Decoding The Impact Of Regulations On Indian Gaming Startups

When we talk about the internet and its various ways uses, we discuss how it has transformed financial transactions and our everyday way of living. The pandemic, along with several other changes, has spurted a sudden growth of the egaming or the online gaming industry. While the industry has grown manifolds, and there are now several stakeholders that are involved in it, the laws around and governing these games are far and few. 

Esports: A State-Issue

In India, online games have been made a “State-Issue” which means that each state can choose to govern it and regulate it as it deems fit. Where some laws and regulations brand all “online games” as illegal, some have gone ahead to allow if they fall under the criteria of skill-based and not chance-based. Laws and regulations related to egames are underdeveloped in India currently and are becoming a major concern for all stakeholders involved — investigating authorities, companies, and customers.

One of the major legal concerns is how can online games be best regulated in order to avoid them turning into betting platforms. Gambling or betting games have been growing in number, and have been a major concern for most investigating authorities. With more and more types of games coming into the picture, creating contracts that are evolved enough to foresee and cover contingencies that have not occurred yet are extremely crucial at this point. 

In fact, the esports phenomenon has created a need for a better understanding of the contract laws as well. One of the biggest areas where players in esports need assistance in contract law is with endorsement contracts. While teams need help with contract negotiations, individual players in some ways are even more vulnerable when presented with a contract.

Intellectual property is another concern that affects the esports world, much like every other recently-digitised creative or entertainment domain. There can be several types of licensing issues, infringement claims, and proprietary rights concerns. Copyright concerns are also pretty extensive and are, quite real. The copyright problem also has a subset called content misuse. Both esports and egaming have similar and concerning legal issues which need to be dealt with, urgently.

Some of the legal issues that proprietors or egaming enthusiasts must look out for are: 

• Whether the game is a “game of skill” or a “game of chance”:  Laws in certain states in India have banned games of chance, considering them to be gambling. This comes under state laws and the majority of Indian states do not allow gambling. 

Skill-based games are legal in India. Though there are very few “online games” which have been clearly defined and identified as “skill-based”. It is important to ensure that clear use of the skill is defined in a game, for it to not be considered illegal in some states.

• Taxation of the funds or proceeds from these games: Online games in India either operate on the rake fee model or the freemium model. In the former, gaming platforms charge a ‘rake fee’ to play the game. In the latter, the gameplay is free but additional features may require the purchase of certain items. 

Gaming platforms in India are required to pay GST because they qualify as suppliers. When a player uses the platform, a portion of the registration fee is transferred as ‘platform fee’ to the online host and is treated as revenue for the platform. The remaining fee is the prize that is transferred to the winner on winning a game. 

Presently, egaming platforms fall under Rule 31A of the CGST Rules 2017 which states that the entire transaction value—which includes the platform fee and the winning amount—is taxed.

• Interest of the company: A question to consider is whether binding the user through contractual obligations and the company’s policies regarding the source of funds, manner or operating on the platform is sufficient to protect the interest of the company.

Checklist For A Gaming Platform

One needs to ensure that the below checklist is kept handy when establishing a gaming platform: 

• Ensure whether your game is a ’game of skill’ or a ‘game of chance’
• Have robust data privacy policies and ensure you’re complying with Indian laws along with the s laws of other relevant countries
• Comply with advertisement guidelines
• Have a  robust ‘terms of use’, defined third-party participation, etc
• Check and comply with international regulations to ensure that you’re not limiting your user base to India
• Protect various aspects of your intellectual property
• Comply with employment laws and regulations
• Have robust agreements with users, vendors, and the internal team
• Always be aware of tax implications in case there is money involved

Indian legislations are still under development and majorly deal with the type of games —“skill” or chance”. There is little regulation beyond that. The Information Technology Act per se does not regulate the online gaming industry but only puts an embargo on gambling. It specifically requires ‘intermediaries’ including social media intermediaries to not host or transmit any content that inter alia relates to or encourages Gambling.

Esports have been considered lawful unless there is an added aspect of “money” attached to the platform. While there are several such platforms that allow users to play on these platforms with the involvement of money, they have claimed themselves to be a game of skill, and are thereby, lawful.

As per Inc42 Plus analysis, the Indian esports market is expected to reach $175 Mn in terms of aggregated revenue by 2023, growing on the back of the higher game engagement, more viewership, bigger esports tournaments, along with the growing number of platforms and esports enthusiasts. So there’s definitely a big scope for esports to become a major contributor to India’s digital economy in the future. 

Note: We at Inc42 take our ethics very seriously. More information about it can be found here.