Online gaming platforms would have to factor the new amendment while distributing winnings to the users. Further, one would have to wait for the computation mechanism to be prescribed for computing the ‘net winnings’ 
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Online gaming platforms would have to factor the new amendment while distributing winnings to the users. Further, one would have to wait for the computation mechanism to be prescribed for computing the ‘net winnings’ The pandemic has changed user patterns and increased usage of mobile phones and other electronic devices. When it comes to online gaming, industry leaders have their eyes set on the Indian market which is highly attractive considering the volume and growth potential. As per reports, India is poised to have 1 billion smartphone users by 2026, and will be the second-largest smartphone manufacturer in the next five years[1]. Also, India is one of the world’s largest mobile gaming markets in terms of app downloads and the revenue from online gaming is expected to reach $1.9 bn by 2024[2].
A large number of individuals participate in fantasy leagues, card games, online challenges etc., which involve actual money. The withholding tax on such winnings has been so far governed by section 194B of the Income tax Act (“the Act”) which provided for withholding tax on winnings from lottery or crossword puzzles, including card games and other game of any sort. TDS was only applicable in cases where the winnings exceeded INR 10,000. Also, the taxation of such winnings in the hands of individual players were governed by section 115BB of the Act which provided a tax rate of 30%.
However, there were various open questions relating to withholding tax on online game winnings such as:
(i) interpretation of the term “game” (eg. each match or tournament or aggregate of games in a financial year); (ii) interpretation of the term “payment” - as to whether constructive payments would be covered (e.g. credit to wallets) (iii) whether TDS under section 194B is applicable on gross winnings or net winnings. As there was no specific clarification, different positions were adopted by entities in the industry.
Considering the large volume of revenue being generated from winnings of online games, the rise in users of such games, variety of playing options and payment options, it was expected that the government may provide clarifications on applicability of TDS and taxation of winnings from online games.
In line with the expectation, Finance Bill 2023 has proposed a separate tax code applicable to online gaming. The Finance Bill 2023 has inserted provisions of withholding tax (section 194BA) and income tax on winnings from online games (section 115BBJ).
A snapshot of the key differences in the proposed amendment vis-à-vis the current provisions are as follows:
| Sr.No | Particulars | Current Provisions | Proposed Provisions |
| 1. | Relevant provisions |
TDS – 194B Taxation of winnings – 115BB |
TDS – 194BA Taxation of winnings – 115BBJ |
| 2. | Effective dates |
TDS – Upto 30 June 2023 Taxation of winnings – Upto – 31 March 2023 |
TDS – From 1 July 2023 Taxation of winnings – from 1 April 2023 |
| 3. | Minimum threshold for TDS | Winnings exceeding INR 10,000 | No threshold provided. |
| 4. | Timing of TDS | Applicable at the time of payment of the winnings |
Annually - Withholding tax to be deducted on net winnings in his user account computed in the manner as may be prescribed at the end of the financial year. For withdrawals during the year – TDS to be deducted at the time of such withdrawal on the net winnings comprised in such withdrawal, as well as on the remaining amount of net winnings in the user account, computed in the manner as may be prescribed, at the end of the financial year. |
| 5. | Rate of TDS | Rates in force - 30%* | Rates in force - 30%* |
| 6. | Winning in kind | The person responsible for paying the winnings, before releasing the winnings to ensure that tax has been paid in respect of the winnings. | The online gaming platform before releasing the winnings to ensure that tax has been paid in respect of the net winnings. |
| 7. | Rate of income tax on such winnings | 30%* | 30%* |
| 8. | Quantum of income to be taxed | There was no specific guidance on taxation of gross winnings vis-à-vis net winnings |
Both TDS and income tax to be computed on the net winnings. The calculation mechanism for the net winnings would be prescribed (would be separately notified). |
* plus applicable surcharge and cess
Based on the above, it can be observed that the proposed provisions of section 194BA is applicable on all net winnings from online gaming without any thresholds and the timing for the applicability of withholding tax is also clarified. The proposed amendment is a welcome move by the government providing clarity on the taxation of online gaming.
Online gaming platforms would have to factor the above amendment while distributing winnings to the users. Further, one would have to wait for the computation mechanism to be prescribed for computing the ‘net winnings’.
Jatin Kanabar, Partner, Deloitte India and Srinath Kumar, Manager, Deloitte Haskins & Sells LLP. The views are personal.
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