The Implications of Finance Bill 2023 on Online ‘Gam(bl)ing’: An Income Tax Perspective

[By Reet Balmiki]

The author is a student of NALSAR University of Law.



With the Union Budget 2023-24 being presented, the Finance Bill 2023 proposed key amendments to the provisions concerning the taxability of winnings from gambling under the Income Tax Act, 1961 and introduced separate provisions to govern online ‘games.’ This move proposed by the Union is in response to the increasing uncertainty in regulating online ‘games’ due to state-wise regulatory mechanisms. While certain states have imposed a blanket ban on all online games played for a stake, others have chosen to regulate the industry through a partial ban. Additionally, the imposition of a complete ban also results in the legislature blurring the distinction between games of skill and games of chance and, in effect diluting the judicial test of ‘preponderance of skill.’

Undeniably, the online gaming industry has cemented its place among the most prosperous sectors in the rapidly growing digital economy. Consequently, a consistent and transparent policy regulating the burgeoning industry while appreciating its contributions to the Indian economy is a pressing need. This article has three objectives: First, it sets out the evolution of the law related to gambling through courts and the legislature; Second, it discusses the controversy surrounding the legislative competence of the recent state laws/ordinances on the subject; Third, it traces the policy implications of the proposed amendments in the Finance Bill, 2023.

Tracing the evolution of the meaning of ‘Gambling’

The debate over the gamut of ‘Gambling’ has dual significance, first, it lays down the foundation for the rational distinction between games of skill and chance which is the focal point of the debate over online gaming, and second, it defines the extent of regulatory jurisdiction of the state legislatures and lies at the heart of the recent controversy over the classification of online gaming. This section briefly traces the judicial interpretation of the term and the jurisprudence attached to it.

The judicial foundation was laid down for the first time in the case of State of Bombay v. R.M.D. Chamarbaugwala, (“Chamarbaugwala”) where the Supreme Court deliberated upon the Bombay Price Competition Tax Act, and referred to the definition of ‘Price Competition’ under Section 2(2) and held that any game which does not substantially depend on the exercise of skill constitutes ‘gambling.’ This reasoning was applied explicitly as the test of preponderance in the K Satyanarayana case. Here, the Court categorized Rummy as mainly and preponderantly a game of skill with only a certain element of chance, thus distinguishing it from chance-based ‘gambling.’ This test was further concretized in the K.R. Lakshmanan case, where the Court was faced with determining whether horse riding is a ‘game of skill’ and consequently saved by the exemption clause in the Madras Gaming Act, 1930. Here, the Court substantiated the ‘preponderance of skill’ test from Chamarbaugwala and concluded that games based on a substantial degree of skill (including games of mere skill or predominant skill) shall not constitute ‘gambling.’

The judicial categorization into predominantly skill-based and purely chance-based games does not foresee the possibility of a purely skill-based game, as evident in MJ Sivani. This conceptual vacuum results from the judicial non-consideration of differentiation between the ‘chance’ factor in a game and the element of ‘accident.

Contrary to this, the Public Gambling Act, 1867 and state legislations have categorized these games into: games based on ‘mere skill,’ games based on ‘mere chance,’ and mixed games of skill and chance. It is only the games of ‘mere skill,’ with the possibility of ‘accidents’ but no ‘chance’ factor, which are exempted from the prohibition under gambling laws. Therefore, while mixed games where skill is predominant are allowed as per the judicial test, many state legislatures have sought to ban these. One prominent example is the Explanation to Section 15 of the Telangana State Gaming (Amendment) Ordinance, 2017, which refuted the judicial interpretation of Rummy being a skill-based game because of the luck/chance factor. However, this position is inconsistent among the states and indicates a broader policy gap.

Legislative Competence for regulating Online Gambling: prerogative of the States or Union?

Moving forward, it becomes noteworthy that nothing in the Constitution prohibits the legislatures from overriding the judicial interpretation of ‘gambling’ through a clarificatory amendment, provided the legislative body has the requisite competence. In this light, the controversy surrounding the definition of ‘gambling’ further intensifies in the case of ‘online gambling’, which has increasingly become susceptible to state regulation.

In the scheme of federalism, the legislative powers have been defined under Schedule 7, where Entry 34 of the State List gives states the legislative competence to make laws on ‘Betting and Gambling.’ However, with the Karnataka Police (Amendment) Bill, 2021, and the Tamil Nadu Gaming and Police Laws (Amendment) Act, 2021 banning online skill-based games, the challenges to the legislative competence of states over such gambling laws has been a prominent issue. Two aspects become relevant; first, whether Entry 34 needs to be read expansively to include ‘games of skill’ and second, whether a liberal construction of Entries under the State list permit such a ban.

The Tamil Nadu Amendment was challenged in Junglee Games case, where the Petitioners contended the competence of the State Legislature to impose a blanket ban on all online games for stake, including ‘games of skill.’ The contention here lies at the crux of our discussion. Firstly, the State attempted to take an expansive view of ‘gambling’ and ‘betting’ under Entry 34 to include any game played for a stake. However, the rational distinction between games of skill and chance cannot be diluted to such an extent as it goes to the very root of competence. An over-expansive reading of the Entry would change the very meaning of the entry, thus being held impermissible. Secondly, the amendment to Section 11 to undo the exemption clause for games of ‘mere skill’ further diluted the preponderance test by imposing a blanket prohibition. Per R. M. D. Chamarbaugwala, ‘games of skill’ form a different class and have been accorded protection under Article 19(1)(g) and Article 301.

The discussion was further refined in the AIGF case where it was held that ‘betting’ has to be read conjunctively to mean only betting on gambling activities. This rebuts any claim for the classification of ‘betting’ to include betting on games of skill. Further, even a liberal construction of Entries 1 and 2 of List II to defend the excessive-paternalistic amendment was rejected as ‘games of skill’ do not fall within res extra commercium and cannot result in the issue of ‘Public Order’ or ‘Police.’

The recent trend of the state legislatures overstepping their competence and regulating supposedly ‘games of skill’ can only be countered with central legislation delineating and regulating online skill-based gaming as distinct from online gambling. In this regard, Article 246, read with Entry 31 of List I, grants exclusive jurisdiction to the Parliament to enact laws for forms of communication, including wireless, telecom, and broadcasting. Further, online gaming platforms constitute ‘intermediaries’ under the Information Technology Act, 2000, falling within Union’s purview. With the increasing prominence of the online gaming industry as a professional space for skilled gamers, clarity as to the regulatory and taxation powers along with protection of constitutional rights under Article 19(1)(g) is a requisite undeserving of ill consideration.

Taxing Winnings from Online ‘Gaming’: Assessing the Proposed Amendments under Finance Bill 2023

Surpassing the question of who can/ought to tax, how it is/ought to be taxed is the consequent concern. This segment depicts how the definitional clash of ‘Online Gambling’ between the judiciary and legislature has been prolonged by the recent Bill, which coequally taxes all ‘online games’ ignoring the rational skill-chance distinction.

Firstly, Clause 53 and Clause 82 of the Bill introduce provisos to Section 115BB and Section 194B respectively, distinguishing ‘winnings from any online games’ from ‘winnings from lotteries, gambling betting, etc.’ This addition, supplanted with the introduction of separate provisions for ‘Online gaming’ recognizes the online gaming industry as distinct from ‘online gambling.’ However, this does little to clarify the specific contingencies of skill and chance in online gambling.

Secondly, proposed Section 115BBJ defines ‘Online Game’ to mean any game (1) offered on the internet and (2) accessible to users through a computer resource. The definition is primarily based on the platform rather than the nature of the game and thus falls short of recognizing games of skill as distinct from gambling. However ignorant this definition be of the judicial classification of games of skill vs chance, it depicts the competence of the Parliament under Entry 31 List I for regulating ‘online gaming’ entities.

In effect, the broad definition conjoins online games of skill and chance under a single head and imposes a blanket rate of 30%. Instead, the Bill seeks to create two distinctions between online and offline games, (1) unlike offline games, where the tax is levied on ‘gross winnings’ for online games, the user pays tax on ‘net winnings.’ (2) Section 194BA imposes an absolute withholding obligation on online games by deleting the minimum TDS threshold of INR 10,000.

Finally, there also exists a necessity for clarification as to whether income under Section 115BBJ would be classified under Income from Other Sources (“IOS”) or Profits and Gains from Business/Profession (“PGBP”). Ideally, such income would fall under Section 2(24)(ix) and constitute IOS per Section 56(2)(ib). However, with the increasing number of professional skill gamers, an overlap with business/vocational gains is likely to arise, inviting judicial interpretation. The issue would turn contentious when the judicial interpretation of professional chance-based gamers would require policy considerations from the legislature on the matter.

Concluding Remarks

The advent of online gaming has revived and further complicated the debate over legislative jurisdiction over gambling laws. A further level of complexity to the skill-vs-chance debate has been added with inconsistent state laws governing online gaming. It appears that a need for collective and cooperative action by federal and state governments arises for the effective regulation of online gambling without excessively restricting the online gaming industry. One avenue in this direction is Article 252, which allows state legislatures to authorize the Parliament to provide a regulatory framework that can assist in a uniform policy. Apart from consistency, this would also provide insights into the policy demarcations between ‘online gaming’ and ‘gambling.’ The gaming-gambling sector and its stakeholders await the same.


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