INDIA ROUNDUP
Bombay High Court clarifies ‘betting and gambling’ under FDI policy
between (i) amount withdrawn by the players; and (ii) non- taxable deposit. 32 Taxable deposits 33 will form part of the amount withdrawn by the players, thereby, increasing the net winnings. The rules and guidelines clarify several questions that operators had with respect to the manner of computation of net winnings, being (i) whether the amount deposited by players to participate in the game should be excluded in computation of net winnings, (ii) how to adjust losses incurred by players in the game, (iii) the treatment of incentives or bonuses offered by gaming operators. It also clarifies the manner of the valuation of winnings distributed in kind to players. Applicability of GST to online skill-based gaming operators has been a contentious issue in India. Online gaming operators are currently discharging GST at rate of 18 percent on the service fee / commission charged from players. The contention of the GST department has been that GST should be applicable on the aggregate of the buy-in amount and the service fee charged from players. The GST Council had formed a Group of Ministers (GoM) to look into the issues related to taxation of the gaming industry. However, the GOM has not been able to arrive at a consensus on the issue to date. The GST Council is expected to address this issue in its next meeting on July 11. Its decision could be a make or break for the Indian online skill- based gaming industry. Action against offshore operators There is an increased risk of offshore operators being blocked under the 2023 Amendments since the revised rules expressly clarify that the MeitY has the power to direct intermediaries to block gambling websites (they also have the power under the existing IT Rules). The 2023 Amendments are also the latest of several measures taken by Indian regulators to curb the activities of offshore gambling providers offering their online games remotely in India, discussed below: • In October 2022, it was reported that certain Indian telecom service providers (“TSPs”) had blocked access to several offshore sports betting and gambling platforms in India. 34
Under the Foreign Direct Investment Policy issued by the Government of India and codified into law by the Foreign Exchange Management Act, 1999 (“FEMA”) the Foreign Exchange Management (Non- Debt Instruments) Rules, 2019 (“Non-Debt Rules”), foreign direct investment (“FDI”) in entities involved in ‘gambling and betting’, and foreign technology collaborations in ‘lottery’ businesses and ‘gambling and betting activities’ are prohibited. The terms “gambling and betting” have not been defined under the Non-Debt Rules. However, in a recent judgment 30 , the High Court of Bombay has clarified that these terms are to be interpreted in accordance with interpretation of ‘gambling’ under the state-wise anti-gambling laws by Indian courts. The Bombay High Court has noted that these judgments recognize that to constitute ‘gambling,’ the activity must be (1) preponderantly chance- based, (2) played for a reward. Accordingly, games which are preponderantly skill based do not constitute ‘gambling.’ In the facts of this particular case 31 , the court held that FDI in the petitioner’s entity, which offered real-money online Rummy was not prohibited under the Non-Debt Rules. The Court further observed that an entity offering games in which no reward is given, did not constitute ‘gambling’, hence was not illegal. Thus, FDI in entities offering such games is permissible under the FDI Policy.
Tax Clarity Gaming operators are required to withhold tax at rate of 30 percent on net winnings from an online game. In a welcome move, clarity has been provided as to the manner of computation of net winnings and timing of withholding tax. Net winnings are required to be computed at the time of every withdrawal by players and at end of the relevant financial year. Net winnings have to be computed as the difference online-gaming-laws/exclusive-leading-offshore-gambling-websites-not-accessible-due-to-ban-under-it-act-2000/ 30 Play Games 24x7 Pvt. Ltd. v Reserve Bank of India & Anr., WP No. 3047/2022
31 A detailed analysis of the High Court’s judgment may be found here: https://www.nishithdesai.com/NewsDetails/9601 32 “Non-taxable deposit” has been defined to mean the amount deposited by the user in his user account and which is not taxable 33 “Taxable deposit” has been defined to mean any amount deposited in the user account which is not a non-taxable deposit and includes any amount paid directly to the user not through the user account 34 See: https://g2g.news/online-gaming-laws/exclusive-government-to-block-220-more-domains-of-offshore-gambling-websites/
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IMGL MAGAZINE | JULY 2023
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