Tax dept issues guidelines on how to compute online gaming taxes

Online gaming is a rapidly growing industry which is expected to grow at a CAGR of around 27 percent over the next five years in India.

The Central Board of Direct Taxes (CBDT) has released guidelines on the computation of taxes on income made from online games, as per the changes introduced in Union Budget 2023-24 which aimed to bring clarity to the matter.

The CBDT has clarified that in cases where net winnings comprised in the amount withdrawn does not exceed Rs 100 in a month, the applicable tax need not be deducted. This also extends to scenarios where the balance in the user account at the time of tax deduction under section 194BA of the Act is not sufficient to discharge the tax deduction.

The valuation would be based on fair market value of the winnings in kind except in cases where the online game intermediary has purchased the winnings before providing it to the user. In that case, the purchase price will be the value of winnings.

Also, another exception is when the online game intermediary manufactures such items given as winnings. In that case, the price that it charges to its customers for such items shall be the value for such winnings.

CBDT further clarified that GST will not be included for the purposes of valuation of winnings for TDS under section 194BA of the Act.

"Taxpayers were expected to deduct tax at source under section 194BA even before issuance of the Rule 133 or this guidance. It is expected that they have carried out that responsibility. However, if there is a shortfall in deduction of tax due to time lag in issuance of Rule 133 or this Circular, for the month of April, 2023 that shortfall may be deposited with the tax deduction for the month of May 2023 by June 2023. In that case there will not be any penal consequences," the CBDT said in its guidance.

"This clarification removes undue confusion on the taxation guidelines and provides transparency. As mentioned in the circular, we wait for further clarifications that will allow more accuracy," said Rahul Tewari, Chief Financial Officer, Games24x7.

"These guidelines, along with the recently released rules for the online gaming, have provided a boost to the sector and will empower the industry to significantly contribute towards the Hon’ble PM’s vision of a trillion-dollar digital economy," he added.

The Union government has carved out a distinction between online skill-based games and other games such as lottery, puzzles and 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 February 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.

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.

Online gaming is a rapidly growing industry which is expected to grow at a CAGR of around 27 percent over the next five years in India, it said, adding, the sector holds a huge potential to boost India's GDP and is anticipated to be a significant job generator, with the ability to add more than 1 million jobs by 2030.