GST, Lack Of Self-Regulating Body, More: Why India’s Online Gaming Sector Is Witnessing A 'Funding Winter'

Policy and legal delays have led to poor regulatory clarity, taxation uncertainty and ad-hocism has further restrained investments and discouraged innovations.

Establishing differentiating parameters in online gaming will set criteria for games of skill and their rightful and legal recognition under the 'permissible games' list.

Source : DrMedYourRasenn/Pixabay

According to EY’s ‘New Frontiers’ Report published in December  2023, the market size of the online gaming industry peaked at Rs 16,428 crores with a CAGR of 28 per cent between 2020-23. The industry also witnessed surmounting investments in this period (2020-23) totalling Rs 22,931 crore from both domestic and international sources.

The sector includes gaming developers, platform providers, a wider ecosystem of 450 million gamers and nearly 1,000+ gaming studios. The online gaming sector consists of immense economic potential in India with a strong and increasing user base. Moreover, along with the potential to attract investments and encourage innovations the sector provides jobs for nearly 3,00,000 people directly/ indirectly.

Various factors can be attributed to this growth of online gaming in India, the foremost being the increased accessibility to smartphones and high-speed internet. Additionally, the COVID-19-induced lockdowns pushed many people into boredom with sufficient leisure time on their hands, resulting in alternating between different modes of online entertainment. One of these is online gaming, which witnessed a rapid increase in the user base, game developers and gaming platforms. 

Policy Framework, Legal Status Of Online Gaming In India

Online gaming in India is regulated through states individually under the archaic Public Gambling Act of 1867 and under the IT Act, 2000, particularly the IT Rules of 2021. The IT rules extended recognition and legality to the burgeoning online gaming industry by the Union Government, recognising its contributions to India’s GDP, ability to attract higher investments and foster innovations. 

However, the need for a comprehensive and national-level regulatory framework becomes crucial considering the size of the industry, and to address some pressing social and economic concerns. The Ministry of Electronics and Information Technology (MeiTY), as the nodal agency regulating online gaming, introduced the IT Rules, 2021 and with it the self-regulatory mechanism in the industry. This further facilitated the signing of the code of conduct by gaming companies, platforms and developers and ensured they abided by the law of the land. This mandated KYC norms, digital payments and legal and informed advertising. 

Although the scenario looks green, the online gaming industry faces certain regulatory and taxation hurdles that are creating a situation of ‘Funding Winter’.

Reasons For Funding Winter

Taxation plays a pivotal role in the growth and sustainability of any industry or business, including emerging sectors like online gaming. The GST issue is the foremost that needs to be resolved on priority. However, the GST council has insisted and maintained the status quo to continue at 28 per cent without distinguishing between a game of skill and a game of chance. 

Additionally, the pain point for the industry has been the retroactive imposition of 28 per cent GST (from 2017 to October 2023) on all bets placed in real money gaming. Moreover, the proposed amendment 11(A) to the Central GST Act, has not been translated into action or an issue of order either by the centre or states. Similarly, policymakers and the union government must consider re-calculation of GST on the income of developers & platform providers. On the legal front, the Supreme Court has been extending dates, and the non-action on petitions filed by the gaming industry has spiralled confusion for the industry stakeholders and interested investors. The sudden changes in the tax structures and unstable regulatory regimes remain under 11(A) and orders to not subject real money gamers to GST. 

Thus, high or unpredictable taxes can erode profits and affect cash flow, reducing a company’s ability to reinvest in innovation, expansion, and talent acquisition. 

Another delay is that, despite The Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Rules, 2021 being in effect for over a year, there has been no formation of a Self-Regulatory Body (SRB). The absence of a Self-Regulatory Body (SRB) has delayed establishing parameters for permissible games and providing a registration mechanism for both online and offline gamers. 

Establishing differentiating parameters in online gaming will set criteria for games of skill and their rightful and legal recognition under the 'permissible games' list. While games of chance have a state-wise registration mechanism under the Public Gambling Act of 1857, the lack of a legal framework for games of skill, especially at the national level results in legal uncertainty, especially for RMG platforms. 

Impact Of Funding Winter

The above-mentioned ambiguities have significantly contributed to lowering investor confidence and thereby funding into this rising sector. According to the ‘EY-US ISPF Report: Impact of new GST law on skill-based online games’ the new GST regime has either negatively impacted companies' revenue and margins or, in some cases, has been utterly devastating, rendering the business model entirely unsustainable.

The policy and legal delays have led to poor regulatory clarity, taxation uncertainty and ad-hocism has further restrained investments and discouraged innovations. This is despite the widely recognised potential for India to become a hub for game development, including games based on Indian stories and skill-building games used as educational tools to bridge the digital divide.

Thus, the immediate need is to establish the SRB, enabling both domestic and offshore online gaming companies to register and apply for categorisation under 'permissible games.' The next step is to define parameters for permissible games, particularly for skill-based games, including real-money games. The definitions for these are already provided in the aforementioned IT rules. Additionally, there is a need for clarification and consistency in the taxation regime. While progress has been made, the lack of a final resolution is causing concern, uncertainty, and hindering the growth of online gaming in India. 

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

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