Online Gaming: TDS Guidelines Provide Clarity But Industry Worried About Impact On User Base

The Central Board of Direct Taxes (CBDT) on Monday released the much-awaited guidelines for Tax Deducted at Source (TDS) for online gaming platforms, providing clarity on taxation. However, platforms are now worried about the impact the taxation will have on their user base.

The CBDT, via a notification published on May 22, 2023, has now prescribed the manner of computation of net winnings in Rule 133 of the Income-tax Rules 1962.

Earlier, the Finance Bill 2023 introduced two new Sections – 194BA for TDS on winnings from online games for online intermediaries, and 115BBJ for computation of taxes for those who earn income from winnings of online games.

Quick Look At The Guidelines

As per the guidelines, in case of multiple wallets under one user, the user account will include every account of the user registered with an online gaming intermediary where any taxable deposit, non-taxable deposit, or the winning of the user is credited and withdrawal by the user is debited.

Each user account will be considered for calculating net winnings and deposit, withdrawal or balance.

Net winnings of an online gamer would be calculated by subtracting the sum of total deposits during the financial year and opening balance at the start of the year in the user account from the amount withdrawn during the year.

Moreover, the CBDT has put a threshold of INR 100 for deducting tax for winnings from online gaming. Simply put, online gaming platforms will not be required to deduct TDS for a user if withdrawal of net winnings does not exceed INR 100.

The CBDT said it has put a cap of INR 100 for taxation to remove difficulty in deducting TDS for “insignificant withdrawal”.

Besides, any deposit in the form of bonus or incentives credited in a user account will also be considered as net winnings and will be subject to tax deduction in case of withdrawal.

“Bonus, referral bonus, incentives etc are given by the online game intermediary to the user. They are to be considered as taxable deposit under Rule 133. The taxable deposit will increase the balance in user account and is not allowed to be deducted in calculation of net winnings as only non-taxable deposits are allowed to be deducted,” the CBDT said in its circular.

As per technology and gaming lawyer Jay Sayta, the introduction of Rule 133 and the guidelines issued by the CBDT provide clarity on most aspects about computing tax on net winnings in online games, except the issue of bonuses and promotions given to users, which may require further clarification from the department.

Will It Lead To Decline In Users?

Online platforms fear that the taxation on winnings from online gaming platforms will negatively impact their user base.

According to Jaya Chahar, founder and CEO of fantasy gaming platform TFG, earlier taxation rules had certain loopholes. The latest guidelines increase not only taxation on net winnings for users but also liabilities for the gaming platforms.

“In my view, while this may lead to a certain dip in online gamers/users in general, it showcases the sector being regulated and recognised,” Chahar said.

Echoing a similar view, Bharat Patel, chairman and director of IPO-bound game development company Yudiz Solutions, said that the new taxation guidelines will lead to reduction in user participation. However, he said that the taxation guidelines will increase transparency in the sector.

“The new rule to enhance transparency and regulation for the industry will help both users and regulatory bodies track the winnings and invested amounts conveniently,” Patel added.

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