The Finance Minister has proposed various changes in the taxability of net winnings from online games. It has been observed that in recent times, there has been a rise in the number of users betting on online games.
As a result, there was a need to frame specific rules concerning how online games are to be taxed, since they are distinct, can be easily accessed through the Internet and computer resources, and there are many ways to play and pay for them.
Section 194B of the Income Tax Act, 1961, says that anyone who pays someone more than Rs 10,000 in winnings from a lottery, crossword puzzle, card game, or any other game must deduct income tax at the rates in effect at the time of payment.
It was found that the persons responsible for deducting tax under the above section were avoiding tax deductions by splitting winnings into multiple transactions, each below Rs 10,000. Since this practice goes against the intent of the legislature, certain changes were necessitated in this regard.
Accordingly, it has been proposed to amend the above mentioned section to provide that the tax deduction shall be on the basis of the amount or aggregate of the amounts exceeding Rs 10,000 during the financial year. It has also been proposed to include "gambling or betting of any form or nature whatsoever" within its scope. However, these amendments would only cater to the online gaming industry until July 1, 2023.
After July 1, 2023, a new section 194BA will come into effect, which will provide for the deduction of tax at source on net winnings in the user's account at the end of the financial year. If a user wishes to withdraw money out of their account during the fiscal, the tax will be collected out of their net winnings at the time of withdrawal. At the end of the financial year, the tax will also be deducted from the user's net winnings that are still in their account.
One could also see litigation on the obligation of a non-resident online gaming intermediary to withhold tax on the earnings of Indian users, especially where the overseas entities have no form of presence in India, including where the app or website is hosted outside India.Ritesh Kumar, Partner, JSA
Another change, by way of adding a new section, has been proposed. Section 115BBJ will take effect on April 1, 2024. This section will contain provisions with regard to the rate of tax applicable on net winnings from online games. A rate of 30% has been prescribed in the said section.
Implementing these provisions is going to be no easy task for the industry, especially where the user has the option to redeem the earnings for rewards or gifts through the platform as opposed to cash. In such cases, the proposal contemplates that the user should provide proof of discharge of tax liability to the intermediary. Implementing a process that doesn't spoil the user experience while achieving compliance will be a challenge, Ritesh Kumar, partner at JSA, told BQ Prime.
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