By Stella Joseph, Yash K. Desai
In recent times, the Government has, through budgetary proposals, attempted to introduce taxation frameworks for the ever-evolving technology industry. Last year, a new tax regime was introduced for cryptocurrencies i.e. “Virtual Digital Assets”. This year, the Union Budget 2023 proposes to clarify the tax regime applicable to Online Gaming. Similar to cryptocurrencies, the overall regulatory framework for the online gaming industry is yet to be crystallized. Pending such regulatory certainty, the online gaming industry has sought clarity on the issue of taxation.
The clarifications proposed by the Union Budget 2023 have mostly been welcomed by the industry and its stakeholders, since it outlines certain aspects of the taxation regime applicable to them.
Importantly, the Budget proposes insertion of separate provisions under the Income-tax Act, 1961 (“IT Act”) to specifically govern “online gaming” and thus seeks to lay down, so to speak, a separate taxing regime for online gaming.
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Brief background for Budget Proposals for online gaming
A new section 115BBJ is sought to be introduced under the IT Act to levy income tax on “net winnings from online games”, computed in the manner as may be provided by rules, at the demerit rate of 30%. The term “online game” has been defined as “a game that is offered on the internet and is accessible by a user through a computer resource including any telecommunication device”. The terms “internet” and “computer resource” have also been separately defined. Section 115BBJ is to become effective from Financial Year 2023-24/ Assessment Year 2024-25.
Concomitantly, a new TDS provision i.e. Section 194BA under the IT Act has been introduced with effect from 1st July, 2023 to stipulate that ‘any person’ responsible for paying to ‘any person’ any income by way of winnings from any online game during the financial year shall deduct income tax at 30% on the net winnings in his “user account”, computed in the manner as may be prescribed, at the end of the financial year. This TDS will apply without any threshold. The term, “user account” is defined as “account of a user registered with an online gaming intermediary”. The terms “user” and “online gaming intermediary” are also defined.
In a case where there is a withdrawal from user account during the financial year, the income tax shall be deducted at the time of such withdrawal on net winnings, as well as on the remaining amount of net winnings in the user account, computed in the manner as may be provided by rules, at the end of the financial year.
Where the net winnings are wholly in kind or partly in cash and partly in kind but the part in cash is not sufficient to meet the liability of deduction of tax in respect of whole of the net winnings, the person responsible for paying shall, before releasing the winnings, ensure that tax has been paid in respect of the net winnings.
Even at present, income by way of winnings from any lottery or crossword puzzle or card game and “other games of any sort” are subjected to income tax at the rate of 30% under Section 115BB of the IT Act, and TDS under Section 194B of the IT Act at the rate of 30%, if the amount exceeds INR 10,000.
Key Impact of the Budget Proposals for Online Gaming
The removal of the threshold of INR 10,000 would impact the present systems followed by online gaming platforms for settlement of transactions for users. The rationale for the removal of this threshold appears to be discouraging online gaming platforms from following a business model of keeping the winnings below INR 10,000, so that they are not covered within the existing TDS provision.
Second, an important clarification of imposing the tax on “net winnings” and not on “winnings” is welcomed by the industry at large. At present, while the law requires the tax to be deducted/paid on “winnings”, practically various players are taking the position that this would apply to net winnings (after deduction of elements like Contest Entry Amount [CEA], cash bonus etc). Since the user ultimately receives only net winnings after these charges are reduced, it is justified that the taxation is also imposed on the “net winnings”. This proposal is also in tune with the actual modalities of how such platforms operate the games, where there are multiple series/levels in the games and ultimately the winnings earned over many days are net in nature (after adjustment at several series/levels). However, net winnings are to be computed in a manner prescribed in rules, which are yet to be issued. The industry awaits final clarity on the exact manner of computation in this regard.
Third, the requirement to compute TDS at the end of the financial year generally or at the time of withdrawals from user account if made during the financial year, will require alternations by the online gaming platforms in their existing systems of settlement and also in the terms of service with the users.
Further, the proposed sections (unlike the present provisions) very clearly cover winnings paid in kind or partly in cash and partly in kind. Thus, it would also cover instances where winnings are given in non-cash forms such as coupons, tokens etc. At present, there are many online gaming platforms which also offer winnings in the form of cryptocurrencies/ NFTs as well, and on a strict reading of the proposed provision, such winnings should also be covered within the ambit of the tax regime for online gaming. The interplay between the proposed provisions for online gaming and the existing tax regime for Virtual Digital Assets under the IT Act would be interesting to examine. In the absence of any central regulations on cryptocurrencies at present, the issues become more complex if one analyses the trade of derivatives in cryptocurrencies, which may be seen as some form of wagering/betting/gambling.
While winnings in kind is specifically covered, how these are to be valued and accordingly the modality of the TDS being deducted in this case, will have to be separately clarified. One hopes such clarifications are duly issued by Central Board of Direct Taxes (CBDT), perhaps in a similar vein as was done for crypto-to-crypto barter.
Finally, there is a perception that the Union Budget 2023 proposals ultimately distinguish between game of chance (covered under the existing Sections 115BB and 194B) and online games (to be covered under new Sections 115BBJ and 194BA). One view would be that as long as the game is played in the online format (whether game of skill or game of chance), it gets covered within the new proposed sections for online gaming. However, in the absence of the definition of “game” itself under the new proposed sections, this position is yet to be tested.
Stella Joseph is a Partner at Economic Laws Practice. Yash K Desai is a Senior Associate at Economic Laws Practice
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