Prahar on Online Gaming Under GST and Income Tax

IT TDS and taxability on net winnings from online games

1. Section 194B of the Act provides that the person responsible for paying to any person any income by way of winnings from any lottery or crossword puzzle or card game and other game of any sort in an amount exceeding ten thousand rupees shall, at the time of payment thereof, deduct income-tax thereon at the rates in force.

2. Section 194BB of the Act provides for similar provisions for deduction of tax at source for horse racing in any race course or for arranging for wagering or betting in any race course.

3. Section 115BB of the Act provides for the rate of tax on winnings from lotteries, crossword puzzles, races including horse races, card games and other games of any sort or gambling or betting of any form or nature.

4. It is seen that deductors are deducting tax under section 194B and 194BB of the Act by applying the threshold of Rs 10,000/- per transaction and avoiding tax deduction by splitting a winning into multiple transactions each below Rs 10,000/-. This is against the intention of legislature.

5. It is also seen that in recent times, there has been a rise in the users of online games. There is a need to bring in specific provisions regarding TDS and taxability of online games due to its different nature, being easily accessible vide the Internet and computer resources with a variety of playing options and payment options.

6. Accordingly, it was proposed in the Finance Act, 2023 to:––

(i) amend section 194B and 194BB of the Act to provide that deduction of tax under these sections shall be on the amount or aggregate of the amounts exceeding ten thousand rupees during the financial year;

(ii) amend section 194B of the Act to include “gambling or betting of any form or nature whatsoever” within its scope;

(iii) amend section 194B of the Act to exclude online games from the purview of the said section from the 1st day of July, 2023, since a new section 194BA is proposed to be introduced for deduction of tax at source on winnings from online games from that date;

(iv) insert a new section 194BA in the Act, with effect from 1st July 2023, to provide for deduction of tax at source on net winnings in the user account at the end of the financial year. In case there is withdrawal from user account during the financial year, the income-tax shall be deducted at the time of such withdrawal on net winnings comprised in such withdrawal. In addition, income-tax shall also be deducted on the remaining amount of net winnings in the user account at the end of the financial year. Net winnings shall be computed in the prescribed manner.

(v) to provide in the proposed section 194BA that in a case where the net winnings are wholly in kind or partly in cash and partly in kind but the part in cash is not sufficient to meet the liability of deduction of tax in respect of whole of the net winnings, the person responsible for paying shall, before releasing the winnings, ensure that tax has been paid in respect of the net winnings;

(vi) to provide that if any difficulty arises in giving effect to the provisions of new section 194BA, the Board may, with the prior approval of the Central Government, issue guidelines for the purpose of removing the difficulty. Every such guideline issued by the Board shall be laid before each House of Parliament, and shall be binding on the incometax authorities and on the person responsible for deduction of income-tax on any income by way of winnings from online game;

(vii) to provide the definition of “computer resource”, “internet”, “online game”, “Online Gaming intermediary”, “user”, “user account” in the proposed section 194BA;

(viii) to amend section 115BB of the Act to exclude income from winnings from online games from the purview of the said section from the assessment year 2024-25, since it is proposed to introduce section 115BBJ to tax winnings from online games from that assessment year;

(ix) to insert a new section 115BBJ in the Act with regard to tax on winnings from online games to provide that where the total income of an assessee includes any income by way of winnings from any online game, the income-tax payable shall be the aggregate of—

• the amount of income-tax calculated on net winnings from such online games during the previous year, computed in the prescribed manner, at the rate of thirty per cent; and

• the amount of income-tax with which the assessee would have been chargeable had his total income been reduced by the net winnings referred to above;

(x) to provide the definition of “computer resource”, “internet”, “online game” in the proposed section 115BBJ.

Bare Provisions of Section 194BA-

[Winnings from online games.

194BA. (1) Notwithstanding anything contained in any other provisions of this Act, any person responsible for paying to any person any income by way of winnings from any online game during the financial year shall deduct income-tax on the net winnings in his user account, computed in the manner as may be prescribed, at the end of the financial year at the rates in force:

Provided that in a case where there is a withdrawal from user account during the financial year, the income-tax shall 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.

(2) In a case where the net winnings are wholly in kind or partly in cash, and partly in kind but the part in cash is not sufficient to meet the liability of deduction of tax in respect of whole of the net winnings, the person responsible for paying shall, before releasing the winnings, ensure that tax has been paid in respect of the net winnings.

(3) If any difficulty arises in giving effect to the provisions of this section, the Board may, with the previous approval of the Central Government, issue guidelines for the purposes of removing the difficulty.

(4) Every guideline issued by the Board under sub-section (3) shall, as soon as may be after it is issued, be laid before each House of Parliament, and shall be binding on the income-tax authorities and on the person liable to deduct income-tax.

Explanation.—For the purposes of this section--

(a) "computer resource", "internet" and "online game" shall have the meanings respectively assigned to them in section 115BBJ;

(b) "online gaming intermediary" means an intermediary that offers one or more online games;

(c) "user" means any person who accesses or avails any computer resource of an online gaming intermediary;

(d) "user account" means account of a user registered with an Online Gaming intermediary.]

GST Council’s Decision to impose 28% GST on Online Gaming-

Similarly through recent and 50th Meeting of GST Council, GoM’s recommendations for imposing higher taxes on Online Gaming/Casino/Races Courses have been accepted.

The GST Council has cited the following reasons for imposing a higher GST rate on gaming apps:

• The increasing popularity of Online Gaming: The Online Gaming industry is growing rapidly in India, and the GST Council believes that a higher GST rate will help to regulate this growth and ensure that the industry is taxed fairly.

• The potential for addiction and gambling: The GST Council is concerned about the potential for Online Gaming to lead to addiction and gambling problems. A higher GST rate is seen as a way to discourage people from engaging in these activities.

• The need to raise revenue: The GST Council is also looking to raise revenue from the Online Gaming industry. A higher GST rate is seen as a way to do this.

However, the gaming industry has argued that the higher GST rate is unfair and will stifle innovation in the industry. They have also pointed out that the rate is higher than the GST rate for other forms of entertainment, such as movies and TV shows.

The final impact of the higher GST rate on the gaming industry remains to be seen. However, it is clear that the GST Council is concerned about the potential risks associated with Online Gaming and is looking to regulate the industry through taxation.

Here are some additional points to consider:

• The 28% GST rate applies to all Online Gaming, including skill-based games and chance-based games.
  The 50th GST Council meeting, held on July 11, 2023, made a crucial decision regarding the assessment of tax liabilities under GST for the Online Gaming industry, casinos, and horse racing businesses. The council, based on the report submitted by the Group of Ministers (GoM) specifically formed for this purpose, made recommendations on the imposition of GST on Online Gaming, casinos, and horse racing. This puts an end to the debate over whether these activities are games of skill or chance.
  Henceforth, a uniform GST rate of 28% will be applied to Online Gaming, casinos, and horse racing on the full face value. This means that there will be no discrimination between skill-based games and chance-based games, and both domestic and foreign gaming companies will be subject to the same GST rate.

• The GST Council has not differentiated between domestic and foreign gaming companies. This means that both domestic and foreign gaming companies will be subject to the 28% GST rate.

• The GST Council has not yet announced when the 28% GST rate will come into effect. However, it is expected to be implemented soon.  The GST Council has deliberated on the issues and has recommended the following: 

• Suitable amendments to be made to law to include Online Gaming and horse racing in Schedule III as taxable Actionable claims.
  The activities of Online Gaming and casinos are considered "Actionable claims" under the definition of "goods" in section 2(52) of the Central Goods and Services Tax (CGST) Act 2017. This means that they are taxable, but they are currently excluded from the scope of GST under clause 6 of Schedule III of the CGST Act.
  
  In order to include these activities in the scope of GST, an amendment to clause 6 of Schedule III is required. The amendment would need to specifically mention Online Gaming, casinos, and horse racing, as well as any other activities that are currently excluded from the scope of GST.

• All three namely Casino, Horse Racing and Online Gaming to be taxed at the uniform rate of 28%.

• Tax will be applicable on the face value of the chips purchased in the case of casinos, on the full value of the bets placed with bookmaker/totalisator in the case of Horse Racing and on the full value of the bets placed in case of the Online Gaming.

The higher GST rate is likely to have a significant impact on the gaming industry in India. It is possible that the industry will see a decline in revenue and growth as a result of the higher GST rate. It anyhow is too premature to say what the impact of the GST Council`s decision to impose a uniform GST rate of 28% on Online Gaming, casinos, and horse racing will be. The decision was made on July 11, 2023, and it’s still too early to see how it will affect the industry.

Some experts believe that the higher GST rate will stifle innovation in the industry and lead to a decline in revenue. Others believe that the industry will adapt to the new tax regime and continue to grow. Only time will tell what the ultimate impact of the decision will be