Government Introduces Two New Sections in IT Act to Tax Winnings From Online Games in the 2023 Budget; Minimum ₹10K Threshold on TDS Removed

The much-awaited Union Finance Minister Nirmala Sitharaman‘s budget speech on February 1 revealed several changes to the IT Act. The gaming industry had reasons to celebrate as the government introduced two new sections to the IT Act to distinguish winnings from online gaming (including poker, rummy, and fantasy sports) from other betting and gambling activities.

While the tax slabs and deductions allowances were positive announcements, the change most pertinent to the online gaming industry was the removal of the minimum threshold of ₹10,000 on TDS and the mandatory tax deduction of winnings in player accounts at the end of the financial year.

Sitharaman, in her budget speech, announced certain amendments to the Income Tax Act 1961, “removing the minimum threshold of ₹10,000/- for TDS and clarifying taxability relating to online gaming.”

Further, the annexure to the Finance Minister`s Budget speech indicated, “For online games, it is proposed to provide for TDS 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 ₹10,000. For lottery, crossword puzzles games, etc threshold limit ₹10,000 for TDS shall continue but shall apply to aggregate winnings during a financial year.”

The Finance Bill 2023 introduced in the Lok Sabha today by Sitharaman includes two new sections dedicated to winnings from online gaming (applicable across poker, rummy, and fantasy sports) – Section 115BBJ and Section 194BA.

Section 115BBJ has been introduced to tax winnings from online games from Financial Year 2023–24 onwards (applicable from April 1), making tax applicable on ‘net winnings’ at 30%.

Winning from online games like poker, which fell under Section 194B, will now be classified under a new Section 194BA, which makes it mandatory for TDS to be deducted at the rates in force (i.e., 30%) TDS on ‘net winnings’ from July 1, 2023, when the user withdraws net winnings from his/her account and at the end of the financial year on any pending winnings in player accounts.

Under the prevalent income tax laws, winnings from online games are taxed at 30%. If it is above ₹10,000, the payer or company has to deduct tax on it at the time of withdrawal. According to section 194B of the Income Tax Act, the person responsible for paying any person any income by way of winnings from lotteries or crossword puzzles will deduct tax at the rate in force. Income from such cash prizes in online gaming was previously taxable under Section 115B of the Income Tax Act at 30%. No deduction or set-off was allowed for such winnings.

Some issues which the government identified were:

• TDS is deducted on winnings of ₹10,000 and above. Online gaming companies offer players the means to split their winnings into two or more withdrawals of under ₹10,000, thereby avoiding TDS.
• Gaming operators offer players vouchers or coupons, in addition to the cash prize, which helps them split their winnings to keep it under the ₹10,000 cap. These vouchers could be encashed later or used to play.

The changes introduced in the Budget 2023 will undoubtedly impact the online gaming industry. The fact that the central government felt the need to make new additions to the Income Tax Act to accommodate the sector proves that the Union is coming to terms with the industry’s potential. Separating online gaming platforms from betting and gambling activities is also a crucial step taken by the central government that will benefit the industry in the long run.

While several industry stakeholders applauded the changes introduced by the government, the decision to remove the TDS threshold negatively impacts the low-to-mid stakes players who will have to shell out 30% of their net winnings even if these are below ₹10,000.

Industry Stakeholders React

Commenting on the budget announcement, Roland Landers, CEO of All India Gaming Federation (AIGF), said, “The online gaming industry welcomes the budget announcement by the Hon’ble Finance Minister, particularly in relation to the rationalisation of direct taxation for online gaming. We are happy to note that the Finance Bill carves out the distinction between betting and gambling activities and online games, through introducing a new section 194BA which taxes a user’s net winnings from online games at the end of the financial year. 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.”

Ankur Singh, CEO and Founder of Witzeal Technologies, said, “We are thrilled with the announcement of the first budget of Amrit Kaal that envisions an empowered and inclusive economy driven on the fundamentals of technology and knowledge. India is now the third largest ecosystem for start-ups globally and ranks second in innovation quality for middle-income countries. Fostering the development of start-ups in the online gaming industry, the initiative of ‘Make AI in India, make AI work in India’ will potentially boost the growth of gaming studios.

“The Hon’ble Finance Minister particularly mentioned clarifying the taxability relating to online gaming. Now as the Indian gaming market is expected to grow at a 27% CAGR reaching 8.6 billion dollars by 2027, government support will further help to streamline the industry and provide structured growth to this burgeoning industry,” Singh concluded.

“The need of the hour is to have a progressive taxation regime to help India become a global gaming hub. We believe that gaming is going to be one of the key sectors in the next five years which will drive significant growth in employment opportunities. We hope that the budget will contain announcements that promote Indian game developers and service providers to grow the ecosystem holistically,” Gaurav Kapoor, CEO of Baazi Games, stated.

According to Gaurav Gaggar, promoter of PokerHigh, the industry needs clarity from the government on the goods and services tax (GST) issue. The department intends to charge 28% on the prize pool as opposed to 18% on the commission or revenue earned by the gaming platforms. “The GST department’s argument that deposits are akin to actionable claims does not hold true in my view as gaming platforms only earn the service fees as their revenues and accordingly should be paying taxes on that,” he observed.

The Budget 2023 announcement comes at a time when the online gaming industry is marred by uncertain tax laws and a need for clarity on several aspects of taxation, including the amount of tax to be charged and what counts as taxable income.

The budget announcement underlined ​​that should any difficulty arise in giving effect to the provisions of new sections, the Board may, with the government’s approval, issue guidelines to remove the difficulty. For now, players and operators will have to wait for a more detailed advisory on the new tax guideline to completely understand the implications of the proposed changes.

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