Navigating The Labyrinth: Impact of Taxation on The Online Gaming Industry
Abstract
Traditional games in India are now gradually being replaced by video games which attributes to the amount of time internet users spend on online gaming. The gaming systems and the seamless platforms have laid a breeding ground for the fledgling gaming industry. It becomes pertinent to have a stabilized regulatory framework for the thriving online gaming sector. Due to the exponential rise in the consumers having access to variety of online games, businesses often find themselves in a tight spot that calls for a transparent regulatory structure. The regulatory discourse with respect to the gaming sector mentions two sets of laws- Public Gambling Act, 1867 and the Information Technology Act, 2000. The archaic Public Gambling Act, 1867 finds no trace of games played in the virtual space. The Information Technology Act, 2000 highlight upon the penalties for cyber related crimes. Laws with regards to online gaming industry stand on a shaky ground till date.
Furthermore, there has always been tussle with regards to the jurisdiction within which this sector falls. The paper attempts to address the jurisdictional conundrum that exists in this sector. This paper investigates the legal and regulatory framework with regards to the taxation of online gaming income. Further, authors have delved into the taxation landscape which was employed on the gaming industry prior to the advent of Finance Bill, 2023 and the regulatory recommendations that have been incorporated post the Finance Bill, 2023. The authors have concluded by providing the potential recommendations to streamline the process and bring clarity to both the users and operators in the fledgling online gaming industry.
Introduction: Skill- Based Online Gaming Industry
India is on the trajectory of becoming a global gaming superpower and a hub for game developers globally. To further this vision, Finance Minister launched an Animation, Visual Effects, Gaming and Comics (AVGC) task force in the recent Union Budget 2022. The Online Skill Gaming Industry (OSG) in India has emerged as a major driving force to enable the growth of the AVGC sector in India. Various factors such as 5G infrastructure, pervasiveness of internet, exponential rise in use of smartphones have laid a breeding ground for the growth of the online gaming industry. The gaming industry has charted an exponential growth projecting a CAGR at 38%.[1]
With the thriving gaming industry, Indian government has enacted various legislations to provide cushion to these industries, particularly the esports and gambling sector. The fledgling growth of online gaming has resulted in the formation of various self- regulatory organizations such as All India Gaming Federation (AIGF) and Esports Federation of India (ESFI). The avowed objective of these organizations is to ensure fair play and responsible gaming. The Union Budget, 2023-24 and the Finance Bill, 2023 have acknowledged the new age gaming industry and compartmentalized separate provisions for taxation of winning accolades and prizes form online gaming.[2] Therefore, there have been no provisions explicitly stating the requirement of filing the written statement and other aspects have been withdrawn.
Landscape of Income Tax under Gaming Income (Prior to Finance Bill, 2023)
Tax and Fees Collection is the primary method that enables a country to generate revenue which aids them to finance investments in human infrastructure and human capital[3]. Simultaneously, countries have to ensure a fair and equitable tax system. The canons of taxation are the guiding forces for the implementation of tax policies in a country. The canon of neutrality, simplicity, certainty and equity are the key forces that regulate the taxation policies of our country. The income-tax scheme meted out by the Indian Legislature is also fundamentally driven by the canons of taxation. Income Tax in India is governed by the provisions of the Income Tax Act, 1961 (‘the Act’). Such acts were made according to the provisions of the Companies Act. Therefore, it has to be given priority amongst the various sections of the society. Therefore, the provisions are still under the graduating stage. Such measures have to be again looked into the directions of the society and the Government. Therefore, the provisions are given under the Companies Act, 2013.
Section 4 of the Act mandates the levy of income tax on the income of a person for an assessment year. Under this provision, every person is liable to pay the tax on the basis of the previous- year income. Tax payment can be either by way of self- assessment with the advance tax or at the time of filing the return by the deduction of taxes out of the total income earned by an individual. Collection of taxes in advance is ensured by payment in advance. i.e. either through advance tax or “Deduction of Tax at Source” (TDS). Section 4(2) read with Section 190 provides for the payment of tax on income by way of TDS.
There was a paradigm shift in 1972 in the approach of the Legislature in taxing non- recurring receipts which were earlier under the “exempted from tax” category under Section 10(3) of the IT Act[4]. The avowed objective behind bringing such income within the taxable limits was two- fold[5]: firstly, to bring it parallel to the principle of taxing equal people with the same capacity, and secondly to curb the cases of tax evasion by converting black money into white money. Section 2 (24) of the Act provides for an inclusive definition of “income”. With the advent of the Finance Act, this definition was expanded to include “winnings from lotteries, crossword puzzles, card games and other game of any sort”, etc.[6] The tenor of the expression “other game of any sort” signifies a wide canvass that includes “online game” within its meaning[7]. Therefore, winnings from these games are within the ambit of “income”. There is no compartmentalization between online gaming and offline gaming under this section. Thus, income generated from online gaming shall also come under the purview of definition of income under Section 2 (24) (ix) of the Act[8]. Therefore, we are of the opinion that such assistance has come to us for a variety of reasons. There have to be various reasons as to why the specific provision is to apply on a particular case. Such provisions have been mandated to provide a stable mechanism to make this a viable choice to make this sense. Accommodatively, this has to be made the final version according to the major provisions of the Companies Act, 2013. Such a case has to be established in line with Entry 6 to the Third Schedule of CGST Act 2017. This states that “ actionable claims are made to join the company as such in the major amendments. Furthermore, such major changes have to be made accordingly. Such action has taken India way ahead of the curve. Such opportunities have to be given as per
Therefore, such changes have to be made accordingly. Therefore, the major provisions have been standing tall since the 2020 Act.
Reactionary post that turns up the case is exactly this. Therefore, all the arrangements have to be made accordingly so that all the post session thumbs up is given the chance. Certainty, along with other things have to be counted on a daily basis. Therefore, the provision seeks to mandates the other states have as well made the rules applicable to the field of law. Therefore, the major provisions have made the provisions mandatory as per the Companies Act, 2013. Companies have been furthermore, Section 14 has classified income under different heads- Income from House Property, Salaries, Profits or Gains from Businesses or Profession, Capital Gains and Income from other sources, Thus, winnings from lotteries, card games, horse race, etc is classified under the purview of the head “Income from other Sources” under clause (ib) to Section 56(2) of the Act[9]. Under Section 15 BB of the Act, flat rate of taxation at 30% rate is imposed on an individual contrary to the incomes which are charged at slab rates. Thus, if an individual has earned an income of Rs 20,000/- by winnings from lotteries, card games, etc., then such income would be chargeable at the rate of 30% irrespective of the income tax slab under which an individual falls.
Taxability of Online Gaming income: Proposals vis-a- vis Finance Bill, 2023
The Finance Bill, 2023 has inserted a new provision for taxation of the income generated by way of winnings from the “online games” under Section 15BBJ with effect from Assessment Year 2024-25. This provision imposes a tax at the rate of 30 % on the income from “net winnings” during the previous year. Furthermore, the bill has proposed a new TDS provision with effect from 1st July, 2023- Section 194BA for withholding tax on winnings from the online games. Under this provision, TDS will be deducted on “net winnings” from online gaming in the “user account” at the conclusion of the relevant fiscal year. However, the calculation of “net winnings” will be specified separately, and the payer must adhere to it in order to deduct tax from such a payment.
The impact of the new proposed changes is contingent upon the rules and definitions on net winnings and the congruency of these rules with the online gaming users. Additionally, there is obscurity on contrasting taxing provisions for the period starting from 1st April 2023 to 30th June. This stands in sharp contrast with the canons of simplicity and convenience of users. Since the nature of income is sporadic and non-recurring and withdrawal instances are irregular, the imposition of new tax liabilities on Online Gaming Industries to deduct TDS on net winnings at the user’s withdrawal or at the end of the financial year, whichever is earlier, would result in a higher compliance burden and costs.
Defining Legislative Contours of Online Gaming Laws
India has both state and central level gaming laws; state enactments regulate specific gaming activities and the central has enacted regulations applicable to OGIs, which are to be made applicable in addition to state-wise laws. The state enactments are in accordance with the Constitution of India, for “betting and gambling” is under entry 34 of List II of the Seventh Schedule.[10] Some states have adopted the Public Gambling Act, while others have enacted their own legislation.[11] However, most of these state laws were enacted before the emergence of online gaming/gambling and were thus concerned primarily with activities taking place on physical premises.[12] However, with the advent of online gaming and the need for its regulation, states like Nagaland, Telangana, Andhra Pradesh, Tamil Nadu, Chhattisgarh and Sikkim extended their state legislation to online medium by amending their specific existing gaming laws or introducing new ones.
In addition to these, the central government has introduced gaming laws under amendments to the IT Rules, which have placed obligations on OGIs offering permissible online real money game (PORMG). [13]Accordingly, under the new IT Rules for verification as a PORMG condition, it is prescribed that it “does not involve wagering on any outcome”, but the same rules have failed to provide any explanation regarding the inclusion or exclusion or the definite meaning of this phrase.[14] Arguably, the central government derives its legislative power in relation to online gaming from Entry 31 and 97 of List I under the Seventh Schedule.
Further, it can be concluded that while ‘betting and gambling’ falls under state jurisdiction (entry 34 of List-II), there was no such entry for ‘online gaming’. Thus, it implies that it falls under the ambit of the Centre to regulate as such and also for the purpose of taxing online games (as per entry 97 of List I). This argument is also backed by discourse at the first public consultation on the draft online gaming policy under amendments to the Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Rules, 2021, during which it was highlighted that online gaming rules are being drafted while keeping in mind that online games come under the jurisdiction of the centre. Further, to remove any doubt, in the sessions of Parliament, it was also highlighted that online gaming platforms are intermediaries and therefore subject to the IT Act and Rules therein, and the Central Government also announced its plan to bring the online gaming industry within the purview of the Ministry of Electronics and Information Technology (MeitY) while proposing the IT Rules, 2021.Hence, it can be concluded that online gaming would fall within the ambit of the Union’s exclusive jurisdiction under entry 31 of List-I of the Seventh Schedule.
These rules came as a respite to the industry because previously online gaming was part of a regulatory grey zone as there was no legislation addressing this matter explicitly. Though the new IT rules are still not comprehensive enough to regard them as a stepping stone for this industry. Moreover, one can argue that the principle of harmonious construction should apply, employing IT rules in addition to state laws until an all-encompassing central legislation is developed. Nevertheless, with the recent legislative actions of the Centre regarding online gaming, it is clear that taxation of online gaming will be undertaken under entry 97 of List I and not under entry 62 of List II of the Seventh Schedule.
Recommendations: A way forward
Provisions expressly addressing the issue of taxation on online gaming have been introduced by the Finance Bill, 2023. Although this brought some clarity to the taxpayers in the industry, there are some issues on which the legislature did not delve deeper. Consequently, this may cause confusion and an unnecessary compliance burden, which stands against the canons of taxation. Further, this text will discuss various points and corresponding recommendations:
1. Since both Section 115BBJ and Section 194BA require deduction of tax on “net winnings”, the formula for calculation of the same becomes integral.[15] Therefore, the computation of net winnings should be rational and incorporate business realities, suggesting that only the net amount earned from online gaming, i.e., the real income of a person, should be considered for tax liability, not the gross prize money. Therefore, while computation provision should be made for offsetting entry fees and other deductions like contribution amounts, basically “net winnings” shall be interpreted in its ordinary and natural sense.
2. Since the net amount of online gaming should be considered for taxation, entry fees across multiple withdrawal sessions in a financial year should be off-set and carried forward by the platform. This stands in parallel with the scheme of the Act, followed in computation under the head “profits and gains of business or profession,” where the net result of business activity is sought to be taxed, ignoring the individual business transaction.
3. For Section 194B and 194BB, a de minimis threshold of Rs. 10,000 is provided for in the Act, yet no such lower limit is prescribed for the similarly situated Section 194BA.[16] [17]Observation of all the other TDS provisions will reveal that no tax is required to be deducted up to a certain monetary threshold. This reduces the compliance burden for the threshold and ensures that small-value transactions are not made subject, which in turn increases the ease of doing business.
4. The application of the amended provisions will create significant compliance issues in cases of multiple transactions in the same financial year. First, online gaming platforms will be subject to Section 194B with an amended threshold only for the period April 2023 to June 2023. To resolve this, the amendment of the threshold should be deferred until July 1, 2023.
Second, in respect of winnings from online games during April 2023 to June 2023, tax shall be deductible as per Section 194B, and from July 1, 2023 onwards, tax would be deductible as given under Section 194BA. However, under Section 194B, tax is on the payment of winnings, whereas under Section 194BA, it is on net winnings lying in the user account at the end of the financial year as well as at the time of withdrawal made during the financial year.
Third, it may happen that tax is deducted on winnings during April 2023 to June 2023, but such winnings are not withdrawn during the mentioned period. In that case, it is not clear whether such winnings already suffered deduction of tax u/s. 194B prior to the Finance Bill 2023 would again be subjected to withholding of tax u/s. 194BA. In this regard, it may be provided that if winnings have been subjected to u/s. 194B prior to the Finance Bill, 2023, and such are not withdrawn, the same will not be deductible under u/s. 194BA. Further, if no tax has been deducted u/s. 194B, then tax would be deductible u/s. 194BA.
5. Section 206AB of the Act is a special provision providing for a higher rate for TDS for non-filers of income-tax returns. [18]Further, it excluded those TDS provisions from its purview where higher TDS, either in terms of rate or amount, is deducted, e.g., Section 194B: TDS at 30% on winnings from the lottery, crossword puzzle, card games, etc.; Section 194LBC: TDS at 25% or 30% on income from investment in a securitization trust; and Section 194N: TDS at 2% on payment of certain amounts in cash. [19][20]On a similar tenor, Section 194BA should be exempted because tax is deductible at a rate of 30%, meaning a higher TDS rate. Therefore, an amendment has to be made regarding Section 206AB, and further, it is only equitable that online gaming also receives the same benefit because Section 194BA is carved out for online gaming from prior Section 194A.
Conclusion
In the online gaming industry, with its ever-growing user base, the introduction of new provisions dealing specifically with the taxation of such has brought much relief to the entire industry. The Finance Bill 2023 has put to rest a host of issues that were not addressed in the old regime; however, there persist certain ambiguities that, if not cleared, would impede the growth of the industry and will also simultaneously cause confusion for operators and users alike. For the growth of the economy, it is important to boost the growth of the online gaming industry to increase revenues and tax collection from this flourishing sector. Therefore, it is essential that the open issues are addressed as early as possible by either issuing a circular or notification or introducing amendments to the Finance Bill 2023.
[1] BCG, ‘Mobile Gaming: India’s $5B + Market Opportunity’ (2021) <https://www.bcg.com/mobile-gaming-market-opportunity-in-india> accessed 1st January 2024.
[2] Business Standard, ‘Budget 2023-24: Online gaming companies welcome clarity on taxation’ (2023) <https://www.business-standard.com/budget/article/budget-2023-24-online-gaming-players-welcome-clarity-on-sector-123020201597_1.html> accessed 2nd January 2024.
[3] The World Bank,’ Taxes & Government Revenue’,<https://www.worldbank.org/en/topic/taxes-and-government-revenue> accessed 28th December 2023.
[4] Income Tax Act, 1961, s 10(3).
[5] Finance Act, 1972,’Memorandum to Finance Bill, 1972’, para 6 of Circular No. 108 , 20 March 1973,<https://incometaxindia.gov.in/Communications/Circular/910110000000000550.htm>,accessed 2nd January 2024.
[6] Income Tax Act, 1961, s 2(24)(ix).
[7] Inserted vide Finance Act, 2001,( w.e.f 1.04.2002).
[8] Income Tax Act, 1961, s 2 (24) (ix).
[9] Income Tax Act, 1961, s 56(2)(ib).
[10] Constitution of India 1950, Sch.VII.
[11] Public Gambling Act ,1867.
[12] Policywatch India Foundation and Primus Partners, ‘Online Gaming in India: Taxation Quandary’ (2023) <https://primuspartners.in/docs/documents/ltOAZaeMVPLOkrH54fDe.pdf> accessed 2 January 2024.
[13] The Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Rules, 2021.
[14] Gowree Gokhale, Tanisha Khanna and Rhythm Vijayvargiya, ‘Gaming Law 2023’ (2023) <https://nishithdesai.com/fileadmin/user_upload/pdfs/research_Papers/Gaming-Law-India-Practice.pdf> accessed 2 January 2024.
[15] Income Tax Act, 1961, s 194BA.
Finance Act, 2023, ‘Guidelines for removal of difficulties under sub-section (3) of section 194BA of the Income-tax Act, 1961’, Circular No. 5, 22 May 202,<https://taxguru.in/income-tax/section-194ba-tds-winnings-online-games-cbdt-clarifies.html>,accessed 2nd January 2024.
Income Tax Act, 1961, s 115BBJ.
[16] Income Tax Act, 1961, s 194B.
[17] Income Tax Act, 1961, s 194BB.
[18] Income Tax Act, 1961, s 206AB.
[19] Income Tax Act, 1961, s 194LBC.
[20] Income Tax Act, 1961, s 194N.
Author Bio
