Online Gaming: Cloud Still Hangs Over Tax On Incentives, Small-Value Wins

New rules have not allayed concerns about the tax treatment in some cases.

<div class="paragraphs"><p>(Image Source: Unsplash)</p></div>
(Image Source: Unsplash)

The Central Board of Direct Taxes has issued guidelines and clarifications earlier this week regarding how the 30% tax rate would apply to net winnings arising from online games.

The rules, however, not allayed concerns about the tax treatment of small-value wins and bonuses. 

The new provisions will widen the tax net, and even treat bonuses and incentives as winnings from online games. Platforms also anticipate significant investment in user education and facilitating the tax deducted at source.

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Joy Bhattacharjya, director general at the Federation of Indian Fantasy Sports, said the new guidelines did a great job of streamlining the TDS framework for online gaming companies and providing a level-playing field for all platforms.

"They mandate the gaming companies to deduct income tax from net winnings upon withdrawal and/or at the end of the fiscal year," Bhattacharjya told BQ Prime. "The guidelines further provide clarity on the treatment of incentives, bonuses and multiple user accounts, which will ensure ease of compliance."

Concerns On Small-Value Wins

In March, the central government had announced a TDS of 30% on the net winnings and removed the Rs 10,000 threshold that had previously existed.

The tax deduction will happen at source on net winnings alone and only at the time of withdrawal or end of the financial year. This offered users the option to offset losses in a particular game against the winnings of another game, as the tax treatment was on net winnings.

However, platform operators argued that the move would effectively bring every instance of winning under the tax bracket and increase the compliance burden for operators who experience a high volume of low-value winnings or micro-transactions, some of which can be as low as Re 1 to Rs 50.

The new guidelines from the tax department offer a solution to this. A concession has been included for small-value net winnings as long as they are below a total of Rs 100.

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The tax would not be deducted until the net winnings in withdrawals exceed Rs 100 (combined) in the same month or subsequent month. In the absence of such withdrawals, tax needs to be deducted in any case at the end of the fiscal.

At this point, if the user's account doesn't have sufficient balance to pay the tax due, then the platform would undertake the responsibility of paying the difference of the balance in the user account. This presents challenges and risks to operators. 

S Vasudevan, executive partner at Lakshmikumaran and Sridharan Attorneys, said the relaxation for small winnings of up to Rs 100 per month appeared to be too low and practically challenging.

This will create difficulties for operators who will now have to bear the risk of TDS payment, in case the balance in the user's account is too low when the tax becomes due, according to Vasudevan.

It is not a complete relaxation from TDS, but a deferment until winnings get accumulated. Some may even consider blocking the due TDS amount (as they don't have to deduct it anymore) as they (operators) experience a high volume in user footfall on any given day
S Vasudevan, Executive partner at LKS

User Education

Mitesh Gangar, co-founder and director of Playerzpot Media Pvt., welcomed the clarifications issued by the tax department. He said it addressed long-standing uncertainties regarding taxation and provided a clear path for companies to understand their obligations.

The gaming platform that previously expressed concern over the compliance burden that comes with taxing all wins, including the smaller value ones.

Gangar said implementing these announcements would help online operators in building trust among all stakeholders. "While it brings positive developments for the gaming industry and its vast user base, there is a concern regarding small transactions and the deduction on each withdrawal."

"Despite this, the industry recognises the importance of adapting to the required calculations and educating users about personalised deductions based on their winning amounts," he said.

Bhattacharjya underscored that the industry would now need to invest significantly in user education regarding the new provisions.

There has been an exponential increase in the number of user queries and grievances related to TDS deductions since April 1, he said. "With the rules and guidelines now being issued on 22nd May, it will now help the platforms to actively engage with their consumers on explaining the new provisions."

Treatment of Bonus

Online gaming platforms offer attractive incentives and rewards, such as joining bonuses and even referrals to reach out to a wider audience.

According to the CBDT guidelines, bonuses, referral bonuses, incentives and others that are given by the online game intermediaries to the users are to be considered as taxable deposits under Rule 133.

"Some deposits could be money equivalent too like coins, coupons, vouchers and counters," the CBDT clarified in its circular. "In such a situation, the equivalence in money of such deposit shall be considered as taxable deposit and would accordingly form part of the balance in (the) user account."

However, if there are some incentives or bonuses that are credited to the user's account only for playing and cannot be withdrawn or used for any other purposes, then they would not form a part of net winnings.

Vasudevan said this rule did not consider the origin of bonuses, which has a significant bearing on how rewards are allotted by platforms. For example, referral bonuses and joining bonuses are incentives that are not linked to the nature of winning, but are subjected to the same treatment as net winnings.

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