Legality
1. Facts
1.1. We understand that Upsports Vision Private Limited (“Upsports”) is an online gaming intermediary platform engaged in the business of providing platform services to customers for playing real money casual games.
1.2 Upsports is currently offering the following games on their platform called “Bazigar”:-
Classic Tetris — Tetris is a puzzle game where players must arrange incoming Tetrominos in a way clears as many rows as possible. The purpose is to clear up to four lines at a time to score more points. Player with the highest score wins. However, if the stack of Tetriminos hits the top of the matrix or the time runs out, the game is lost.
Tetris Neo — In this version of Tetris, all the rules of a classic tetris game apply with some variation. Players can control the game using a finger swipe, making it easier to move the shapes left and right. Dragging down the shape their fingers would make the Tetriminos fall faster, while a single tap would rotate the shapes.
Jungle Snake — In this game, the players controls a snake that moves on the screen with the main objective of eating as many apples as possible within a given time to win the game. The snake grows longer in size after eating three apples. If the snake touches the boundary, then the snake dies and the game will be over. Players are required to use their skills and quick action to avoid obstacles and keep the snake alive.
Desert Snake — The game is set up in a dessert. The other rules remain to bc the same as Jungle Snake.
Snow Snake - The game is set up in a snow setting. The other rules remain to be the same as Jungle Snake.
1.3 In each game discussed above, the winner is going to be determined on the basis of the score achieved by the player in a game. All players will be on the same footing as the game being organised will be identical for all players so as to allow for a competitive game amongst them.
1.4 The games discussed will have to be played and won using skills of the players. With the games being played by all players being identical, the element of chance will be diminished. The games being organised thus shall be games of skill because there is a preponderance of skill over chance.
1.5 In light of the above facts, the company wishes to understand that Indirect Tax (GST) and Income Tax implications
2. Background on Gaming Law
2.1. Prior to the Indian Constitution taking effect, the Public Gambling Act, 1867 (PGA) was enacted for the regulation and prohibition of gambling. Under the Constitution, the State legislatures have been given the power to regulate games that involve “betting and gambling” under Entry 34, List II, Schedule VII.
2.2. Sections 3, 4 and 5 of the PGA criminalize the act of gambling in a public forum in India and the keeping of a ‘common gaming house’, i.e., any enclosed space, in which instruments of gaming are kept or used for profit or gain.
2.3. However, Section 12 of the PGA states that none of the provisions of the said Act will apply to a ‘game of mere skill’ wherever played. Many states in India have adopted the Central PGA, whereas there are few states, which have enacted their own statutes governing gambling, which have a similar carve-out for games of ‘mere skill’.
2.4. The PGA does not define what constitutes a game of ‘mere skill’. It would be pertinent to refer to relevant decisions where the term, ‘mere skill’ has been analyzed. The same is highlighted in the Schedule A.
2.5. Parallelly, the State Governments have been given the power under the Constitution of India to legislate on matters of “betting and gambling”. In furtherance to the same, various states have notified their own state specific laws on gaming amounting to betting and gambling.
2.6. Recently, the Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Amendment Rules, 2023 (“IT Intermediary Amendment Rule 2023”) have been notified on April 06, 2023, for online gaming intermediaries and permissible online games.
3. Standard Operating Procedures – Territories of operation
3.1. The following states have their own respective gaming laws for their specific states:
3.1.1. Tamil Nadu: The Tamil Nadu Prohibition of Online Gambling and Regulation of Online Games Act, 2022 (“Tamil Nadu Gaming Act”) has been notified by the State Government of Tamil Nadu. Under the said act, a wide variety of games, both chance and skill have been prohibited from being organised in the state. The local online games provider are required to obtain registration for permissible games. A game-on-game analysis shall have to be undertaken to understand the implications on the games offered by Upsports. [●]
3.1.2. Nagaland: Game can be organised with necessary licenses.
3.1.3. Sikkim: Game can be organised with necessary licenses.
3.1.4. Meghalaya: Game can be organised with necessary licenses which requires certain criteria to be fulfilled, one of which is that the Company should have minimum experience of 5 years.
3.1.5. Telangana: Gaming is banned.
3.1.6. Andhra Pradesh: Gaming is banned.
3.1.7. Odisha: We do not see an issue in organising a game in this state on the basis of the reading of the Orissa (Prevention of Gambling) Act, 1955. However, most gaming companies are not organising games in the said state.
3.2. Tracking of users for blocking in the specified states:
3.2.1. The Company can opt for either: (a) Geo-tagging; or (b) Self-declaration in the address provided by the customer.
3.2.2. Specific Requirements under the Tamil Nadu Gaming Act
3.2.2.1. For games that are prohibited under the Tamil Nadu Gaming Act, the online game providers are required to either exercise due diligence as specified under the Tamil Nadu Gaming Act or have geo-blocking in the state.
3.2.2.2. Due diligence as specified under the Tamil Nadu Gaming Act is as under:
(a) Informed prospective customers that the State prohibits online gambling and playing of certain online games to customers who are physically present in this State.
(b) Require the customers to enter into contracts with an express condition that the customers shall not use the service, if they are physically present in the state.
(c) Require customers to provide personal details sufficient to establish that they were not physically present in the state.
(d) Obtain data that indicated that the customer was not physically present in the state when the customer account was opened and throughout the period when the service was provided to the customer.
(e) Taken all other reasonably practicable measures to ensure that no person physically present in the State could have access to the games prohibited under the act.
4. Standard Operating Procedures – Compliance requirements and KYC
4.1. With the introduction of the Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Amendment Rules, 2023 (“Intermediary Rules”), an online gaming intermediary is required to follow due diligence requirements both under Rule 3 and Rule 4 of the Rules.
4.2. Compliance with Rule 3 and Rule 4 are not impacted by the number of users that a gaming company has, which is the case with a social media intermediary. The detailed compliances have been covered under Schedule B.
4.3. Under Rule 4, one of the compliance requirements is the Know-Your-Customer (KYC) compliance.
4.4. As per the said rule, any online gaming intermediary must, before accepting any deposit in cash or kind from any user for a permissible online real money game, identify the user in the same manner as a bank governed by the RBI identifies and verifies a customer at the commencement of an account-based relationship.
4.5. As per the Master Directions on KYC 2016, the account-based relationship requires a full-KYC requirement as prescribed in the CDD process. It is advised to wait for further clarity on the matter once the SRO’s frameworks are released.
5. What should be the wallet structure for the application?
5.1. The Company should have a minimum of two wallet structure for the game. A separate wallet can be maintained for bonus points as well.
5.2. The deposit wallet should accept deposit from the users for playing the game. The said wallet should not allow for withdrawal of cash. The deposit wallet will be a closed system PPI. The amount held in the deposit wallet shall be held in trust and therefore, the said amount cannot be forfeited.
5.3. The winnings wallet and the bonus wallet can allow for withdrawals for winnings earned from playing the game and this shall not be considered to be a PPI.
5.4. Bank Account: The Company should maintain two separate bank accounts. One account should be used for general operations of the Company where the platform fee can be credited and another for holding the deposits received / winnings earned by the customers, held in trust by the Company. The balance in this bank account should never be lesser than the amount owed to the customers.
5.5. Escrow Account: The Company may also consider opening of an escrow account for the deposit wallet money collection purposes. This shall formalise the trust arrangement between the company and the customer. This is a higher standard of protection that merely maintaining a separate bank account.
6. What are guidelines with respect to advertisement of the Platform?
6.1. The Advertising Standards Council of India has “Guidelines on Online Gaming Issued by Advertising Standards Councils of India (ASCI)”.
6.2. The guidelines provided in the following document should be adhered to for advertisement. https://mib.gov.in/sites/default/files/Advisory.pdf
6.3. Further, one of the due diligence requirements under the IT Intermediary Rules is that an online gaming intermediary shall make all efforts to ensure that it does not share on its platform, advertisement or surrogate advertisement or promotion of an online game that is not a permissible online game, or of any online gaming intermediary offering such an online game.
7. Are there any constraints with respect to receiving Foreign Direct Investment (FDI) in the company?
No, there are no restrictions with receiving foreign direct investment in the Company.
8. Registration requirements under the IT Intermediary Rules
8.1. Under the IT Intermediary Rules, everyone online gaming intermediary must be registered with a self-regulatory body as is approved by the central government.
8.2. The self-regulatory bodies shall provide membership after determining whether the games being offered by the online gaming intermediary are permissible online games or not and whether the online gaming intermediaries are in compliance with the IT Intermediary Rules.
8.3. The online gaming intermediary shall also have to ensure, compliance with the framework of the self-regulatory body.
Schedule – A
Judicial Interpretation of “Mere skill Games” in contrast to “Chance Games”
1. The Hon’ble Supreme Court, in the case of State of Bombay v. R.M.D. Chamarbaugwala, AIR 1957 SC 699 has held that a competition in order to avoid the stigma of gambling must depend to a substantial degree upon the exercise of skill; therefore, a competition, success wherein does not depend to a substantial degree upon the exercise of skill, is recognized to be of a gambling nature. It was also observed that despite there being an element of chance, if a game is preponderantly a game of skill it would nevertheless be a game of "mere skill".
2. The issue in this case related to the validity of the Bombay Lotteries and Prize Competitions Control and Tax Act, 1948. The impugned Act was enacted to control and levy tax on lotteries and prize competitions in the State of Bombay.
3. The Hon’ble Supreme court held that gambling or conducting the business of gambling is extra-commercium and hence not included within the meaning of ‘trade, commerce or intercourse’. Consequently, it is not protected by the fundamental right to trade and profession under Article 19(1)(g) or the freedom of trade, commerce and intercourse under Article 301 of the Constitution of India.
4. In State of Andhra Pradesh v. K. Satyanarayana & Ors. (1968) 2 SCR 387, the question before the Hon’ble Supreme Court was whether the game of Rummy was a game of mere skill or a game of chance.
5. It was held that the game of Rummy is not a game entirely of chance because it requires a preponderant amount of skill in memorizing the fall of cards, and in holding and discarding the cards. The Supreme Court also clarified that the distribution of cards being dependent on the card placement in the shuffled pack does involve an element of chance, but that alone does not make the same a game of chance. Hence, the game of Rummy was held to be “mainly and preponderantly a game of skill”. The Supreme Court in this case also observed that bridge is a game of skill.
6. The Hon’ble Apex Court in K.R. Lakshmanan (Dr.) v. State of T.N., (1996) 2 SCC 226 has held that horse-racing is a sport which primarily depends on the special ability acquired by training and that it is the speed and stamina of the horse, acquired by training, which matters. It was observed that jockeys are experts in the art of riding and between two equally fast horses, a better trained jockey can touch the winning-post. In view of this discussion, it was held that horse-racing is a game where the winning depends substantially and preponderantly on skill and wagering and betting on such games would not come within the ambit of gambling.
7. Another landmark decision was rendered in 2017 by the High Court of Punjab and Haryana (P&H) in the case of Shri Varun Gumber v. Union Territory of Chandigarh and Ors., CWP No. 7559 of 2017. This decision was rendered in the context of fantasy sports games which involve users drafting fantasy teams based on certain conditions from a list of players scheduled to play live games on a given day.
8. In the above case, the petitioner was registered as a player on the platform Dream11.com, which was operated by Dream11 Fantasy Private Limited (“Dream11”). He lost while playing fantasy sports games tournaments offered on Dream11.com. The petitioner moved the P&H High Court alleging that fantasy sports was not based on skill and that Dream11 was carrying on business covered within the definition of ‘gambling’.
9. The P&H High Court relied on the Hon’ble Supreme Court’s decision in the Lakshmanan case (supra). It was observed that the participant has to assess the relative worth of each athlete based on their strengths and weaknesses at the time of drafting players, which finally determines the success or failure of fantasy sports games. Hence, it was held that the element of skill predominantly affects the outcome of matches and that Dream11’s games are exempt from the provisions of the PGA as they require a substantial degree or preponderance of skill.
10. A Special Leave Petition against this judgment was dismissed by the Hon’ble Supreme Court vide Order dated 15.09.2017.
11. The above decision of the P&H High court was relied upon in the case of Gurdeep Singh Sachar v UOI 2019 (30) GSTL 441 (Bom). In this case, a criminal public interest litigation was filed before the Hon’ble Bombay High Court by one, Mr. Gurdeep Singh Sachar against Dream11 contending that Dream11 was (a) carrying out gambling / betting / wagering in the guise of ‘online fantasy sports gaming’ in violation of applicable laws; and (b) evading taxes by levying inadequate goods and services tax (GST) on such offerings. Relying on the analysis of the P&H High court in the Varun Gumber Case, the Bombay High Court held that the activities and offerings of Dream11 were permitted in law and were not illegal operations of gambling or betting in the guise of online fantasy sports gaming. It also concluded that there was no evasion of GST by Dream11 due to the activities not amounting to gambling. However, this decision has recently been stayed by the Hon’ble Supreme court vide Order dated 06.03.2020.
12. Another Public Interest Litigation petition was filed before the Hon’ble High court of Rajasthan in the case of Chandresh Sankhla v State of Rajasthan D.B.C.W.P. No. 6653 of 2019, with a grievance that the online game “Dream 11” should be declared involving betting and gambling. The Hon’ble Rajasthan High Court endorsed the views of the Bombay High Court in the Gurdeep Singh case as well as those of the P&H High Court in the Varun Gumber Case. It was held that the issue of treating the Dream11 game as having any element of betting / gambling is no more res integra.
13. From a reading of the above decisions, it is safe to conclude that any game which involves a preponderance of skill, would not fall within the ambit of gambling or betting. The courts in India have recognised that no game is a game of pure skill alone and almost all games involve an element, albeit infinitesimal, of chance. In such circumstances, Indian courts have by and large adopted the ‘dominant factor test’, or ‘predominance test’ which requires assessment and determination of whether chance or skill “is the dominating factor in determining the result of the game”.
“Casual Digital Games of Skill”
14. As has already been discussed above, the courts of the country have interpreted “Games of mere skill” on the basis of preponderance of skill test to decipher them from games of chance. There is no further classification that has been created in the skill-based gaming.
15. However, with the ever evolving and rapidly changing nature of skill-based games, certain countries have identified the need for further segregation of skill-based games into different categories.
16. Malta, which has one of the most contemporary legislations on gaming, has segregated its games beyond skill and chance intro four categories depending upon the level of skill and risk that is involved in each game.
17. Similarly, UK has identified different genres of games as well. In UK, games of chance include games of skill with any element of chance. Thus, unless a game is of pure skill, it is regulated and subject to licensing requirements by the government. In the said context, UK has undertaken extensive studies on “Social Gaming” to understand the need for regulation and the extent of it. In the said study they noted as under:
(a) Some of these games are ‘social’ in the sense that interaction with other people is a key feature of the gaming or gambling.
(b) Vast majority of people who play social games spend very modest amounts of time and money, there is clearly a very small group who spend significant amounts. However, it is likely that this group is not sufficiently large to justify any form of additional regulatory intervention.
(c) Owing to the little contribution for playing these games and the lack of addictive feature to these games, the said games do not seem to be harmful in itself to vast majority of the players. However, there is lack of clarity on the same.
18. Thus, countries such as Malta and UK have recognised that even within the category of Games of Chance and Skill, there are further sub-categories that can be created to govern the degree of regulation that the said games shall require for the welfare of the public.
19. In the Indian context, the discussion on online gaming has not reached this stage. However, keeping in mind the development in the last century, it is safe to assume that eventually the games will further be segregated beyond mere skill and chance game.
20. In the case laws discussed above, it is evident that certain games of skill are more heavily debated and opposed than the others. Card games such as Poker and Rummy, while qualifying as skill games, are considered as more serious, addictive and high-stake games of skill which continue to require certain amount of regulation even after qualifying as games of skill.
21. Therefore, it is relevant to note that even within the context of skill based games, games can be segregated intro more serious, addictive and high stake skill based games such as card games and fantasy games which pose risks of addiction and loss of money similar to gambling and casual digital skill based games which are low stake, non-addictive games which are played more in the nature of social gaming and do not pose risks similar to gambling.
Schedule - B
Compliance requirements under the Intermediary Rules for online gaming intermediaries
1. Prominently publish its website and mobile based application or both, (a) rules and regulations; and (b) privacy policy; and (c) user agreement in English.
2. Online gaming intermediary through the rules and regulations, privacy policy and user agreement must ensure that, it itself as well as the users do not host, display, upload, modify, publish, transmit, store, update or share any information that:
a. belongs to another person and to which the user does not have any right;
b. is obscene, pornographic, pedophilic, invasive of another’s privacy including bodily privacy, insulting or harassing on the basis of gender, racially or ethnically objectionable, relating or encouraging money laundering or gambling, or an online game that causes user harm or promoting enmity between different groups on the grounds of religion or caste with the intent to incite violence;
c. is harmful to child;
d. infringes any patent, trademark, copyright or other proprietary rights;
e. deceives or misleads the addressee about the origin of the message or knowingly and intentionally communicates any misinformation or information which is patently false and untrue or misleading in nature or, in respect of any business of the Central Government, is identified as fake or false or misleading by such fact check unit of the Central Government as the Ministry may, by notification published in the Official Gazette, specify;
f. impersonates another person;
g. threatens the unity, integrity, defence, security or sovereignty of India, friendly relations with foreign States, or public order, or causes incitement to the commission of any cognizable offence, or prevents investigation of any offence, or is insulting other nation;
h. contains software virus or any other computer code, file or program designed to interrupt, destroy or limit the functionality of any computer resource;
i. is in the nature of an online game that is not verified as a permissible online game;
j. is in the nature of advertisement or surrogate advertisement or promotion of an online game that is not a permissible online game, or of any online gaming intermediary offering such an online game;
k. violates any law for the time being in force;
Any evidence about the violation of the above should be preserved for 180 days for investigation purposes or such longer time as maybe required by the court or government agency.
3. Periodically inform users, at least once every year, that if the rules and regulations, privacy policy or user agreement is infringed upon by the user, then the intermediary has the right to terminate the access or usage rights of the user immediately or non-compliant information or both.
4. Any change in the rules and regulations, privacy policy or user agreement should be notified to the informed to the users, as soon as possible, but not later than 24 hours after the change is effected.
5. The information collected from the user at the time of registration must be retained for 180 days after any cancellation or withdrawal of the registration by the user.
6. Must take reasonable measures to secure it computer resource and information as per the Information Technology (Reasonable Security Practices and Procedures and Sensitive Personal Information) Rules, 2011
7. the intermediary must not knowingly deploy or install or modify technical configuration of computer resource or become party to any act that may change or has the potential to change the normal course of operation of the computer resource than what it is supposed to perform thereby circumventing any law for the time being in force.
8. the intermediary must report cyber security incidents and share related information with the Indian Computer Emergency Response Team in accordance with Information Technology (The Indian Computer Emergency Response Team and Manner of Performing Functions and Duties) Rules, 2013.
9. the intermediary must take all reasonable measures to ensure accessibility of its services to users along with reasonable expectation of due diligence, privacy and transparency.
10. the intermediary must respect all the rights accorded to the citizens under the Constitution, including in the articles 14, 19 and 21.
11. The intermediary must prominently publish on its website as well as the mobile based application, the name of the Grievance Officer and his contact details as well as mechanism by which a user or a victim may make complaint against violation of the provisions of this rule.
12. appoint a Chief Compliance Officer who will be responsible for ensuring compliance with the Act and rules made thereunder and will be liable in any proceedings relating to any relevant third-party information, data or communication link made available or hosted by that intermediary where he fails to ensure that such intermediary observes due diligence while discharging its duties under the Act and rules made thereunder.
13. appoint a nodal contact person for 24x7 coordination with law enforcement agencies and officers to ensure compliance to their orders or requisitions made in accordance with the provisions of law or rules made thereunder.
14. appoint a Resident Grievance Officer, who shall be responsible for the functions of the grievance redressal mechanism.
15. publish periodic compliance report every month mentioning the details of complaints received and action taken thereon.
16. The intermediary must have a physical contact address in India published on its website and the mobile based application for the purposes of receiving the communication addressed on it.
17. The intermediary must implement an appropriate mechanism for the receipt of complaints as per the grievance redressal mechanism and must enable the complains to be tracked by providing a unique ticket number for every complaint and enable status tracking.
18. The intermediary must enable users who register for their services from India, or use their services in India, to voluntarily verify their accounts by using any appropriate mechanism, including the active Indian mobile number of such users, and where any user voluntarily verifies their account, such user must be provided with a demonstrable and visible mark of verification, which must be visible to all users of the service.
19. The intermediary must display a demonstrable and visible mark of verification by an online gaming self-regulatory body on such permissible online real money game.
20. In the rules and regulations, privacy policy and terms of service, the online gaming intermediary must ensure that the following points are covered:
a. The policy related to withdrawal or refund of the deposit made with the expectation of earning winnings, the manner of determination and distribution of such winnings, and the fees and other charges payable by the user;
b. the know-your-customer procedure followed by it for verifying the identity of the users of such online game;
c. the measures taken for protection of deposit made by a user for such online game; and
d. the framework referred to in rule 4A, relating to such online game.
21. An online gaming intermediary must, before accepting any deposit in cash or kind from any user for a permissible online real money game, identify such user and verify his identity.
The procedure required to be followed by an entity regulated by the Reserve Bank of India for identification and verification of a customer at the commencement of an account-based relationship shall apply, mutatis mutandis, in identification and verification of the users of such online gaming intermediary.
22. An online gaming intermediary must not itself finance by way of credit or enable financing to be offered by third party for the purpose of playing such online game.
