India's Day In Court: Skill Gaming On The Precipice

July 6, 2023
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India's Supreme Court is preparing to hear a seismic case on the legality of online skill gambling in India, with potentially explosive results. In this forensic explainer, VIXIO's contributing editor for Asia, Martin Williams, examines what's at stake and how it fits into the rapidly developing picture of online gambling in India.

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India's Supreme Court is preparing to hear a seismic case on the legality of online skill gambling in India, with potentially explosive results.

In this forensic explainer, VIXIO's contributing editor for Asia, Martin Williams, examines what is at stake and how it fits into the rapidly developing picture of online gambling in India.

Introduction

The rapid expansion of India’s online gaming market and the central government’s introduction of an industry self-regulatory model promise decades of opportunity for a sector that struggled for years before the coronavirus pandemic to gain customers and legal respectability.

But it is the judiciary’s ongoing impact on the industry that remains critical not only for its commercial stability, but also its very survival.

Online gaming companies have been blessed by a legal system and a constitution that has held the line for the industry against most other forces, including sceptical and unyielding state legislatures, cautious or indifferent Cabinet ministers and hostile members of the public.

In this forensic explainer, VIXIO GamblingCompliance focuses on the two main groupings of litigation now in play, the risks and opportunities each poses, and why they are central to the shape, scope and confidence of the industry in the foreseeable future.

Skill Or Chance, Come What May

What is skill gaming with stakes?

India’s unusual legal definitions for gaming can generate confusion, and not just for foreign observers.

“Gambling”, by law, refers to predominantly or entirely chance-based games such as baccarat, roulette and slot machines.

Other than lotteries, which are chance-based but not classed as gambling products, chance-based games are almost entirely prohibited, with exceptions in casinos in Goa and Sikkim.

Skill-based games such as poker and rummy are defined as “gaming”, activity that enjoys the protection of the constitution and associated Supreme Court interpretations.

“Stakes” simply refers to bets or wagers. Stakes on skill games are legal bets or wagers.

As with “gaming”, “stakes” is a legally recognised term, but in reality it is also a euphemism when one considers the profound stigma attached to de facto gambling behaviour across swathes of Indian society.

Within months or weeks the Supreme Court of India is likely to hear the mother of all gaming lawsuits.

Over the years, the Supreme Court has declined to pursue a number of corporate and activist appeals on online gaming matters.

To do so would have risked making the court a judicial activist for an obscure, nascent industry and compelling the central government to legislate on online gambling.

However, the coronavirus pandemic has triggered enormous market growth in all online gaming segments, forcing governments to exert control over a divisive and sometimes divided industry, ranging from e-gaming to fantasy sports and from skill games such as poker to chance-based casino products.

The result has been a number of showdowns pitting pro-industry state high court judges against state executive and legislative branches united in enmity toward online gaming.

Ultimately, this has led the apex court to accept an appeal from the Karnataka state government, since joined by the Tamil Nadu state government, to rule on the legality of online skill gaming with stakes, as distinct from chance-based games.

A binding decision for the online gaming segment could transform the industry, not least by allowing the formation of a legal market in every state and territory in the nation.

The State of Karnataka v All India Gaming Federation

Whats it about?

In February 2022, the Karnataka High Court struck down the state government’s new ban on online gaming with stakes, slamming the “manifest arbitrariness” of the authorities’ criminalisation of betting and wagering.

It was the third state high court to reverse tough anti-gaming laws, after Tamil Nadu’s Madras High Court in August 2021 and Kerala High Court in September 2021. The Karnataka and Madras judgments cited Supreme Court precedent, stressed civil liberties and criticised punitive policymaking in lieu of scientific evidence.

It was the Karnataka government that lodged the Supreme Court appeal, with Tamil Nadu joining later. A third state, Telangana, applied to join the state governments’ appeal in December 2022 following a late challenge in its own high court to its groundbreaking 2017 ban.

The state government appellants are seeking Supreme Court validation and re-institution of their sweeping bans on online gaming. Online skill gaming peak body All India Gaming Federation is the lead respondent, joined by skill gaming companies looking to defend newly won market turf and expand into hitherto taboo jurisdictions.

Why it matters

1. Supreme Court decisions such as The State of Andhra Pradesh v K Satyanarayna in 1968 have long established that skill-based games involving stakes, such as rummy, are legal. Such decisions and arguments have guided the high court judges whose decisions are under appeal in this case. If, however, the Supreme Court finds for the government petitioners and shuts down online skill gaming with stakes, it will reverse decades of established law.

2. The court has previously cited constitutional provisions in defence of skill gaming, but not to defend the “gambling” of chance-based games, which is a matter for the states. Upholding the skill-chance distinction for online games has the potential to override all state government objections and obstructive legislation and regulations.

3. The national Cabinet has recently muddied the waters on its agenda following the release of its online gaming rules. After consultation with the industry, expert observers had speculated that the government’s online regulation framework would liberally include chance-based online games. Instead, one of the responsible ministers is hedging on whether even skill-based games with stakes will be permitted. A Supreme Court ruling for the gaming industry would force the central government, along with its state counterparts, to ensure that the skill-chance distinction is honoured in any central legislation or regulation that prohibits betting and wagering.

4. A favourable ruling for the industry would strengthen the political and operational environment of a national regulatory framework, as well as its attractiveness to state governments now hostile to the online gaming industry.

5. Such a ruling would place enormous pressure on state governments to enact compatible legislation that meets constitutional requirements, perhaps even compelling cooperation with the central government. Although this might assist in assuaging fierce anti-gaming sentiment in legislative assemblies and much of the wider community, it could also anger civic and religious organisations and communities opposed to gambling in any form.

6. A pro-industry ruling would go some way to restoring the dignity and authority of state high courts, particularly the Madras High Court in Tamil Nadu, whose voiding of the state ban on online gaming was de facto overruled by the government and Legislative Assembly via an updated law with identical intent. Tamil Nadu officials are continuing to dispute the Supreme Court interpretation in the Madras High Court, arguing in a filing this week that the online environment removes the preponderance of skill from skill games.

7. Nationwide legalisation of online skill gaming with stakes would greatly increase the size of the market, industry revenue and tax revenue, while also posing political challenges for state governments that have been uncompromisingly hostile to the industry, as well as more pragmatic governments sensitive to public anger.

8. Should the Supreme Court side with the state governments, the collapse in a distinction between skill and chance gaming with stakes would require review of myriad Supreme Court and high court rejections of petitions claiming fantasy sports to be a gambling (predominantly chance-based) activity.

9. Constitutional armour for online skill gaming with stakes would mark a sea change in institutional respectability for the industry. An achievement of such magnitude could embolden sports-betting advocates to take the “skill gaming” litigation route to legalise the colossal underground industry where politics, activism and law reform commissions have failed.

Associated cases

In addition to the rulings of high courts of Karnataka, Tamil Nadu, Telangana and Kerala, the following current or recent state high court actions would be directly affected by a Supreme Court ruling on online skill gaming with stakes.

1. In Madhya Pradesh, an increasingly testy high court has ordered the state government on several occasions to honour a commitment to regulating or banning online gaming with stakes. Current evidence suggests the government favours prohibition of all stakes-related gaming.

2. In Andhra Pradesh, the high court early this year instructed the state government to determine what constitutes online skill and chance games after receiving petitions challenging the state’s 2020 ban.

3. In Maharashtra in May this year, the Bombay High Court ruled for the raided developer of an online quiz game and against police who cited him for gambling offences, declaring that the game with stakes was a skill-based activity.

4. Also in May, the Bombay High Court ordered that PlayGames 24x7 Pvt Ltd was eligible to apply for long-delayed foreign direct investment (FDI) approvals because, in part, its skill-based online games do not constitute gambling activity (a banned FDI category).

5. In Delhi, social gaming platform WinZO applied to the Delhi High Court in April this year to compel reluctant Google executives to include its skill-based games in the Google Play Store and join permitted rummy and fantasy sports products.

GST Showdown

The fate of the online gambling industry is not merely in the hands of lawmakers and judges bickering over the sheer legality of games. It is also to some extent in the hands of tax authorities and what the courts will allow them to take.

The central government’s revision of goods and service tax (GST) provisions across all industries has included the imposition of the maximum 28 percent rate on online gaming companies.

The GST Council is set to convene on July 11 to finalise this and other matters, with confirmation of the full rate for the online gaming industry likely.

But the council will also determine if companies should be taxed on volume or gross gaming revenue, a decision that industry lobbyists warn could sink a material number of companies in the space if the council opts for a turnover-based model.

Consequently, it is of considerable concern to the industry that companies escape the pincer action of a volume-based tax and the full GST rate.

A lawsuit by Gameskraft Technology may have come to the industry’s rescue, weaponising the skill/chance distinction to force a lower GST rate out of the government.

Gameskraft Technology Pvt Ltd v Directorate General of GST Intelligence

What's it about?

In September 2022, Gameskraft Technology received a demand for $2.6bn from the central government’s Directorate General of GST Intelligence (DGGI) to cover several years of unpaid GST.

The DGGI alleged Gameskraft’s products constituted gambling and attracted the highest GST rate, but Gameskraft said its games were skill-based and exempt from the additional tax.

Gameskraft sued the DGGI in the Karnataka High Court, and prevailed in a May 2023 judgment.

The single-judge court cited the skill/chance dichotomy and equivalence between online and traditional skill games with stakes, quashing the DGGI’s demand.

Gaming industry observers anticipate the DGGI will launch a Supreme Court appeal over the ruling.

It is expected the DGGI will not only bypass an appeal to the full bench of the Karnataka High Court and head to the Supreme Court, but also fold the appeal in with those against several other state high court GST decisions favouring the online gaming industry.

Gameskraft, in turn, has anticipated the appeal with a caveat filing to the Supreme Court that would require the company to be informed of and consulted by the court on any government petition against them.

Why it matters

1. The Karnataka High Court ruling entrenches a skill-chance distinction in the formulation of GST rates and implies pressure will now be on the government to set a lower rate on skill-based games.

2. This distinction could be critical for the survival of gaming companies if the GST Council taxes turnover instead of gross gaming revenue.

3. The basis for the ruling is constitutional law, and if the Supreme Court hears the case and sides with the industry, it would immunise the skill-based segment against lawsuits on tax matters.

4. This ruling and any Supreme Court affirmation will put pressure on revenue officials to categorise and define skill games, thereby clarifying the skill/chance gaming distinction for administrative purposes and reducing litigation risk.

5. The GST Council, while not bound by the decision to set specific GST rates, will need to bear the decision in mind to avoid future lawsuits. IndusLaw partner Shashi Mathews and lawyer Abhishek Boob have said that should the council materially ignore the courts and introduce tax amendments that continue to aggress against the companies, further litigation may be necessary. “The said proposals will need to be brought into effect through suitable amendments under the GST Laws. At that stage, a new line of challenge may become available to the stakeholders,” they wrote in a June 16 analysis.

Associated cases

These are some of the cases likely to be folded into any DGGI appeal of the Karnataka High Court to the Supreme Court.

1. In January 2023, the Rajasthan High Court blocked the DGGI from recovering GST from fantasy sports company MyTeam11 on the basis of preceding rulings from the court that fantasy sports are games of skill and do not constitute gambling or betting.

2. In the common High Court of Punjab and Haryana, the bench last month ordered the Haryana state GST Intelligence Unit to desist from recovering allegedly unpaid GST from opinion trading platform Probo Media Technologies until the central government and relevant state ministers clarify a national GST stance. The decision conformed with the same court’s order in late 2021 for the GST Intelligence Unit not to pursue online gaming company Witzeal Technologies until clarity is delivered.

Conclusion

The legality of skill games with stakes and the tax regime that ought to bind the industry have produced two formidable constellations of litigation and legal debate.

With the matter of skill game legality now before the Supreme Court, and the GST question likely to follow, the industry is on the verge of a new era that even its most optimistic supporters might have doubted was possible only a few years ago.

That milestone is the marriage of central government legislation and regulation, apex court protection and a commercially and politically friendly operating environment in key states ahead of a national rollout.

Although not a done deal, the legal foundations for such an outcome are being laid. And whatever it holds, the future is online.

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