Regulatory Instability: Challenges Faced By Online Gaming Companies In India

Currently, with the rapid increase and spread in gaming from offline to online and from consoles to mobile gaming, the internal state boundaries and laws have become porous.

The  amendments to the IT Rules in 2023 allowed the online gaming industry to establish three SROs to help the government differentiate between online “games of skill,” with or without Real Money Gaming (RMG), and “games of chance.”

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By Dr Aruna Sharma

Online gaming companies in India have undergone several significant changes. The most recent regulatory updates, such as revised taxation policies leading to amendments of state laws and the recent IT Rules of 2023 requiring them to qualify as permissible games and register at the national level, have thrown the industry in a state of confusion and uncertainty that has also been damaging the growth of online gaming in the country.

According to the India Gaming Report 2024, which draws on analysis from the Interactive Entertainment and Innovation Council (IEIC) and secondary data, India is home to 1,400 online gaming companies, one-third of which are gaming studios. India boasts the biggest gaming market, with 568 million users and 9.5 billion app downloads. The industry has been on a continuous rise, with a compound annual growth rate (CAGR) of 7 per cent, and is expected to reach Rs. 155 billion by 2027.

The rapid growth of the industry has been fueled by the widespread adoption of smartphones and increasing digital penetration, making gaming more accessible to a broader audience. However, regulatory challenges persist. The distinction between games of chance and games of skill remains a critical issue, impacting the industry's regulatory framework. State bans on online games and the recent increase in GST from 18 per cent to 28 per cent on games of skill, applied retrospectively, have added to the uncertainty. The online gaming sector in India urgently needs clear, consistent, and comprehensive regulations to sustain its growth trajectory and continue to innovate and develop.

Role of Technology in Boosting iGaming Experience

Many large tech companies partner with game development agencies to create engaging online gaming experiences. This growth story showcases India's potential as a key developer in the global gaming market. The widespread use of smartphones and digital access has facilitated the continued growth of online gaming. However, some states have banned online games, necessitating a distinction between “games of chance” and “games of skill.” Games of chance fall under the regulatory discipline of state governments under the Indian Gambling Act.

Current Scenario & Formulation of 3 SROs

Currently, with the rapid increase and spread in gaming from offline to online and from consoles to mobile gaming, the internal state boundaries and laws have become porous. Thereby, state bans on online games have created a dilemma, prompting MeiTY (Ministry of Electronics and Information Technology) to issue new rules under the 2023 amendments to the IT Act 2000, Intermediary Guidelines, and Digital Media Ethics Code. These rules enable the national recognition and registration of permissible games, such that these platforms do not face operational restrictions from any state laws. In this scenario, it is notable that many courts have classified horse racing, rummy, and other activities as "games of skill," extending this classification to fantasy games and e-sports, whether played for money or not.

The  amendments to the IT Rules in 2023 allowed the online gaming industry to establish three SROs to help the government differentiate between online “games of skill,” with or without Real Money Gaming (RMG), and “games of chance.” These SROs have requested formal issuance of guidelines to clarify the permissibility of online games and facilitate industry registration. The delay in issuing these guidelines is causing increasing apprehensions in the gaming industry.

The sudden increase in GST on online “games of skill” from 18 per cent to 28 per cent, applied retrospectively, requires money to be transferred to winners after deducting direct tax.

The challenges regarding the permissibility of games and the appropriate jurisdiction for registration — State or Central — remain unclear. Additionally, Real Money Gaming is not necessarily a "game of chance," highlighting the need for formal guidelines to distinguish "games of skill" from "games of chance" and clarity on direct and indirect taxation.

The emerging online gaming industry urgently needs regulatory clarity to continue innovating, developing, and enhancing the gaming experience. Without this, companies might relocate. Clarity, consistency, and comprehensive regulations are essential for the industry's growth and stability.

(The author is a Practitioner Development Economist and Retd Secretary GoI)

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