Taxation on online Gaming

Introduction:
India is witnessing sharp rise in online gaming sector as well as in betting sector. Many platforms offer winnings on completion of a particular game or upon winning a bet. This is one of the significant factor government has looked upon to generate revenue through taxation. In India, games that promote gambling are prohibited. One may think that Apps like Dream 11, My circle or Betway are openly running their businesses and not just that but these companies get celebrities to promote their gaming platforms, then why such applications are allowed and not prohibited.

Various decisions of courts alongwith views of Supreme court’s views supported by NITI Aayog’s claims have clarified that games in which judgement, knowledge, attention, study, analysis and skills are involved are allowed. Whereas, games those simply depend upon chances of winnings are prohibited.

Taxation of Winnings in case of Online Gaming:
Earnings from winnings of online gaming are not exempt from tax. These winnings are to be reported under “Income from other sources” while filing the return of Income. This is taxable under 115BBJ and 194BA. Winners of these contests are supposed to pay tax @30% irrespective of the winning amount.

As per Budget 2023, The CBDT has issued a circular to clarify the TDS rules for online gaming winnings. The circular states that online gaming companies are liable to deduct tax at 30% before distributing the winnings if it exceeds the threshold of ₹100. Amendments came into effect on 1st April 2023. The tax will be calculated on the net winnings of the user, which is the difference between the amount withdrawn and the amount deposited in the user account.

According to Section 194BA, online gaming platforms must deduct TDS from a player’s net winnings in a financial year. The TDS rate is 30% under Section 194BA of the Income-tax Act. The circular also clarified that any bonuses, incentives, referral bonuses, etc., given by the online gaming company to the player are taxable deposits under Rule 133 of the Income-tax Act.

Are referral and joining bonuses liable to TDS ?
As you may all have witnessed that these online gaming platforms offer various referrals and joining bonuses to participants. One may wonder whether these referrals and joining bonuses are liable to tax. It is clarified that these are not prize winnings and hence they are not liable to tax under section 115BB. However, these amounts are considered as taxable deposits which means these are added to the amount of winnings when the participant makes the withdrawal. Net winnings are the total withdrawals deducted  by fresh deposits and opening balance.

Conclusion:
As the digital gaming industry continues to experience rapid growth and innovation, tax authorities face challenges in adapting tax policies to address the unique characteristics of online gaming activities. For governments, effective taxation of online gaming involves striking a balance between generating revenue and fostering a conducive environment for industry growth. The rapid growth of the online gaming industry is compelling the Indian government to bring changes in tax rates, GST and applicable thresholds. Government is also planning to levy GST @28% on the Gross Gaming Revenue.

About Author:
CA Chinmay Shirish Agate
Chinmay Agate is a Practicing Chartered Accountant having 4+ years of experience and expertise in the field of Direct Taxation and Auditing compliances. In the past, he worked in various CA firms and comes with wide industry experience from services, retail to manufacturing to trading where he has handled various complex assignments. He has keen interest in Forex and Derivative knowledge as well as fundamental analysis.