By Apalka Bareja and Vidhi oberoi
The pandemic has altered consumer behavior, leading to a rise in the use of smartphones and other technological gadgets. Industry leaders are focusing on the Indian market because of its huge volume and growth potential in the online gaming industry.[1]
As per the latest norms introduced by Income-Tax Department, online gaming companies are required to deduct TDS on every rupee earned from winning an online game by a participant. This rule kicked in from April 1, 2023 and is applicable since then. Before 2023, TDS on winnings from online games was applicable only if the winning amount exceeded Rs. 10,000 in a financial year.[2] The change in the Indian online gaming industry have raised concerns about player motivation and reduced earnings. Gamers are still taking their time to get habitual with the changes.
Purpose behind the Insertion of New Regulation:
The government made the decision to segregate the taxability of tax gains from online games due to the unique nature of these platforms. The online gaming industry in India has witnessed a sudden escalation in popularity and has now become a growing sector with ample opportunities. In India, many individuals engage in game activities such as card games, rummy games, fantasy leagues and online challenges, involving real money transactions.
Below mentioned are the key differences between the previous and newly introduced provision-
| BEFORE MARCH, 2023 | AFTER MARCH, 2023 |
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TDS- Section 115B and Taxation on Winnings- 194B |
TDS- Section 115BBJ and Taxation on Winnings- 194BA |
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Section 115BB i.e. Taxability of Income from Lotteries, Crossword Puzzles, etc. and Section 194B- TDS on Income from Lotteries, Crossword Puzzles, etc. governed the taxability of such gains. |
The gaming companies are now under a mandate to deduct TDS at the rate of 30% from the ‘net winnings’ of the user account, on every withdrawal or at the end of the financial year in case of no withdrawals.
|
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Minimum Threshold 10,000/- |
No Threshold provided |
Present- day TDS Deduction for Net Winnings:
The union government carves out a clear description about online skill-based games. Now, the TDS will be deducted as per the new introduced Section 194BA of the Income Tax Act, 1961. The TDS rate on winnings from online games is 30% under Section 194BA.
As per the new norm,
“Net Winnings” is A – (B + C)[3]
Where, A= the entire sum taken out of the user’s account
B is the total of the account owner’s non- taxable deposits made in the user account up to the withdrawal date of the financial year, and
C is the user account’s opening balance at the beginning of the financial year.
To put it another way, net profits are determined by deducting the total amount of withdrawals from the user account from the total amount of fresh deposits and the opening balance.
As per the new mandate, calculation of TDS will be done at the conclusion of the financial year or at the time of withdrawal by a player. The gaming companies are now under a mandate to deduct TDS at the rate of 30% from the ‘net winnings’ of the user account, on every withdrawal or at the end of the financial year in case of no withdrawals.
Penalties for TDS Non- Compliance:
A person is subject to fines and imprisonment for a minimum of three months and a maximum of seven years under Section 194B if individuals fail to make TDS payments.
Relaxation on TDS- Exemption:
The Central Board of Direct Taxes (CBDT) has made it clear that if net gains are less than Rs. 100 in a given month, TDS would not be charged. But if a player withdraw more than Rs. 100 in a given month or the month after, this tax will be withheld. The deduction will take place at the end of the financial year if there isn’t any withdrawal.[4]
Bonus, Referral Bonus & other Incentives-
In some scenarios, Online Gaming Companies (OGIs) also provide bonuses, referral bonuses and other incentives to the players. User doesn’t deposit any of it in his account but as bonuses and other incentives spikes the balance in the user account, they are considered as part of the taxable deposits. Therefore, such offers will also be considered as part of the net winnings and will be applicable for TDS deduction.
Net Winning will be determined using the monetary equivalent if the incentive is in the form of coins, coupons, vouchers, etc. Net Winnings will not be computed for deposits made with incentives or bonuses that are credited to the user account solely for the purpose of playing and cannot be withdrawn or utilized for other purposes. These incentives do not belong in the opening or closing balance and are not considered non- taxable deposits. It is necessary for the companies to keep track of these incentives given to the user. In the event that these incentives are deemed withdrawable, their value will be taken into account when computing net winnings for that particular year.
What happens if the net gains are not paid out of cash?
At times, an online gamer may receive an item such as car, motorcycle, smartphone or gadget instead of cash as a prize. TDS will also be applied to such gains. The fair market value of the gift will be the basis for determining the TDS.
Conclusion:
In India, online gaming has become popular enough that more individuals are participating in it for financial gain from the comfort of their homes. In the upcoming years, exponential expansion in this industry is anticipated, opening up new job opportunities and career paths. It is therefore imperative that a sector with such high earning potential be included in the IT Act’s purview and subject to separate taxation. In order to avoid needless legal action in the future regarding the taxes of online gaming, CBDT may offer more clarity in relation to rules.
Aishwarya, Assessment Intern at S.S. Rana & Co. has assigned in the research of this Article.
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