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Online gaming has become a popular and booming industry in India. Whether playing games on a PC, gaming console, or mobile phone, online gaming offers a chance to have fun and win real money. However, many online gamers may not be aware of the tax implications of their winnings. According to the Income Tax Act, any game winnings are considered income and are subject to tax at 30% under Section 115BB. This includes the actual winnings and any bonuses, referral incentives, or other inducements offered by online gaming platforms.
Moreover, the tax has to be deducted at source (TDS) u/s 194BA by the payer before paying the net winnings to the recipient. The payer could be the operator of the online game or any other person responsible for paying the winnings. Online gamers must declare their winnings from online gaming in their income tax returns (ITR) under the head 'Income from Other Sources' u/s 115BBJ and pay the tax accordingly. The tax rules apply to all kinds of online games involving skill or chance. Even if the winnings are in the form of coins, coupons, vouchers, or merchandise, they are taxable as per their market value. I.e., online gamers should be aware of the tax implications of their winnings and comply with the law to avoid any penalties or disputes.
Budget 2023 Update:- The CBDT has issued a circular to clarify the TDS rules for online gaming winnings. The circular states that online gaming companies must deduct a 30% tax before distributing the winnings if it exceeds the threshold of ₹100. Amendments came into effect on 1st April 2023. The tax will be calculated on the net winnings of the user, which is the difference between the amount withdrawn and the amount deposited in the user account.
According to the K.R. Lakshmanan verdict of 1996 by the Indian Supreme Court, online gaming/gambling is regulated by a guiding principle. Games that depend more on chance than skill are prohibited, while games that require more skill than chance are allowed.
Moreover, courts have recognized fantasy sports as a distinct category of online games that involves skill, knowledge, judgment, and attention. The Punjab & Haryana and the Bombay High Courts have ruled that Dream 11's games (such as Fantasy Cricket, Kabaddi, and Football) are not online gambling.
The 2020 consultation paper on gaming by NITI Aayog also echoed the Supreme Court's views on fantasy sports because of the public interest factor and the inconsistent treatment of fantasy sports games across different Indian states.
However, without a regulatory mechanism, authorities have treated E-sports differently and have imposed the same taxes on gambling/horse betting as on E-sports.
Tax on Online Gaming in India:
The online gaming industry is one of the fastest-growing sectors in India, with a projected market size of $3.8 billion by 2024. However, the industry faces a major challenge from the government's proposal to impose a 28% GST on the GGR of online gaming. Currently, online gaming platforms pay 18% GST on the CEA, which is the amount paid by users to participate in games. The co-founder of Winzo Games, Saumya Singh Rathore, has expressed her concern that the proposed GST rate will hamper the growth potential of the online gaming industry, which can contribute significantly to the Indian economy.
Online games like Ludo Empire, Dream 11, and others offer the winner real money. However, the earnings are not exempt from tax. It comes under the “Income from other sources” category and is taxable under sections 115BBJ and 194BA. Winners must pay a flat tax of 30% on this income, regardless of how much they earn.
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Online games that offer bonuses, referral bonuses, and other incentives to their players are not considered prize winnings, and hence, they are not subject to tax under section 115BB of the Act. However, these amounts are treated as taxable deposits and are included in the net winnings of the user account. The net winnings are calculated as the total withdrawal minus the total fresh deposits and the opening balance. The net winnings are taxed at 30% under section 115BBJ of the Act. The person responsible for paying the net winnings has to deduct TDS under section 194BA of the Act at the end of the financial year or at the time of withdrawal, whichever is earlier.
Online gaming tournaments offer various merchandise to the participants, and the winner gets either cash or a gift prize. The income tax law treats the winnings from gaming tournaments as winnings from online gaming and taxes them at 30% under section 115BB of the Act. The merchandises received by a professional are taxable under “Income from business & profession,” regardless of the market value of the merchandise. For others, the income is taxable under section 56(2) of the Act only if the total market value of the merchandise is more than ₹50,000.
A related issue that needs to be discussed is how to treat the losses from one game against the profits from another game. Ideally, we may expect that losses of one game should be allowed to be adjusted against profits of another game in the calculation of net winnings. Even if this is not done in calculating net winnings, there is no explicit prohibition under the IT Act to prevent the set-off of losses within games. Moreover, there is no explicit prohibition under the IT Act to set-off off losses of a specific year arising from online games against income from other sources/ heads and vice versa. Only some restrictions exist for carrying forward losses to subsequent years. Therefore, set-off of current-year losses within and across sources/heads should be permissible in computing income from online games.
One may wonder whether the cost of playing online games can be claimed as a deduction. However, section 58 of the IT Act specifies certain amounts that are not deductible while computing the income taxable under the head Income from other sources. According to section 58(4), no deduction is allowed for any expenditure or allowance related to such income arising from lotteries, crossword puzzles, card games, races, and other games of any kind or gambling or betting of any nature.
According to Section 194BA, online gaming platforms must deduct TDS from a player's net winnings in a financial year. The TDS rate is 30% under Section 194BA of the Income-tax Act. The circular also clarified that any bonuses, incentives, referral bonuses, etc., given by the online gaming company to the player are taxable deposits under Rule 133 of the Income-tax Act.
