Mechanism For Calculating Net Winnings From Online Gaming- Income Tax – Sales Taxes: VAT, GST

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-

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.

Footnotes

1 Available at https://www.businesstoday.in/union-budget/opinion/story/online-gamers-to
watch-out-for-new-tds-income-tax-provisions-on-winnings-368828-2023-02-03

2 Available at https://economictimes.indiatimes.com/wealth/tax/tds-on-online-games
winnings-how-companies-will-deduct-tax-as-per-cbdt
guidelines/articleshow/100500282.cms?from=mdr

3 Available at https://www.businesstoday.in/union-budget/opinion/story/online-gamers-to
watch-out-for-new-tds-income-tax-provisions-on-winnings-368828-2023-02-03

4 Available at https://economictimes.indiatimes.com/wealth/tax/tds-on-online-games-winnings-how-companies-will-deduct-tax-as-per-cbdt-guidelines/articleshow/100500282.cms?from=mdr

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