambling and betting including casinos, etc.’ Matters of foreign investment fall in the ‘union list’ under the Constitution, and only the central government (and not the states) is entitled to make laws pertaining to the same. Therefore, if the gaming business of any company qualifies as gambling, foreign direct investment is also not permitted in such company.
Given that a regulator or court has yet to issue any comprehensive directions in relation to online real money games, the Reserve Bank of India (RBI) has, in some instances, raised questions to certain companies regarding the permissibility of their having received foreign investment. While there remains some level of ambiguity and risk regarding online real money gaming, no action has been taken by the exchange control regulator in this regard.
Most companies engaged in the gaming business operate on a model that allows players to create a digital account or digital wallet (digital account) where the player can deposit certain amounts of money to be able to play games at any point in time. Some online gaming companies, subject to certain conditions, permit their users to withdraw the money deposited by the user irrespective of whether the user wins or loses a game. However, some companies allow their users to withdraw only their winnings.
As per the provisions of the Payment and Settlement Systems Act, 2007 (PSSA) and the regulations framed thereunder, a company (not being a bank) can issue and operate a pre-paid payment instrument (PPI) in accordance with the conditions set out thereunder and the Master Directions on Prepaid Payment Instruments dated 27 August 2021 and updated as on 12 November 2021 (PPI Master Directions).
While there are different kinds of PPIs having different uses and functionalities, PPIs are generally understood to be instruments that facilitate the purchase of goods and services, including financial services and remittance facilities, against the value stored on such instruments.
The PPI Master Directions recognise the following three kinds of PPIs that may be issued by a company (not being a bank): the closed loop pre-paid instrument (CSP), the small PPI and the full know your customer PPI (full KYC PPI). Issuance of a CSP is not classified as a payment system (i.e., a system that enables payment to be effected between a player and a beneficiary involving clearing, payment or settlement service or all of them, but does not include a stock exchange), and therefore does not require the approval or authorisation of the RBI. However, the operation and issuance of a small PPI or a full KYC PPI still require prior registration with the RBI in accordance with Section 4 of the PSSA.
Under the PPI Directions, a view may be taken by the RBI that such digital accounts of players function as a PPI since they allow users to use services of the gaming platform against the value stored in the digital account. Accordingly, leading industry players have adopted the following best practices to facilitate deposits and withdrawals by users through their digital accounts:
As per the PPI Master Directions, all PPI issuers (except CSP issuers) are required to comply with KYC and anti-money laundering (AML) compliances under the Master Direction – Know Your Customer Directions, 2016 (KYC Master Directions) issued by the RBI. As per the KYC Master Directions and PPI Master Directions, RBI-regulated entities are required to comply, inter alia, with the following requirements:
It is pertinent to note that CSPs (which are not regulated by the RBI) are not obligated to undertake KYC and AML-related compliances since KYC requirements and the obligations prescribed under the KYC Master Directions are applicable only to entities regulated by the RBI (such as banks, non-banking financial companies and payment systems). However, amendments introduced into the Information Technology (Intermediary Guidelines and Digital Media Ethics Code), 2021 (Intermediary Guidelines) (see Section V) require online gaming intermediaries (OGIs) (which typically operate CSPs) to verify the identity of each user in accordance with the procedures prescribed by the KYC Master Directions before accepting any deposit in cash or kind from any user.
This additional obligation would not have an adverse impact on gaming companies, since leading industry players have already adopted best practices to ensure compliance with the KYC Master Directions including, inter alia, conducting basic KYC checks by obtaining basic KYC documents for identity and address proof of users, such as a permanent account number card, Aadhaar card, passport, voter card or driving licence.
Companies in the gaming business often face issues on whether the tax deducted at source (TDS) needs to be deducted on all payouts or earnings, or from only those earnings that are above a certain threshold, or whether the earnings are required to be consolidated player-wise.
Non-deduction of TDS should not per se attract criminal liability. However, if a person deducts TDS but fails to pay it to the government, such person can be punished with imprisonment for a minimum term of three months and up to a maximum of seven years under Section 276B of the Income Tax Act, 1961. Section 279A of the Income Tax Act provides that such offences shall be deemed to be non-cognisable within the meaning of the Code of Criminal Procedure.
Non-deduction of TDS will render the expenditure incurred on payout inadmissible for tax purposes if such payout is otherwise eligible or admissible for the purposes of computing taxable income.
There are two principal goods and service tax (GST)-related risks currently applicable to the gaming business:
While the GST rate issue falls squarely under the purview of the GST Council, [7] the GST quantum issue may require additional amendments to the Central Goods and Services Tax Act, 2017 and the state GST Acts (collectively, GST Acts), which are also based on the recommendation of the GST Council.
The outcome of the issue depends on:
The Advertising Standards Council of India (ASCI), a self-regulatory organisation that prescribes guidelines and standards for the advertising industry, published guidelines in November 2020 governing advertisements of online gaming for real money winnings (Gaming Ads Guidelines) to ensure that online gaming advertisements do not violate the ASCI code pertaining to misleading advertisements.
As per the Gaming Ads Guidelines:
Pursuant to this, the Ministry of Information and Broadcasting on 4 December 2020 issued an advisory directing all private television satellite channels to ensure that advertisements appearing on television channels adhere to the Gaming Ads Guidelines. [8]
On 13 June 2022, the government issued an advisory note advising advertisers and broadcasters to completely refrain from publishing advertisements of online betting websites and platforms in India. [9] It is notable that by virtue of this June 2022 advisory note, the government appears to have recognised an explicit distinction between online real money gaming and online betting and gambling. While this advisory note has an adverse impact on the advertisement and broadcasting activities related to online betting and gambling, it does not appear to alter the existing position (captured under the December 2020 advisory note) for skill-based real money online games.
In 2021, the state government of Tamil Nadu enacted the Tamil Nadu Gaming and Police Laws (Amendment) Act, 2021 (TN 2021 Amendment Act), which amended the Madras Acts to prohibit and penalise the participation in and conducting of wagering and betting by ‘playing Rummy, Poker or any other game’ in cyberspace. While the TN 2021 Amendment Act did not specifically amend the construct around the games of skill exception, it specified that playing ‘Rummy, Poker or any other game’ online for stakes was explicitly included within the ambit of wagering and betting, making them punishable acts and leaving a question mark on the legality of other games of skill played online for stakes in Tamil Nadu.
Various online gaming companies filed writ petitions challenging the constitutional validity of the TN 2021 Amendment Act and, in August 2021, the Madras HC struck down the TN 2021 Amendment Act, declaring it to be ultra vires of the Constitution. [10] However, the Madras HC observed that ‘Nothing herein will prevent an appropriate legislation conforming to the constitutional sense of propriety being brought in the field of betting and gambling by the State’.
The state government, at the first instance, filed an appeal before the Supreme Court against the Madras HC order to strike down the TN 2021 Amendment Act. While the appeal currently remains pending, the state government, perhaps relying on the aforementioned observations made by the Madras HC, constituted a committee to advise the state on enacting new legislation to regulate online gaming. The committee, in its report, recommended a ban on online gaming for stakes, pursuant to which the state government promulgated the Tamil Nadu Prohibition of Online Gambling and Regulation of Online Games Ordinance, 2022 (2022 Ordinance). The Ordinance sought to:
Subsequently, the state government introduced a bill in the state assembly to prohibit online gambling and to regulate online gaming within the state of Tamil Nadu, which received the assent of the Governor on 7 April 2023. The Tamil Nadu Prohibition of Online Gambling and Regulation of Online Games Act, 2022 (TN Act), which was brought into force with effect from 21 April 2023, prohibits any person from offering or advertising any online gambling services (including online games of chance played for money or other stakes) within the territory of Tamil Nadu.
While the TN Act recognises the games of skill exception and only prohibits ‘online games of chance’, it has expanded the definition of an online game of chance to include any online game that:
Furthermore, any game identified in the schedule appended to the Act (Schedule) is deemed to be an online game of chance. While the Schedule currently identifies rummy and poker as games of chance, the state government is empowered to include additional online games within the Schedule.
The TN Act further envisages the establishment of the Tamil Nadu Online Gaming Authority (Authority), which would be authorised to, inter alia, regulate and oversee the functioning of online games within the state, identify online games of chance, resolve grievances received against any online games provider and maintain information with regard to the activities of online games providers within the state. Further, the Authority has been empowered to introduce regulations in relation to the functioning of online games within the state of Tamil Nadu, including in relation to time and monetary limits and age restrictions for online games.
Various online gaming organisations have filed petitions in the Madras HC challenging the constitutional validity of, and seeking a stay on, the TN Act.
The Gujarat HC, in a judgment dated 11 November 2006 (the poker order), while dealing with the legality of playing poker, made an observation that ‘even . . . a game of skill but played with stakes, may be considered as gambling’. Interestingly, the Gujarat HC, while examining poker, opined that ‘the game of poker is a game of gambling card, which unnecessarily involves betting as it is an inseparable part of the game play . . . the principle and criteria involved with regard to the substantial degree of skill referring to the game of Rummy would stand on different footing than the game of Texas Hold’em Poker, which would fall short of the observations and criteria laid down by the Hon’ble Apex Court.’ Pursuant to the poker order, leading industry players do not allow players from Gujarat to access poker games (played for stakes) on their respective portals.
More recently, the Gujarat State Law Commission released a report suggesting that the Gujarat Prevention of Gambling Act, 1887 be amended to expressly cover online gambling by amending certain definitions and enhancing the penalties under the Gujarat Act. While the report does not appear to seek to strike down this exemption, or expressly prohibit online games of skill, the report does cite the need to prohibit online rummy as one of the reasons for the amendments. It remains to be seen whether the state government will take up the recommendations of the Gujarat Law Commission at this stage.
On 23 December 2022, the central government amended the Government of India (Allocation of Business) Rules, 1961 to introduce ‘matters relating to online gaming’ within MeitY’s purview, and notifying MeitY as the nodal agency for regulating matters relating to online gaming (under the Government of India (Allocation of Business) Rules, 1961).
Subsequently, on 6 April 2023, MeitY notified and brought into effect the Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Amendment Rules, 2023 (2023 Amendments). The 2023 Amendments introduce certain changes to the Information Technology (Intermediary Guidelines and Digital Media Ethics Code), 2021 (Intermediary Guidelines) with the intent to regulate the online gaming sector in India in order to safeguard users’ interests.
Set out below is a brief summary of the key legislative changes introduced by the 2023 Amendments.
The 2023 Amendments seek to introduce the following definitions within the Intermediary Guidelines:
“’Online Game’ refers to any game offered on the internet, accessible to a user through a computer resource or an intermediary (thus including all online games, irrespective of whether they involve real money or not).”
The 2023 Amendments further classify online games into three categories:
Online gaming intermediaries (OGIs) refers to any intermediary that enables the users of its computer resource to access one or more online games. As such, OGIs will need to comply with ongoing due diligence requirements that other intermediaries undertake pursuant to the Intermediary Guidelines in order to avail their safe-harbour protection under Section 79 of the Information Technology Act, 2000 (IT Act).
Under the Intermediary Guidelines, an intermediary is required to inform its users of the prescribed categories of content that are prohibited from being uploaded on its platform. The 2023 amendments seek to introduce, inter alia, the following due diligence requirements, applicable to all intermediaries (including OGIs), in addition to the existing requirements set out under the Intermediary Guidelines: any RMG that has not been verified as a permissible online game, any online game that causes user harm, or any (surrogate) advertisement or promotion of any RMG that has not been verified as a permissible online game.
The 2023 Amendments further prescribe additional compliance requirements, specifically for OGIs, which will become effective only after the expiry of three months from the establishment of at least three SRBs. These compliances include:
The regulatory landscape in relation to the gaming business is likely to undergo significant transformation in the coming years, which might have an impact on the scope and universal recognition of the games of skill exception. While the 2023 Amendments have provided much-needed legitimacy to the sector, the amendments are subject to state legislation (such as that promulgated by Tamil Nadu and Karnataka). Accordingly, the outcome of the ongoing proceedings with respect to the legislation introduced by Tamil Nadu and Karnataka would serve as a precedent for other states that may be contemplating the regulation of the real money gaming sector.
In conclusion, given the potentially robust demand, the country’s young populace with its affinity for embracing online experiences and a complementing pool of software development talent, India is expected to become a global hub for the real money gaming sector and attract significant interest from global investors (both financial and strategic). However, regulatory and policy bottlenecks will need to be resolved to unlock the full economic value of India’s enormous sports and games-loving population.
Footnote
[1] K R Lakshmanan v. State of Tamil Nadu, (1996) 2 SCC 226.
[2] K R Lakshmanan v. State of Tamil Nadu, (1996) 2 SCC 226.
[3] State of Andhra Pradesh v. K Satyanarayan and Others, (1968) 2 SCR 387.
[4] K R Lakshmanan v. State of Tamil Nadu, (1996) 2 SCC 226.
[5] State of Andhra Pradesh v. K Satyanarayan and Others, (1968) 2 SCR 387; See also Executive Club formed by Lalitha Real Estates Pvt Ltd, Vijayawada and Ors. v. State of A P, 1998 (2) ALT (Cri) 207.
[6] In the case of ring games, the wagered amount (minus the amount lost) stands transferred to the withdrawable amount.
[7] The GST Council is a constitutional body set up to recommend policy and legislative changes in the GST laws of India. The Council, constituted in accordance with Article 279A of the Constitution, consists of the Union Finance Minister as chairperson; the Union Minister of State In Charge of Revenue or Finance; and the Minister In Charge of Finance or Taxation or any other minister nominated by each state government.
[10] Junglee Games India Private Limited v. State of Tamil Nadu, Writ Petition No. 18022 of 2020 etc.
This article was originally published in The Law Review on 29 May 2023 Co-written by: Aayush Kapoor, Partner; Harjas Singh, Associate. Click here for original article
Contributed by: Aayush Kapoor, Partner; Harjas Singh, Associate
Disclaimer
This is intended for general information purposes only. The views and opinions expressed in this article are those of the author/authors and does not necessarily reflect the views of the firm.
