Budget 2023 – Is gaming no longer easy?

India is the one of the largest mobile gaming markets in terms of app downloads. By current estimates, there are more than 400 million gamers and more than 500 gaming studios in India. As per NITI Aayog, the online gaming segment grew by 28 per cent in 2021 to reach $1.9 billion. The pandemic has also led to a dramatic upsurge in the use digital means of entertainment, which has resulted in exponential growth of the gaming industry during and post the pandemic.  

Budget 2023 

The gaming industry has garnered colossal user base over the recent past and has the capacity to be a global behemoth with high employment potential. The revenue generated by the gaming industry varies for each game but is largely based on revenue from in app purchases, sale of branded merchandise, entry or contest fees, advertisements, streaming services, etc. The user generally earns revenue by way of winnings from contests in the form of cash or kind (redeemable vouchers, bonus points etc.). Taxation of such earnings by the users has been a vexed issue, especially in the recent past.. Though certain provisions currently exist to levy tax on games, it was riddled with ambiguity on whether such online games would be classified as games of chance or games of skill or game of any sort. The existing provisions are categoric in taxing the income from winnings from lotteries, crossword puzzles, races including horse races, card games and other games of any sort or gambling or betting. A withholding regime of 30 per cent on gross earnings is in place under the existing law, subject to a threshold of payout of Rs 10,000. The gaming companies largely adopted this route to withhold tax on the winnings of the users subject to adherence of this threshold.   

The Budget has proposed for the introduction of a new section with effect from April 01, 2023 for taxing such winnings from any online games. Correspondingly, a new withholding tax provision is proposed to be introduced from July 01, 2023 to withhold tax on the net winnings in the user accounts at the end of the financial year or at the time of withdrawals during the year. What is conspicuous by its absence is any threshold limit that is prescribed present under the existing withholding tax sections. The withholding tax is proposed to be applied on any payouts whether in cash or in kind (e.g. redeemable vouchers, points etc.), or on balance in the user account at the end of the financial year. The proposed section defines online game in a broader manner to cover ‘a game that is offered on the internet and is accessible by a user through a computer resource including any telecommunication device’, which seeks to nullify differentiation between a game of skill or a game of chance, as well as distinguish itself from the present definition of game of any other sort. 

While certainty of taxation of and withholding tax from such winnings from online games is a welcome step, it would be interesting to see how the ‘net winnings’ are calculated for the purpose of withholding taxes. This is sought to be clarified at a later stage. Moreover, in its present avatar, the compliance burden on the Indian gaming companies could increase manifold as they would need to have a robust mechanism in place for tracking the withdrawals and deducting tax based on whether the user is a resident / non-resident (involving evaluation of eligibility for tax treaty benefits, compliance at the time of remittance of proceeds etc.). Further, from the user perspective, while the winnings would be subject to tax, carry forward and set-off of the losses remains ambiguous.  

Another possible interpretation worth mentioning is that a foreign gaming company may also be subject to the withholding provisions at the time of such withdrawals by the Indian users or on balance as at end of the financial year in the user accounts. This is in addition to the possibility of applicability of equalisation levy on its earnings (as stated above) from Indian users.  

Ongoing debate under GST  

The Indian gaming industry is fraught by existing litigations under GST regime in the context of online games (e.g., fantasy games) as the GST authorities seek to levy GST treating such games as games of chance (attracting GST at 28 per cent) rather than game of skill (attracting GST at 18 per cent). This issue is still being contested, while the GST Council in the upcoming meeting expected to announce its recommendations.  

To sum up 

Introduction of withholding tax on net winnings at 30 per cent without any threshold may dampen the spirits of the users and could impact the volumes of the booming gamers market in India. It would be helpful to have clarity on above issues under Income Tax and GST in the interest of the users and the gaming industry which could then be equipped to re-evaluate its business models and develop systems to comply with the newly introduced provisions.  

Views are personal. The author is Partner, Nangia Andersen LLP. With inputs from Tamanna Hinduja and Vijiyan Khongal, Nangia Andersen LLP.