Tax on Online Gaming in India
The online gaming industry in India has seen massive growth in the last ten years and is expected to grow to $5 billion by 2025. The use of online gaming platforms, including card gaming platforms, battlegrounds, sporting games, and quizzes, has resulted in offering real money to its players.
Last year, the three bodies of the online gaming industry, namely, the E-Gaming Federation (EGF), Federation of Indian Fantasy Sports (FIFS) and All India Gaming Federation (AIGF), approached the Central Board of Direct Taxes (CBDT) to reconsider TDS regime changes that have been effective from 1st April 2023.
Hence, this article will give you in-depth information about India's online gaming industry, its taxation policies, and any potential adjustments.
Tax on Winnings from Online Games
The CBDT provided clarification on TDS applicability vide a Circular and notification dated May 22, 2023. Online gaming organisations must deduct TDS at the rate of 30% on any winnings drawn by a user from winning online games if it exceeds the threshold of Rs.10,000. The threshold of Rs.10,000 was applicable only till the financial year 2022-23 as per Finance Bill 2023, Sections 115BBJ and 194BA have been introduced to tax the user's winnings on different gaming platforms.
- Under Section 115 BBJ, income tax would be charged on net winnings for the previous fiscal year at a rate of 30%.
- Section 194BA mainly deals with TDS applicable on net winnings in the user's gaming account at the end of the fiscal year. So, your net winnings from online gaming platforms at the end of a fiscal year would be taxed at 30%.
Net winnings = A - (B+C)
where A= Amount withdrawn from the user account.
B= Aggregate amount of deposits made in the account by the user until the time of withdrawal.
C= Opening balance of the user account at the start of the financial year.
Example of Online Gaming Tax
Suppose you have paid Rs.1,000 as an entry fee to enter an online game and won Rs.40,000 from that. In such a case, the gaming firm will deduct your TDS on Rs. 39,000 (Rs. 40,000 - Rs. 1,000) at 30%. Therefore, you will have to pay a tax of Rs. 11,700, which will get deposited to the government and the remaining balance of Rs. 27,300 will be credited into your account as your income from the win.
Basis of Revenue Collection and their Chargeability
Some of the key sources of collecting revenue through online gaming and the applicability of tax policy on them are discussed below:
- Contest entry amount (CEA) and gross gaming revenue
Currently, GST is levied @28% on the total value of bets placed and not on the gross gaming revenue, both skill-based and chance based. Earlier, GST was levied on the Gross Gaming Revenue(GGR). The applicable rate in the case of game of chance was 28%, and for games of skill, it was 18%. According to the co-founder of Winzo Games, Saumya Singh Rathore, the online gaming industry has the potential to become a big part of the Indian economy, but enforcing 28% GST will hamper the overall growth of the online gaming industry.
- Winning real money from online games
Different online gaming platforms such as Ludo Empire, Dream 11 and others provide a chance to win real money for players. This income is taxable under the heading of 'Income from other sources' under Sections 115BBJ and 194BA. Winners are taxed at the flat rate of 30%, irrespective of any threshold.
- Distribution during Gaming Tournaments
Winnings from different gaming tournaments are either in the form of cash or gift prize. As per the income tax law, these winnings are treated as winnings from online games and taxed at 30% under the head ‘Income from other Sources’.
- Referral and Joining Bonuses
In case where such deposit is only for the purpose of playing and cannot be withdrawn for any other purpose, such deposits should be ignored for the calculation of net winnings. However, if this amount is recharacterized and allowed to be withdrawn, then it should be treated as a taxable deposit and will be the part of net winnings for that particular year.
Comparison of Old and New Provisions on Online Gaming Taxation
Particulars | Old Provisions | New Provisions |
Relevant provisions | Taxation of winnings - 115BB | Taxation of winnings - 115BBJ |
The minimum threshold for TDS | Rs.10,000 | No provision of threshold |
Effective dates | Taxation of winnings - Up to 31st March 2023 | Taxation of winnings - From 1st April 2023 |
Rates of TDS | Rates in force - 30%* | Rates in force - 30%* |
Timing of TDS | Applicable during the payment of winnings | Annually - Net winnings in the user account will be subject to prescribed withholding tax at the end of the financial year. |
Winning in kind | Before releasing innings, the payer must ensure that taxes get paid on them. | The online gaming platform must ensure taxes get paid on net winnings before releasing them. |
Rate of income tax on such winnings | 30%* | 30%* |
Quantum of income to be taxed | No specific guidance is available on the taxation of gross winnings in relation to net winnings. | Income tax and TDS needs to be computed on net winnings. |
*Plus applicable cess and surcharges
Final word
The imposition of tax on online games is mandatory, irrespective of the amount you win. The rapid growth of the online gaming industry has compelled the Indian government to bring changes in tax rates, GST and applicable thresholds.
However, the changes proposed on GST rates can negatively impact the growth of the Indian gaming sector, as a 28% GST levied can discourage players. But as this industry is rapidly growing at both Indian and global levels, we can only hope that the Indian government will take action to boost this sector and ammend GST rates on the same.
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