Background

The advent of online gaming has revolutionized the entertainment industry, attracting millions of gamers worldwide, including a rapidly growing player base in India. According to news reports, India's gaming market size is estimated to be around US$ 2.6 billion in FY22 with over 500 million gamers, and it is predicted to reach US$ 8.6 billion by FY27. Users are looking for innovative e-sports, skill-based & board games.

However, the taxation and other legal frameworks surrounding online gaming has been a matter of contention, as authorities strive to streamline the industry and ensure diligent oversight.

With a view to ensure consistency in approach, the Finance Act 2023 inserted specific provisions vide Section 115BBJ in the Income-tax Act, 1961 ("the Act") to provide tax on “net winnings” from “online gaming” at the rate of 30%.

Further, Section 194BA of the Act has also been introduced to facilitate imposition of Tax Deduction at Source (“TDS”), on such gains.

The Act defines “Online gaming” to mean “a game that is offered on the internet and is accessible by a user through a computer resource including any telecommunication device”. The definition is sufficiently expansive to encompass both "games of skill" and "games of chance" that are conducted through online platforms.

To give effect to above-mentioned provisions, the tax department has now inserted Rule 133 to the Income-tax Rules, 1962 (“ITR”) which prescribes manner of computation of net winnings and has also issued guidelines to further clarify the same.

Manner of computation of net winning for the purpose of withholding tax under Section 194BA of the Act

Rule 133 of the ITR prescribes the manner of computation of net winnings from online gaming. It is pertinent to note that tax is required to be deducted:
1. at the time of each withdrawal; and
2. at the end of the financial year.
Consequently, the Rule has delineated calculation of net winnings into three distinct phases during a FY as outlined below:

*Further it has been provided that in case the result of above computation in any of the formula is negative, Net Winnings shall be considered to be zero.

Withdrawal: The triggering point

Primarily, the Act defines withdrawal as “any amount withdrawn by the user from any user account”. However, the guidelines issued by the Central Board of Direct Taxes (CBDT or the Direct Taxes Regulatory Body), clarifies that if a user has multiple wallets with an online gaming intermediary (“OGI” or “tax deductor”) all such wallets are to be clubbed for computation of “net winnings”. This means deposit in any wallet would be considered as deposit and withdrawal from any wallet would be considered as a withdrawal.

However, if it is not “technologically feasible” to integrate multiple wallets across platforms, “net winnings” can be computed for each platform separately for the purpose of deducting taxes, at the option of OGI.

Further it has been clarified that, transfer of amounts between multiple wallets with the same OGI would not to be subject to TDS unless the OGI is deducting taxes separately for different platforms. When an OGI issues coupons for purchase of goods or services or some items in kind are issued, it shall also be considered as withdrawal.

Taxable and non-taxable deposits

“Non-taxable deposit” means amount deposited by the user in his wallet to play online game and “taxable deposit” includes any amount paid directly to the user by the OGI. Further, as per the guidelines if a deposit is made into user account from borrowed funds, it shall be considered as a non-taxable deposit.

Furthermore, it has been clarified that bonus, referral bonus, incentives etc. given by the OGI to the user and allowed to be withdrawn, are considered as taxable deposits. In case the bonus amount cannot be withdrawn or used for any other purpose, it shall be ignored for the purpose of calculating net winnings. However, Money equivalent of deposits in form of coins, coupons, vouchers, counters etc. shall be considered as taxable deposits.

The guidelines provided much needed clarity, and therefore OGIs should analyse the bonus schemes and take a position whether such bonuses etc. will be considered for purpose of computation of Net Winnings or not.

Payments in kind, liable to TDS?

As per the Guidelines, where the Net Winnings are in cash which can be used to buy an item in kind, taxes shall be deducted as per the provisions. However, where the net winnings are entirely in kind, or where cash is involved but is insufficient to meet the liability of TDS, the OGI needs to ensure that tax has been paid appropriately on the net winnings before releasing such winnings basis the proof of payment (challan etc.) has been furnished by such user.

Further the valuation of winnings in kind would be based on fair market value (exclusive of GST) of the winnings in kind except in following cases:
(i) Value of winnings would be purchase price if the OGI has purchased the winnings.
(ii) Value of winnings would be sale price if the OGI manufactures such items given as winnings.

Many OGIs have online merchandise (Dream11) and avatars (Call of duty) or cars etc. which can be purchased through winnings/ coupons or for the purpose of withdrawal. In case where such items are given as winnings to players, value of winnings would be sale price of such items.

Computation of Net Winnings for the purpose of withholding tax under section 194BA of the Act

Let us understand the computation mechanism of Net Winnings with the help of an illustration:

Exemption from TDS implications on insignificant withdrawals. Is it enough?

In case of insignificant withdrawals, the Guidelines provides that taxes shall not be required to be deducted in case Net Winnings comprised in the amount withdrawn does not exceed INR 100 during a month. However, when the Net Winnings comprised in withdrawal exceeds INR 100 during the same month or in subsequent months or if there is no such withdrawal, at the end of the FY, taxes need to be withheld. Further, the tax deductor has the responsibility of paying the difference in taxes if the balance in the user account is insufficient for such purpose.

It should be noted that this is not an exemption and is only a relaxation for TDS purposes.

Conclusion: A robust prescription

The prescribed method to compute new winnings is both robust and effective, encompassing a comprehensive range of transactions. It is designed to be straightforward, ensuring that it does not entangle OGI into cumbersome TDS compliances or reporting mechanisms. The mechanism designed covers all possible ways to tax sums withdrawn from the user account.

( Yash Murarka contributed to this article. )