Comments on the NITI Aayog’s draft ‘Guiding Principles’ for the ‘Regulation of Online Fantasy Sports Platforms in India’

On 5th December 2020, NITI Aayog released a draft for discussion titled ‘Guiding Principles for the Uniform National-Level Regulation of Online Fantasy Sports Platforms in India’ (“Draft Report”), seeking comments from different stakeholders of fantasy sports industry. The Draft report hits two birds with one stone; firstly, it proposes to establish a single Self-Regulatory Organization (SRO) for Online Fantasy Sports Platforms (OFSP) so as to enable ‘light touch’ regulatory framework, secondly, these guidelines also act as a ‘regulatory sandbox’ for OFSP.  

A brief summary of our submission to NITI Aayog with comments, concerns and recommendations in relation to the Draft Report are as follows: 

Recognition for all categories of “pay-to-play” online games

Apart from online fantasy sports, there are many other pay-to-play format of online games like rummy, cricket simulation etc. that are offered using the same digital interface through which they offer online fantasy sports contests. For instance, Paytm First Games and Mobile Premier League, to name a few. We have raised the concern that governing only OFSP could result in complex situation for online gaming industry in general and such all-in-one online gaming platforms in particular. We recommend that by virtue of these guidelines all “pay-to-play” formats of online games should be recognised.

Specify definition and extent of the term ‘fantasy sports’

The Draft Report neither defines the term neither ‘fantasy sports’ nor enlists activities that might constitute the same under the proposed framework. The framework proposes that “all formats” of fantasy sports offered by OFSP must be skill-predominant. There is no clarity whether ‘free to play’ formats, which doesn’t involve any stake of players and are risk-free, are also required to be game of skill. In our comments, we have formulated an element-wise definition of ‘fantasy sports’ wherein we have specifically pleaded that the definition should exclude free to play format specifically from the definition of fantasy sports.

The proposed framework requires a platform to take approval from SRO if offering a fantasy format different from judicially determined game of skill. There are three HCs which have analysed the Dream 11’s format as game of skill and no definitive criteria have been laid down by any of them for determining whether a fantasy format is game of skill or not. Therefore, we believe that ‘judicially determined’ format of fantasy sports is subjective and the framework should itself provide objective test in the Draft Report itself.   

Uniform and diverse representation in the SRO

The Draft Report prescribes that only a fantasy sports industry body, which have as members OFSPs with registered user base, in aggregate, equivalent to at least 66 percent of registered users of online fantasy sports in India, could be recognised as SRO by the Government. This is an absurd eligibility criterion as the concentration of users is not uniform across OFSPs. In such a scenario, there is a risk of disadvantage to the interests of OFSPs with small user base.

The proposed model of membership of SRO leaves aside many other participants of the fantasy sports industry like advertisers, payment service providers, consumer bodies etc. We recommend that the eligibility criterion for recognition of an industry body as SRO must be based on diversity and number of members rather than the strength of user base of its members. This will lead to a holistic and pervasive regulatory framework.

Requirement of minimum safeguards in the organizational framework of SRO

Three internal bodies have been envisaged within the proposed SRO: an independent oversight board, a grievance redressal mechanism and an evaluation committee. We recommend that a governing body, in addition to the internal bodies, must be constituted. Further, basic principles and minimum safeguards must be incorporated in the framework to ensure independence of oversight board, transparency in working of grievance redressal body and evaluation committee, etc.

Clarity on how safe-harbour exemption will be implemented

The guiding principles proposed in the Draft Report grant safe-harbour exemption or a criminal immunity to all the member-OFSPs of the SRO. As “gambling and betting” is a subject of the state list, it is recommended that a clarificatory note be released by the NITI that fantasy sports be construed as a class apart from gambling rather than exception. In short, fantasy sports should be governed by the Union using its residuary powers under Entry 97 of List I.

(Authored by Eukti Garg, Volunteer-Researcher at LawforIT, with inputs from Aryan Babele)

The tax methodology dilemma in India for eGaming companies

The indirect tax department is questioning some of the major online fantasy gaming companies to ascertain whether goods and services tax (GST) is applicable on the entire transaction value (the amount players deposit or escrow for a particular game) or the commission/platform fees (revenues) that accrue to these gaming companies and operators for facilitating transactions.

As reported by ET, the tax official wants to determine if there is any revenue leakage due to the methodology that is adopted by these platforms to calculate and pay goods and services tax (GST). The report states that the tax department has questioned several officials from different online gaming companies.

Currently most of the online skill gaming companies are paying GST on the commissions/platform fees that company accrues from players’ contribution.

To give backdrop, online skill gaming companies like Dream 11, Fantain, etc collect a certain contribution to a prize pool or escrow account from players who want to lay bet on the outcome of a match. The online gaming platforms deduct commission from the pool or escrow account as a service fee, which amounts to 20% of the total contribution by a player. As of now the gaming companies are reportedly paying 18% GST on this service fee, whereas the tax authorities are questioning whether the GST should be applicable on entire contest entry amount (the amount that player deposits in the prize pool).

Even the online gaming companies are divided over the issue as certain leading companies like Dream11 (that recently turned unicorn in latest funding round receiving more than $1Bn) is already paying GST on the entire transaction value instead of the margins (commissions/revenues). As Dream 11’s co-founder Harsh Jain told to ET, We pay GST on the gross consideration collected by our platform and not on our margins. Levying GST on user deposits would mean that it’s paid only once when users make their deposits and not every time they play in our contests with t heir winnings as well, which is when Dream11 provides a service to them. This is the same practice followed globally in every mature GST-following country. GST for online gaming companies is charged on their Gross Gaming Revenue,”

The tax authorities referred to the valuation rules that favors tax imposition on the entire consideration.

The report says with reference to a tax official that, “The valuation rules (under GST framework) are quite clear that GST is levied on the consideration and currently there is no clarity as to whether the revenue charged by these companies be considered consideration or the total pool. In March some companies were asked to explain why they shouldn’t be paying GST on the total pool”.

The Rule 31A of the Central Goods and Services Tax Rules, 2017 provides that the GST is to be paid on total consideration for the supply of actionable claim in the form of betting, gambling or horse racing. Meanwhile, online skill gaming companies claim that these rules are not applicable to them as their activities cannot be categorized as gambling or betting. These companies pay tax at the rate of 18% and not under the 28% tax slab of gambling, betting or lotteries, as their activities fall under the ambit of ‘games of skill’.

Further, online skill gaming companies believe that ‘deposit’ is exception to the valuation rules and therefore the entire contribution could not be taxed as it is a deposit. However, tax experts maintains that ‘deposit’ is defined as a sum of money paid by and returned to the same individual- which is not the case with online skill based gaming companies. As it is not at all clear that whether the contribution to prize pool received initially is ‘deposit’ or transaction, the authorities will closely scrutinize these transactions.

Fantasy sport is relatively a new industry with no precedent to determine tax. In the absence of similar model of business there is no precedence, and hence the tax authorities want clarity on the issue of methodology that should be adopted. In response, an industry body of eGaming companies, Indian Federation of Sports Gaming (IFSG) has reached out to the Ministry of Finance and GST council for clarity on the issue. If there will be no clarification from the government, the matter will lead to litigation.

If authorities decide to change the metric of calculation and ascertainment of tax, the difference could be significantly huge between the tax on commission and the tax on total deposit and it could lead to ‘shut down’ of businesses.

Multiple Petitions over ‘PUBG Ban’: Another facet of Technology v. Law

PlayerUnknown’s Battlegrounds (PUBG) is one of the most popular online multiplayer games in the world. It has almost 400 million players base to play the game worldwide. The game is a standalone game in which up to hundred players parachute onto an island and collect weapons and equipments to kill others. The players have to avoid getting killed themselves. The available safe area of the game’s map decreases in size with time, pushing surviving players to tighter areas to force encounters. The last player or team surviving wins the round.

On 11th April 2019, the Gujarat High Court dismissed a Public Interest Litigation (PIL) petition filed by the Internet Freedom Foundation (IFF) which challenged the ban imposed on playing of PlayerUnknown’s Battlegrounds (PUBG), by at least six Gujarat Police departments.

Hearing the IFF’s petition, the HC bench comprising of the Chief Justice Anant S Dave and Justice Biren Vaishnav observed that they “are not satisfied that the scope of the present writ petition falls under the ambit of Public Interest Litigation”.

Public Interest Litigation means litigation introduced for the protection of the public interest. It is litigation introduced in a court of law, not by the aggrieved party but by the court itself or by any other private party. It is not required, for the exercise of the court’s jurisdiction., that the person necessarily should be the victim of the violation of rights. However, the person filing the petition must prove to the satisfaction of the court that the petition is being filed for a public interest and not just as a frivolous litigation.

Whereas in a separate PIL petition seeking ban against the PUBG, The Bombay High Court has issued a direction to the Ministry of Electronics and Information Technology (MEIT) to assess and review online game PUBG and take an action if any “objectionable content” is found.

The Gujarat HC’s order

During March, following a letter from the home department, notably several police departments of Gujarat issued notifications of banning PUBG on the orders of Commissioners under Section 144 of the Code of Criminal Procedure. The orders were issued on the ground that it results in violent behaviour among youngsters and affects their studies. According to several reports, teenagers who were found playing this online game were arrested under Section 188 of the Indian Penal Code.

Section 144 of the Code of Criminal Procedure gives State Governments the power to

It is the case of the IFF’s petition that the ban is arbitrary and unreasonable as it is violating Articles 14, 19 and 21 of the Constitution of India.

The impugned order banning PUBG has been contended by the IFF’s petition as a violation of the fundamental right to liberty under Article 21. According to IFF’s petition, the ban is a disproportionate invasion of privacy due to the following grounds:

  • The ban does not serve any of the legitimate purposes mentioned in Section 144 CrPC, because persons arrested for playing the game are not engaging in any violent or aggressive behaviour.
  • The ban, which carries the threat of arrests and criminal prosecution, is “patently unsuitable method of promoting psychological, social and educational well-being of adolescents and young adults”.
  • “Further, there is no evidence to suggest that the negative effects of PUBG are severe enough to endanger human life or health”.

The petition further challenges the ban as infringing several freedoms guaranteed under Article 19 on following grounds:

  • PUBG provides in-game text and voice chat feature which are used by players to form “meaningful bonds through team play and recreation. Therefore, the ban on game violates players the right to freedom of speech and expression guaranteed by Article 19(1)(a).
  •  PUBG is a team game and players assemble in public places to play PUBG in teams. The petition contends that such ban denies players the right to peacefully assemble in public spaces guaranteed by Article 19(1)(b).
  • There are “professional PUBG competitions” that are held at world stage and “award large cash prizes” and hence is “a source of livelihood for individuals”.  The ban violates the right to practice any profession or occupation under Article 19(1)(g).

The petition further contends that the order of the police is in excess of its powers and is arbitrary under Section 144 of CrPC. The ban is arbitrary as it “cannot be invoked merely based on the remote possibility of a threat”. The banning order is a form of “moral panic” based on unverified data showing ill effects of PUBG.

The Section 144 of CrPC resides as the sole occupant under the chapter of ‘temporary measures to maintain public tranquillity’ and gives State Governments the power to issue orders for immediate remedy in urgent cases of nuisance or apprehended danger.  

From a bare reading, the relevant portion of Section 144 can be carved out into three basic elements:

  • The authority to issue orders: lies with the District Magistrate, a sub divisional magistrate or any other Executive magistrate specially empowered by the State Government in this behalf.
  • The grounds on which S. 144 can be invoked: The reasons include: a)sufficient ground, b) requirement for immediate prevention, and c)speedy remedy to prevent a likely obstruction, annoyance or injury to any person lawfully employed, or danger to human life, health or safety, or a disturbance of the public tranquility, or a riot, or an affray.
  • The intended recipient: After determining sufficient ground and through a written order, the authorized can direct any person to abstain from a certain act or to take certain order with respect to certain property in his possession or under his management.

The IFF previously before the filing of this petition, on 14th March 2019, has also issued an appeal in public for revoking the Section 144 orders and cease criminal prosecutions following the ban.

During the hearing, the Hon’ble Gujarat HC did not agree with the submission of the IFF and rejected the PIL. However, the HC has mentioned that the individuals who have been arrested for playing PUBG may approach the High Court themselves. According to IFF, they have anticipated such a concern in their petition and has noted that “young college students who have been arrested may not have the resources and support to withstand protracted litigation against the Police department”.

The Bombay HC’s order

Hearing a PIL, that seeks a ban on PUBG in schools, Bombay HC’s bench comprising of Chief Justice Pradeep Nandrajog and Justice NM Jamdar has directed the Secretary of the IT Ministry to review and assess the game and take action against the service providers if any objectionable content is found.

The PIL filed by 11-year old Ahad Nizam, represented by his father, contends that the popular online multiplayer game promotes immoral conduct such as “violence, murder, aggression, looting, gaming addiction and cyberbullying”, thus should be banned.

The PIL seeks directions to be issued to the State Education Department to ban PUBG in schools forthwith. It also sought directions to be issued to the Ministry of Electronics and IT, Government of India to form an Online Ethics Review Committee to monitor such content from time to time.

The Court has adjourned the case and posted it for hearing after vacations.

In light of the above two judgments, the blog will explore the tussle between regulations and eSports. Keep checking the posts to know more.