There has been a robust growth of real money online gaming players in India. While the sector is making multifold year-on-year growth, the tax law surrounding the gaming industry has not kept pace with the same. As a result, sea changes have been proposed under Union Budget 2023 for computing the income of the users/players and also the withholding tax liability of the online gaming companies.
While in the longer run, the changes may provide a sense of certainty and a level playing field amongst the operators, the transition phase from April to June 2023 may be arduous journey for the industry. This is especially due to change in de minimis threshold from “per game” basis to a “yearly” basis.
The amendment may result in expeditious rise in compliance cost for the gaming companies and also pose challenges in maintaining the user confidence.
This article seeks to discuss the changes proposed by Union Budget 2023 and the potential challenges it may bring for the players in the gaming industry during the transition period.
Withholding tax regime at present for online gaming companies
The tax laws do not contain specific provisions relating to online gaming sector. The law does have provisions for subjecting winnings from games to deduction of tax at source (TDS), but these provisions were introduced 5 decades ago for offline games and lottery winnings. Since then, no significant change has been introduced in the tax laws and the improvised businesses continue to be subjected to conventional withholding tax provisions.
Under the existing regime, tax is required to be deducted on a “per game” basis, when the winnings of the players from the game exceed INR 10,000. For computing the winnings, the investment made by the players and the platform fees charged by the gaming company for the game are allowed to be reduced. Since, threshold is applicable on a per game basis, tax is deducted only where winnings exceed Rs 10,000 and games resulting in losses may not be set off against the winnings amount.
Transition phase (April to June 2023) – What is going to change?
For the aforesaid period, the de minimis threshold of INR 10,000, which was earlier applicable on per game basis, will now be applicable on an aggregate basis for the entire financial year. Meaning thereby, if the aggregate winnings of the player in the financial year exceed INR 10,000, tax will be required to be deducted on the entire winnings. The manner of computing the winnings shall remain same as is prevalent in the existing regime.
New regime proposed from July onwards
The Finance Bill, 2023 has proposed insertion of a new TDS provision i.e., Section 194-BA into the Income Tax Act, 1961 for withholding tax on winnings from online games. Under the new regime, tax is required to be deducted on the net winnings lying in the user account at the end of the financial year or at the time of payment, whichever is earlier. The manner of computing the net winnings is yet to be prescribed, however, it appears that since TDS is applicable across winnings in a financial year, the Government may permit set-off of losses and winnings from different games for computing TDS liability.
Also, no de minimis threshold has been prescribed in the new regime. Meaning thereby, TDS will be required to be deducted on the entire net winnings regardless of the quantum. The approach is much different when compared to erstwhile and other traditional TDS provisions.
Challenges ahead during the transition phase (April to June 2023)
The change in threshold from “per game” basis to financial year basis is likely to adversely affect the gaming companies during the transition phase.
As per the memorandum to Finance Bill, 2023 in the existing regime, the deductors used to structure their games in such a manner that the winnings from each game in majority of cases were lesser than INR 10,000. As a result, no TDS was required to be deducted by the gaming companies. Since TDS was required to be deducted in sporadic cases, the gaming companies used to bear the cost of the TDS in order to promote user retention. The same was done by offering promotional offers and bonuses.
Way forward, during the transition phase, gaming companies will be liable to deduct tax if the aggregate winnings during the financial year exceed Rs 10,000. The same will increase the cases where tax is deductible. If the gaming companies continue to bear the cost of TDS, it may add to their cost significantly. A lot will depend on how different competing players in the industry, structure their policies.
The gaming companies may also witness a substantial increase in the compliance cost. This is because within the Financial Year 2023-2024, the gaming companies will have to implement two different TDS regimes. One from April to June and another from July onwards.
Another important issue which is worth highlighting is the practical difficulty which will fall upon the gaming companies for deducting tax during the transition phase. Let us say that a user plays three games, wins INR 9000 in Game 1, loses 8000 in Game 2 and wins 2000 in Game 3. In said facts, at the end of Game 1, as the aggregate winnings of the user does not exceed INR 10,000 the gaming company may not withhold tax. However, at the end of Game 3, the gaming company will be required to withhold tax on entire INR 11,000 (i.e. 9000 plus 2000). At that stage, there may not be sufficient funds lying in the user account balance in order to withhold 30% tax.
Considering the above issue, the gaming companies will have to devise mechanism to ensure that the TDS does not become a cost for them. One way to achieve the same could be to impose lien corresponding to the TDS amount in the winnings derived in Game 1. However, such an approach may reduce user confidence and the overall revenue for the gaming companies. Gaming companies will also have to make changes to their terms and conditions and educate the users about the new TDS policy.
Closing remarks
Considering the practical difficulties which may fall upon the online gaming companies during the transition phase, the Government may consider deferring the proposed amendment in Section 194-B till July 2023. Resultantly, the gaming companies will have to transition only once instead of twice within the same year. Necessary clarification through amendment to Finance Bill, 2023 will be a welcome move for the gaming companies.
† Executive Partner at Lakshmikumaran and Sridharan Attorneys, Chennai.
†† Associate Partner at Lakshmikumaran and Sridharan Attorneys, Chennai.
††† Principal Associate at Lakshmikumaran and Sridharan Attorneys, Chennai.
