Ambiguities Removed And Taxes Rationalised: Why Budget 2023 Was Good News For Online Gaming Industry

On 1 February, the Finance Minister presented the Union Budget for the Financial year 2023-24.

This was a budget that addressed inclusive development to reach the last mile with a push for infrastructure and investment, unleashing the potential of our economy with a great bit of focus on “Green Growth”.

The Budget also addressed the financial sector and our needs for the decades ahead.

This Finance Minister has taken this Budget opportunity to clarify a lot of issues and bring certainty in various sectors. One such aspect is in relation to the online gaming industry.

In my earlier article I had focused on the lack of clear regulations and on the indirect tax aspects of the industry. In her Budget, the Finance Minister laid down clear guidance as far as the Direct Tax regime is concerned with respect to the industry and it’s a very welcome move. 

The Old Taxation Regime For Online Gaming Industry:

As per the old rules, any winnings upto Rs 10,000 did not attract any provisions for deduction of the taxes at source. The old regime was guided by Section 194B of the Income Tax Act, which required that the rate at which TDS is to be deducted was at “the rates in force.”

Thus, the section did not provide any clear percentage at which TDS was supposed to be deducted, hence, reliance had to be placed on Section 2(37A) of the act, which required the payer to deduct TDS at 30 per cent for the online gaming activity.

Second issue with the old regime was that the term 'payment' was not clarified at all. Thus, there was confusion as to when the TDS is required to be deducted.

Therefore, the payer or the online gaming companies would deduct the TDS when the amount was available in the hands of the user or player. Basically, the users had to shell out 30 per cent tax at source on all their winnings, even though they may have or might not have withdrawn their winnings.

To add to the complexity, the words 'winnings' were also not defined in the Act — which basically meant that if a user wins say INR 15,000, then he would be subject to 30 per cent TDS, even though he might have lost, say Rs 30,000, in other games that he played on the platform.

Technically he may not have “earned” anything but in fact might have lost Rs 15,000, but still he would end up paying tax plus surcharge on the winnings of INR 15,000.

The issue was such that, as per an amendment to the income tax law in 1987, losses from one game could not be set off against winnings from another game. This was permissible before 1987. The income had to be computed on gross basis and added in income from other sources, without any deduction even from games in similar nature.

To further explain: the winner had to pay tax every time he won, but could not set off losses when he/she lost a game.

To add to this, there was no deduction in respect of the amount he has invested to play the same game as well.

To illustrate: assume that Mr. A invests INR 10,000 to play an online game and wins Rs 25,000, hence his net earnings is actually INR 15,000 but due to the nature of the law, he wouldn’t get a deduction of the amount invested — but would end up paying tax on the gross amount i.e. Rs 25,000. The tax was always on the full amount i.e. gross winnings. This was unfair and burdensome.

Amendments Introduced In The New Regime

The Finance Minister has introduced a new section altogether while dealing with online gaming, thereby showing the understanding and the seriousness of the government towards this rising industry.

With effect from 1 July, 2023, the newly introduced Section 194BA shall be the guiding force for direct taxation for winnings in online gaming henceforth.

First change in the approach is that the TDS provisions shall be applicable only during withdrawals. This aspect clarifies the timing and point of taxation and brings a lot of clarity for the online gaming industry, as well as the users/taxpayers. 

The second and most important is that the TDS provisions will be attracted only on the “net winnings” in the user account at the end of the financial year.

What it could mean with the same example as stated earlier is if Mr. A invests Rs 10,000 to play any online game and wins Rs 25,000 then his net earning would be considered Rs 15,000 and TDS will be deducted on this amount rather than the gross amount i.e. Rs 25,000.

Further, the new amendment also clarifies what happens if a user withdraws amounts during the financial year, which is what happens most of the times. In such cases the TDS is to be deducted at the time of withdrawal on the net winnings comprised in such withdrawal.

What remains to be further clarified is how the “net winnings” shall be calculated. The current amendments lay down a very clear guideline that the TDS shall be on net winnings and not gross winnings. 

What is more interesting is that the users can now also claim the benefit to set-off losses. Essentially the government only wants to tax net earnings from entire gaming activities and recognizes that there could be losses as well during the gaming indulgence. This will substantially reduce the tax burden on the user.

Benefits For The Gaming Industry And The Users

For the users, like explained above, they are now taxed only on net earnings that they make, option to set off losses has been introduced and the same can even be carried forward. Secondly, the incidence of tax happens only during withdrawals and not at the time of winning a game. 

For the gaming industry, what these amendments bring forth is that they don’t have to formulate their own policies for tax deduction which led to a lot of compliance issues. The timing of tax deduction has attained surety.

Secondly, the user’s account will practically be treated as a running profit and loss account in their systems and the TDS will be attracted only on the net winnings. Further this will be applicable only during the withdrawals. In short, the user account is more like a wallet. 

These new provisions should be read in conjunction with other amendments that were brought about in Section 115BB, to lay down a distinction between winnings from lotteries and crosswords.

The other way to look at it is, that the government clearly wants to demarcate the winnings from game of skill and game of chance. This is further substantiated by the fact that the government is even recognizing that there could be losses in these gaming activities.

This will lead to the formalising of the sector and gaming will be treated as a legitimate business/profession at par with other professions. This is a win for both the users and the online gaming intermediaries.

What remains to be seen is, how the rules regarding prescribed method to calculate net winnings will be designed by the Central Board of Direct Taxes. Given the clarity that the government has shown in bringing forth these distinctions, it can be anybody’s guess that the method too shall remain simple and transparent.

All in all, with the Budget proposing massive changes to the way online gaming industry is looked at by the taxation department, the stakeholders in the sector have a big reason to cheer.

An enabling regulatory environment, including, defined rules for the use of skills as well as a proper taxation structure definition, was the need of the hour. Online gaming is pretty much the future of entertainment. 

India will not lag far behind, given that Indian digital infrastructure has grown by leaps and bounds. Economists generally agree that, to become an export powerhouse, a country needs to have a big domestic market.

Online gaming industry in India has both these aspects covered very well and such regulatory moves only add to the growth.