Budget 2023: Online gaming sector gets a boost with better clarity on taxation

The Bill has removed the minimum threshold of Rs 10,000 for TDS while also allowing it to be calculated either at the end of the financial year or at the time of user withdrawal, with effect from July 1, 2023. (Representational image: Keenan Constance via Unsplash)

The Union government has carved out a distinction between online skill-based games and other games such as lottery, puzzles, crossword puzzles through new clauses in the Income Tax Act as disclosed in the Finance Bill on February 1, thereby providing much-needed clarity to the nascent industry in terms of taxation over winnings on online gaming platforms.

The finance bill has introduced two new sections - Section 194BA that pertains to TDS (tax deducted at source) on net winnings from online games and section 115BBJ related to computation of tax on winnings from online games.

In a press briefing on Feb 1, Revenue Secretary Sanjay Malhotra said the taxation will now be on net winnings from online games at a rate of 30 percent since people typically play a series of games over a period of time, unlike horse racing where people usually play one game.

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The Bill has removed the minimum threshold of Rs 10,000 for TDS while also allowing it to be calculated either at the end of the financial year or at the time of user withdrawal, with effect from July 1, 2023. Prior to this, gaming companies were required to deduct TDS at the rate of 0.1 percent for each winnings of over Rs 10,000 while gross winnings from online gaming were taxed at a flat rate of 30 percent.

The revenue secretary noted that the TDS change came after it was noticed that a few online gaming companies were keeping the winning amount lower than the Rs 10,000 threshold.

Vikash Sureka, chief financial officer at Mobile Premier League (MPL) said "With this change, users who play multiple games will only have to pay tax at year-end based on their net winnings, eliminating the need to pay tax on notional credit. For companies, the TDS calculation process is simpler, improving compliance."

Sureka said this distinction signals the government’s recognition of the unique nature of both games of skill and games of chance and the need for separate tax policies.

"Recognising and carving out a separate clause in the act for ‘Online Gaming’ as against gambling or betting is in line with Meity’s recent draft amendment to IT rules for Online Gaming, and is a testimony to the government's genuine intent to nurture the burgeoning sector," said WinZO co-founder Paavan Nanda.

Siddharth Sharma, VP-Business Strategy at Head Digital Works, termed the inclusion of these provisions as a "win-win scenario for both the government and the industry."

"Deducting TDS on net winnings at the end of a financial year will catalyse the growth of this sunrise sector even further and this goes to show that this government has applied itself to solve for the needs of both the gamers and the industry. This is exactly the kind of outlook that India needs from the government in today's digital economy," Sharma said.

Some industry stakeholders termed this as a progressive step but also mentioned that they are awaiting more clarifications and guidelines on this matter.

"While we await CBDT’s clarifications and guidelines in this regard, we are hopeful that the certainty in taxation offered by the budget announcement will be a huge stimulus for the growth of the online gaming industry," said All India Gaming Federation CEO Roland Landers.

Jay Sayta, a technology and gaming lawyer, said it is a welcome step that the concept of 'net winnings' has been recognised in the Income Tax Act for online games.

"However, the manner in which net winnings are supposed to be calculated and the set-offs that may be permitted before calculating such net winnings are left to be clarified by the CBDT through rules/guidelines," he said.

These developments come less than a month after the government designated the Ministry of Electronics and Information Technology (MeitY) as the nodal ministry for all online gaming related matters. It also officially recognised Esports as a multi-sport event and will be under the Ministry of Youth Affairs and Sports.

MeitY subsequently released proposed new rules as draft amendments to the Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Rules, 2021 and sought public comments until January 25, 2023.