Opinion

The challenge of regulating online gaming

Dinker Vashisht |R Gopalan | Updated on: Apr 19, 2022
Categorisation of the sector is problematic

Categorisation of the sector is problematic | Photo Credit: JJFarquitectos

The trades are largely inter-State. The Centre has various options to regulate the sector that is growing at breakneck speed

The formal announcement of an AVGC (Animation, Visual, Gaming and Comics) Task Force, by the government last week, highlights the Centre’s commitment towards these sunrise sectors and their potential in drawing investments, generating revenues, and creating employment opportunities. However, the task force will have to examine some interesting questions with regard to legislative competence, especially in the context of regulating gaming, especially online skill gaming.

The question of gaming regulation becomes critical because the leitmotif of all three recent High Court judgments (Madras, Kerala, and Karnataka) was that State governments cannot categorise Games of Skill (rummy, fantasy, poker, bridge, horse racing, chess, etc) under Entry 34 (Betting and Gambling) of List II (State list) of Schedule 7 (segregating legislative powers in Centre, State and Concurrent Lists) of the Constitution.

In doing so, the High Courts reiterated the Supreme Court’s ruling that Games of Skill are a legitimate business activity protected under Article 19(1)(g) of the Constitution.

With the option of Entry 34 out, and no existing entry in Schedule 7 that specifically mentions “Online Gaming”, the government, particularly in States, face a predicament on how to categorise and regulate this sector. One option could be Entry 33 in List II which, amongst other things, lists sports, entertainments, and amusements. This allows State governments to introduce entertainment taxes and licence fees, thereby using the popularity of this burgeoning sector to generate revenue.

Theoretically, there is an option to regulate it under Entry 26 of List II, which deals with intra-State trade and commerce. But this categorisation is problematic because most online skill games are played between participants spread across States. There is also the apprehension that if States were to start regulating the sector, it could create a labyrinth of different licence fees, durations, commission tax rates, which go against the Centre’s objective of simplifying the taxation regime.

The nature of the industry, where transactions are overwhelmingly inter-State, opens a possibility for the Centre to regulate under Entry 42 (inter-State trade and commerce) of the List I (Union List). Another option is Entry 31 of the Union List that empowers the Centre to legislate on matters pertaining to posts, telegraphs, telephones, wireless, broadcast, and other like forms of communication, thereby putting it under the purview of the Ministry of Information and Broadcasting, or under the Ministry of Electronics and Information Technology (MeITY).

The Centre could also use residuary powers (Article 248 and Entry 97 of the Union List, in the Constitution) that empower it to legislate on any matter not enumerated in List II or List III (Concurrent). Previous governments have used these powers to enact legislation such as the Gift Tax Act, the Wealth Tax Act and the Right to Information Act.

With its dominant majority in both the Houses, the BJP government at the Centre is comfortably placed to take this route, though it could see resistance from States.

It will also have to meet the test of pith and substance , the yardstick used by the judiciary to check trespass by one side into another’s legislative domain, since exercise of residuary powers is considered a matter of last resort.

Leaving it to the Centre

The other pragmatic route for the Union to legislate is through Article 252 of the Constitution, wherein legislatures of two or more States abdicate their power on an entry in the State List and ask the Union to make a law.

The law, thus, framed has applicability only to the States that have passed this resolution; other States may adopt it. Previously, this modus operandi resulted in the enactment of the Wildlife Protection Act, the Urban the Land Ceiling Act, and the Water (Prevention and Control of Pollution) Act.

It was also the genesis of the Prize Competition Act, which was at heart of the famous Chamarbaugwala cases of the Supreme Court, wherein the apex court first made the distinction between games of skill and chance — the raison d’etre of the skill gaming industry in India.

If the Centre were to follow this route, it would be the proverbial wheel having turned the full circle.

With the gaming sector growing at breakneck speed, a regulation could be in the offing sooner rather than later.

Whether it is each State having its own regulation, or Parliament introducing a federal law, will be observed with considerable interest, especially as Digital 3.0, Metaverse, and blockchain will continue to present quandaries of legislative competence.

The writers are a former Secretary, Economic Affairs, and a policy and regulatory professional, respectively

Published on April 19, 2022
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