Union Budget 2023-24: Clarity On Taxation Provides Relief To Online Gaming Industry

The Union Budget 2023-24 has brought a sense of relief for the online gaming industry in India that has been seeking clarification on taxation. Finance Minister Nirmala Sitharaman proposed removing the minimum threshold of INR 10,000 for game wins to charge TDS in the Budget presented on Wednesday (February 1).

“For online games, it is proposed to provide for TDS (tax deducted at source) and taxability on net winnings at the time of withdrawal or at the end of the financial year. Moreover, TDS would be without the threshold of INR 10,000,” the Budget document said.

However, the threshold limit of INR 10,000 for TDS will continue for lottery, crossword puzzles, games, among others, but will apply to aggregate winnings during a financial year.

In a press conference after the Budget, Revenue Secretary Sanjay Malhotra explained that the taxation will be on net winnings. Users of online gaming platforms usually play a series of games over days, not only one, he noted.

In her speech, the finance minister said that the government will issue more clarity on the taxation regime for online gaming.

The Finance Bill provided this clarity by introducing 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

Explaining the taxation, Malhotra said, “Whatever are the net winnings, when you withdraw that money the tax will be on that. TDS was previously on each winning of INR 10,000 or more, so some of the companies were keeping the winning amount below INR 10,000. So that we have removed, there is no threshold for TDS.”

Do The New Sections Put An End To Game Of Skill And Chance Debate?

As the two new sections solely relate to online gaming and the ones pertaining to games of chance are covered under a separate section, 194B, stakeholders of the online gaming industry believe that the introduction of the new sections is an important move to differentiate games of skill from games of chance.

“With the introduction of two new sections — 194BA (for TDS of winnings from online games foronline intermediaries) and 115BBJ (for computation of taxes for those who earn income from winnings of online games) — the government has cleared ambiguities regarding TDS calculation for online gaming and simplified the process for both companies and users,” Vikash Sureka, chief financial officer of Mobile Premier League (MPL), said.

He also added that as the new provisions allow TDS to be calculated either at the end of the financial year or at withdrawal, it streamlines settlements and returns for users.

“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.

According to Roland Landers, CEO of the All India Gaming Federation (AIGF), the Finance Bill has clearly carved out a distinction between betting and gambling activities and online games through the introduction of Section 194BA.

Industry Seeks Clarity On Computation

While the new sections have provided clarity on taxation, the industry is not sure about the impact it will have on user sentiment and revenue of online gaming startups. The details on computation methods will allow the gaming firms to understand this impact.

“It’s a progressive step as the government is creating a new section for the online gaming industry. It cements the recognition of online gaming as a distinct technology-driven entertainment sector. We will await to get more clarity from the department on the computation mechanism,” Rahul Tewari, chief financial officer of Games24x7, said.

According to Siddharth Sharma, VP business strategy of online skill gaming company Head Digital Works, the government’s aim was to bring more taxpayers under its ambit without impacting the operational-end.

Echoing similar sentiment, Landers said, “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.”

The move comes at a time when several online gaming startups have been served notices by the GST and taxation authorities for alleged miscategorisation. Recently, the Directorate General of GST Intelligence (DGGI) served a notice to online gaming startup MyTeam11, though the notice was stayed by the Rajasthan High Court later.

In December last year, the government told the Parliament that the Central Board of Indirect Taxes and Customs (CBIC) was investigating gaming companies for alleged GST evasion of nearly INR 23,000 Cr.

Govt Tightening Online Gaming Regulations

Of late, the government has increased its focus on regulations for online gaming. In December, the Centre appointed the Ministry of Electronics and Information Technology (MeitY) as the nodal ministry to oversee the online gaming industry.

Within a week, MeitY published the draft online gaming rules as draft amendments to the IT Rules, 2021. “With the user base of online games growing in India, need has been felt to ensure that such games be offered in conformity with Indian laws and that the users of such games be safeguarded against potential harm,” MeitY said in its notification.

Most importantly, the ministry proposed a self-regulatory mechanism for online gaming companies in the draft online gaming rules. The self-regulatory bodies will be registered with the ministry and may register online games of such online gaming intermediaries who are its members. The self regulatory bodies will also need to have a grievance redressal mechanism.

Meanwhile, the government is also working on finalising the GST rate for the online gaming industry. The inter-ministerial panel headed by Meghalaya Chief Minister Conrad Sangma, recommended the GST Council to levy 28% GST on gross sales value.

Currently, a tax rate of 18% is levied on the commission collected by online gaming platforms for games not involving betting or gambling, whereas it is zero for contest entry fee.