Evolving Legal Framework Of Online Skill-Based And Chance-Based Games
Tarun Dua And Pragun Dua
31 Aug 2023 5:21 AM GMT
In the realm of Indian law, a pivotal distinction exists between "Game of Skills" and "Game of Chance." Game of Skills, can be identified by their reliance on the knowledge of the player, experiences, expertise, abilities and skill. In stark contrast, "Game of Chance" focuses on randomness and luck, sidelining the skills of the player, knowledge, or experience. These games find their outcomes tied to fortuitous events, rendering players with limited influence over results.
A milestone within Indian jurisprudence, the landmark judgment delivered by the Supreme Court in the celebrated judgement of, K. R. Lakshmanan v/s State of Tamil Nadu clearly distinguishes a game of chance as against a game of skill on the touchstone of predominance of chance over skill.
Through this lens, the Indian legal landscape underscores the importance of skill and chance as defining pillars in determining the legality and classification of various games, cementing protections that echo far beyond mere entertainment into the realms of commerce and constitutional rights.
History of Legislation on Betting and Gambling:
The Public Gambling Act, 1867 (“PGA”) was enacted during British colonial rule to provide punishment for public gambling and running of common gaming houses and was applicable only in the states of United Provinces, East Punjab, Delhi and the Central Provinces. Moreover, the provisions of PGA did not apply to any game of skill.
After independence, the Constitution of India, intricately allocated the legislative power between the Central government and various state governments. In terms of such division of power under the VII Schedule of the Indian Constitution, Entry 34 of List II (State List) bestowed upon the States the authority to regulate the realms of "betting and gambling". In such a scenario, post-independence states have enacted their own legislation on betting and gambling, adopting principles of PGA with required amendments.
Several Indian States, including Telangana, Andhra Pradesh, Tamil Nadu, Orissa, and Assam, adopted a strict stance, barring all involvement in real-money games of skill and chance. In contrast, States like Goa, Sikkim, Nagaland and Meghalaya presented a nuanced approach. Goa, Daman & Diu and Sikkims’ legislation permit the setting up of casinos, gambling subject to obtaining prior permission, licences and compliance with specific terms. The Meghalaya and Nagaland legislations define "game of skill", as games where there is preponderance of skill over chance and list specific games as "games of skill," promoting and regulating them through electronic means.
However, Tamil Nadu took a different route with the Tamil Nadu Prohibition of Online Gambling and Regulation of Online Games Act, 2022 (“TN Act, 2022”) which explicitly outlaws and bans online gambling and games of chance played for stakes. The TN Act, 2022, was challenged by the Online Gaming companies in a Writ Petition filed before the Madras High Court which is presently pending.
In a recent decision, the High Court of Karnataka followed the decision of the Supreme Court in the case of K. R. Lakshmanan, inter alia identifying distinct difference between games of skill and games of chance. The Court applied the test of predominance and held that :
- a game of chance whether played with stakes is gambling;
- a game of skill whether played with stakes or without stakes is not gambling;
- a game of mixed chance and skill is gambling, if it is substantially and preponderantly a game of chance and not of skill;
- a game of mixed chance and skill is not gambling, if it is substantially and preponderantly a game of skill and not of chance.
Recent developments impacting Online Games
- Mandatory KYC requirement:
Recently, Fin-Tech rules in India have upended online gaming, unsettling firms. Mandatory Know Your Customer (“KYC”) checks on Google Play Store have dampened engagement. To respond, gaming companies want simpler KYC from the Ministry of Electronics and Information Technology. Complex procedures drive drop-offs due to slow checks, glitches, hurting user experience. Fraud risks prompt pre-emptive actions like AI alerts, user segmentation by withdrawal activity, and name-based duplication. The Reserve Bank of India is considering Fin-Tech regulations, monitoring the industry and discussing frameworks with stakeholders. Implementation timing depends on industry consultations.
- Information Technology Act, 2000:
India's gaming sector combats cyber crime under the IT Act, 2000. Exploiting online games for quick gains, cyber criminals target both platforms and players due to the sectors’ substantial revenue. Recent amendments in the April 06, 2023 notification introduced rules to govern India's online gaming, emphasizing Self-Regulatory Body (“SRB”) verification for Real Money Games, safeguarding against fraud, addiction, and financial risks. The SRB also upholds national interests and international relations, prioritizing user safety and responsible gaming.
Recent tax changes in India have hit the gaming sector hard. A 30% of tax on withdrawal winnings has discouraged a casual gamer and reduced number of players. Additionally, the GST Council's decisions in its 50th and 51st meetings in July-August, 2023 have brought a uniform 28% of tax on online gaming and expanded its tax road map, proposing changes to acts and rules to cover domains like casinos, horse racing and online gaming, thus, raising concerns about the sector's future. Effective from October 01, 2023. These changes encompass player sums, creating financial strain. Thus, a 50% of taxation on winnings, could reshape the industry and impact player participation.
- Advisories issued by Information and Broadcasting Ministry on 13.06.2022, 03.10.2022, 06.04.2023 and 25.08.2023
The Information and Broadcasting Ministry has been issuing advisories in respect of advertisements of Online Betting Platforms. In its recent advisory issued on 25th August, 2023, it has been observed that advertisements of gambling/ betting platforms not only pose significant financial and socioeconomic risk for the consumers, especially youth and children, but has linkages to money laundering networks, thereby threatening the financial security of the country. It further stated that such advertisements have been rampant during major sporting events, including cricket tournaments.
The advisory has been issued to media entities, online advertisement intermediaries and social media platforms to immediately refrain from showing direct and indirect advertisements, promotional content on betting or gambling in any form, failing which appropriate legal action will be taken under various statutes.
The advisory has apparently been issued in the wake of ensuing Asia Cup Cricket Tournament, 2023, and the ICC World Cup, 2023.
The gaming laws in India are undergoing a transformative phase revolving around the realms of “game of skills” and “game of chance”. Various States have established their unique regulations pertaining to "betting and gambling". Conversely, some states have taken a more stringent approach, enforcing an outright ban on online games involving real-money transactions. Amidst this evolving legal landscape, it becomes paramount for both the Gaming Industry and players engaged in online gaming to be well-versed with the laws applicable within their specific state. This proactive stance not only safeguards the interests of the gaming industry and players but also contributes to the broader goal of a well-regulated and transparent gaming environment in India.
Authors: Tarun Dua, Partner, and Pragun Dua, Senior Associate, Singhania and Partners LLP. Views are personal.