Update 27/3/2023 at 12:15 pm: Section 194BA will apply from April 1st, 2023, according to the amended 2023 Finance Bill passed on March 24th.
Original story published on 7/3/2023 at 6:00 pm: Last month, three of India’s biggest online gaming associations wrote to the Ministry of Finance on their concerns with gaming taxation amendments announced in this year’s Budget.
What happened?: In a letter to the Central Board of Direct Taxes viewed by MediaNama, the All India Gaming Federation, E-Gaming Federation, and Federation of Indian Fantasy Sports highlighted how implementing the changes could cause practical difficulties. For starters, the multiple tax amendments will be implemented from different dates across the next year, making tax calculations a cumbersome exercise for users, companies, and the government. Online gaming companies would have to inevitably comply with these changes, which would raise expenditures that smaller companies may find difficult to comply with. They would also lead to more platforms shouldering more tax liability, while multiple tax changes could lead to exponential increases in user complaints.
What do they want the Ministry to do?: Ideally, to align the dates from which all these tax amendments are supposed to be implemented.
Why it matters: The fact that the Budget recognised the Indian online gaming industry is a step forward—after all, this is a sector which has been pushing for government recognition for years now. But, these tax amendments are one among many worrying the sector right now. Rumours that state governments are considering hiking the GST rates for the sector—which could dampen revenues and user acquisition—have sent alarm bells ringing. If this letter is anything to by, these amendments could make complying with India’s tax laws that much harder for it. To top it all off, most of these changes are happening in a sector where the basic definitions of what online gaming is (and isn’t) are still inconsistent. What we’re curious about: is the Indian government thinking about these issues as it mulls over a pan-India framework to regulate online gaming?
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The amendments that matter
To understand this letter, we’ve got to understand a couple of important amendments to the Income Tax Act announced in this year’s Union Budget. They are:
- Section 115BB: This section lays out the “tax on winnings from lotteries, crossword puzzles, races including horse races, card games and other games of any sort or gambling or betting of any form or nature whosoever”. The amendment basically says that this provision doesn’t apply to online gaming—which is defined in Section 115BBJ of the Act.
- Section 115BBJ: This is a new section that’s supposed to be inserted into the Income Tax Act. It basically lays out how the net winnings from online gaming should be taxed. It also defines an online game as one that’s “offered on
the internet and is accessible by a user through a computer resource including any telecommunication device.”
When will these come into effect?: In short, both these amendments apply from April 1st, 2024. Why? Because both will be applied to the assessment year 2024-25—which is when taxes are collected for the financial year 2023-24. The assessment year runs from April 1st, 2024 to March 31st, 2025. The financial year runs from April 1st, 2023 to March 31st, 2024.
Is that it?: There are two more amendments that are crucial here:
- Section 194B: This section deals with “Tax Deducted at Source” or TDS. It says that TDS should be imposed on winnings from lotteries or crossword puzzles exceeding Rs. 10,000. The amendment adds on more activities that can be taxed—namely gambling and betting. The section will be in force until June 30th, 2023. After that, on July 1st, Section 194BA comes into the picture, and online games will be exempted from Section 194B’s taxation scope.
- Section 194BA: This is a new section. It says that TDS on online gaming winnings during a financial year should be imposed on the net winnings in their user account. The section adds that TDS will be imposed when someone deducts their winnings from their user account during the financial year. It’ll also be deducted from the remaining net funds in the user’s account at the end of the financial year.
To sum it up: Income tax and income tax returns for online game winnings for the financial year 2023-24 will be shaped by Section 115BBJ. As for TDS, amended Section 194B will be in force until June 3oth, 2023. After that, Section 194BA becomes applicable.
Aren’t all of these amendments a little confusing?
Well, yes. And, as the gaming associations note, they also raise calculation issues and operational difficulties—that could make working in the sector difficult.
The three-month itch: Remember Section 194BA imposing TDS on the net winnings from an online game? Well, it’s only in effect from July 1st, 2023. This raises certain issues:
- Section 194B actually deals with winnings from online gambling, lotteries, and crosswords. It only exempts online games from this banner after July 1st. So, from April 1st to June 30th, the amendments presuppose that Section 194B applies to online games, the associations note.
- But, “online games” under Section 194B are based on a definition included in Section 115BBJ. Remember, that’s only effective from the assessment year 2024-25, which applies to the financial year 2023-24. So, for Section 194B, “the effect to section 115BBJ remains suspended for 3 months from 1st April 2023 to 30th June 2023”.
- The same issue arises with Section 194B’s successor—Section 194BA. It is applicable to online games from July 1st, 2023, and derives the online game definition from Section 115BBJ, which only comes into effect the next year.
The problem with winnings and net winnings: We didn’t italicise the words ‘winning’ and ‘net winning’ for nothing earlier. They’re important here, because:
- Under Section 194B, TDS from April 1st, 2023 to June 30th, 2023, is imposed on online game winnings. But, once Section 194BA comes into effect come July 1st, TDS is imposed on net online game winnings.
- The two calculations for TDS under Section 194B’s three-month period and Section 194BA’s nine-month period would be wholly dissimilar. On top of all that, at the end of the year, income tax returns have to be determined based on Section 115BBJ—which taxes net winnings. Online gaming transactions will have to be redrawn to do this.
Unsurprisingly, the gaming associations think this is a cumbersome exercise for users, platforms, and even the government.
So, what’s the effect of this 3-month TDS regime under amended Section 194B?
In short, the associations think gaming companies might end up bearing extra liabilities. Here’s how:
- Suppose Priti’s* aggregate winnings while playing online games are Rs. 8,000 on April 10th, 2023. That’s below the Rs. 10,000 threshold for charging TDS under Section 194B. Because it’s less than this limit, Priti can withdraw that entire sum without any TDS deduction.
- Suppose that a day later, on April 11th, luck favours Priti. She wins another Rs. 3,000. Taking into account her previous loot too, her aggregate winnings are 11,000. Now, she has to pay TDS of 30% on that aggregate amount.
- Now, 30% of 11,000 is Rs. 3,300. So, that much tax has to be deducted from Priti’s account. But, remember, in reality, Priti only has Rs. 3,000 in her account right now. So, there’s still a balance of Rs. 300.
- In short: the amounts available are lower than the amounts needed. This leads to a “short deduction” of the TDS. Or, in this instance, the online gaming platform might have to incur the additional liability of Rs. 300.
The three gaming bodies think it’s likely that many scenarios like this will arise. The platform won’t be able to recover these amounts from users later. As a result, gamers like Priti will stop playing online games on these platforms. The tax liability gets passed on to platforms then. These matters are complicated by Section 271C of the Income Tax Act which imposes penalties for non-deduction of TDS under Section 194B. To sum it up: the gaming associations think this amendment poses undue burdens and liabilities on platforms from April 1st to June 30th, 2023.
Phew, do the concerns end here?: Not really. Other roadblocks are:
- The online gaming industry will face severe challenges while making the technological changes required to comply with the two different tax regimes within three months.
- These switches lead to rising costs and unnecessary expenditures, which smaller gaming companies may find difficult to bear.
- Educating India’s 20 crore+ online gamers on the multiple tax changes taking place in this quarter will be an uphill task. This will lead to exponential increases in user complaints which could reduce the number of players, the gaming associations warn.
So, what’s the fix?
The associations have two solutions on deck. Measures like these two may help reduce differences in interpretation or operational difficulties for the sector, the associations note.
- Aligning dates: First, align the effective dates for “online games” in the case of:
- Amended Section 115BB and the newly-inserted Section 115BBJ; and
- Amended Section 194B and the newly-inserted Section 194BA.
In short, line up all the dates so that these awkward accounting issues are minimised.
- Qualifying the amendments: The alternative is that amended Section 194B shouldn’t apply to “online games” from April 1st to June 30th, 2023. In this case, the TDS that should be deducted should be based on the unamended provision currently in force.
*The pseudonym and dramatisation were introduced by the author to improve reader understanding. The original letter did not make use of a name or any creative devices, explaining the scenario in simple language with the term, “a user”.
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