Analyzing the taxability of online gaming vis-a-vis Finance Bill, 2023: A conspicuous intention with poor implementation
Introduction
The Income Tax Act of 1961, since its inception, has subjected winnings from lotteries, horse races, card games, and more to taxation. Section 115BB of the IT Act mandates separate taxation for these winnings. Additionally, Section 194B imposes a tax withholding obligation at the source.
The Finance Bill of 2023 proposes specific measures pertaining to tax deductions (Section 194BA) and the taxability of online games (Section 115BBJ), recognizing the unique nature and growing popularity of online gaming. This paper will discuss various implications of these newly enacted laws.
Relevant sections
According to Section 115BBJ of the IT Act, income tax is due at a rate of 30% on the amount of net winnings from an online game when the assessee’s total income includes any winnings from such a game. It is recommended that distinct standards be established for calculating net winnings. Once implemented, this provision will take effect on April 1, 2024.
It is suggested that the term “online game” be defined as a game that is accessible via a computer or a telecommunications device and is made available online. The scope of this description could presumably encompass any online game.
Section 194BA imposes TDS at the end of the Financial Year (“FY”) on user accounts containing net winnings from online games. The event of deduction is initiated either at the time of withdrawal or on the remaining balance at the end of the fiscal year. A user account is any account of a user registered with an online gaming intermediary. When rewards are delivered in kind rather than currency, the payer is responsible for ensuring that the recipient has paid their fair share of taxes. This clause will take effect on July 1, 2023, once implemented.
Be mindful that until June 30, 2023, Section 194B of the IT Act will continue to require the source deduction of tax from online gaming winnings. Currently, it is intended to implement the Rs. 10,000 thresholds outlined in Section 194B on a fiscal year basis in order to trigger the tax deduction liability. In contrast, the new section 194BA mandates a tax deduction on net gains from online games without a threshold.
Classification of online gaming income
The proposed amendment is structured to tax “net winnings” from online gaming. Net winnings are not specified at this time, but it is anticipated that rules will be announced in due time to specify how net winnings are calculated. It is essential to remember that online gaming profits are not a brand-new source of taxable income.
In accordance with Section 2(24)(ix), the definition of “income” includes all winnings from lotteries, crossword puzzles, racing, card games, and other forms of wagering or betting. Therefore, income from such an activity is expressly considered the assessee’s income. According to Section 56(2)(ib), which stipulates that income described in Section 2(24)(ix) is subject to tax under the head “Income from Other Sources” (or “IFOS”), the aforementioned winnings were formerly subject to tax. Consequently, online gaming profits would also be classified as IFOS.
Currently, Section 115BB taxes gaming winnings, including online game winnings, at a flat rate of 30%. In light of the unique characteristics of online gaming, the proposed Section 115BBJ proposes to tax online gaming earnings separately. The tax rate, which is 30%, remains unchanged. The exclusion of profits from online games from the scope of Section 115BB has also been proposed as a consequential modification.
Claiming a tax deduction for incurred expenditures
At this time, it would be essential to ascertain whether any costs associated with online gaming can be deducted. In accordance with Section 58 of the IT Act, certain expenses cannot be deducted when calculating taxable income under the header “IFOS.” According to Section 58(4), winnings from lotteries, crossword puzzles, races, card games, and other forms of wagering or betting of any kind or nature are not deductible for any expenses or allowances related to such income.
Given the precise criterion established by Section 58(4) of the IT Act, the authors are of the opinion that it may be difficult to claim deductions for expenses incurred in calculating winnings from online gambling. Since Section 58(4) does not apply and the proposed Section 115BBJ commences with a non-obstante clause, one could argue that the restriction is irrelevant and that any deduction permitted for calculating “net winnings” would be permitted. To better comprehend the legislative intent behind establishing a taxing mechanism for online games while maintaining the current tax rate, it may be necessary to await the anticipated implementation of the method for calculating “net winnings” before determining the anticipated computation method.
Compensating losses
If a loss in one game can be mitigated by a victory in another, this is another topic worthy of discussion. In an ideal world, we may anticipate that the computation of net profits itself might allow for the set-off of losses from one game against those from another. Even if it is not factored into the calculation of net winnings, the IT Act does not explicitly prohibit the deduction of losses incurred during games. In addition, the IT Act does not expressly prohibit offsetting losses from online gaming in a given year against income from other sources or categories of revenue, and vice versa. Certain restrictions apply only to the carryover of losses into subsequent years. Therefore, when calculating online gaming revenue, it must be possible to include intra and inter source/head set off of current year losses.
Consequences with respect to User Accounts
A user’s account holding net winnings from online gambling is subject to TDS at the end of the fiscal year, per Section 194BA. Explanation (d) of the proposed Section 194BA defines “user account” as the account of a user who has registered with an online gaming intermediary. A clause (a) defines an intermediary that delivers one or more online games as a “online gaming intermediary.” As a consequence, it follows that the phrase “user account” shall refer to all accounts created with an online gaming middleman. The following circumstances may necessitate additional clarification when determining tax deduction eligibility:
How will it be ensured that tax is ultimately deducted only from the net gains from playing online games if a single wallet is used for both general and gaming purposes?
Examples of situations requiring a deposit before participating include: Assume, for example, that a player deposits Rs. 100 to begin a game and has Rs. 500 remaining in his pocketbook at the end of the year after playing multiple games. In this circumstance, he only obtains 400 rupees; the remaining 100 rupees represent his initial deposit. At the close of the year, must tax be deducted from Rs. 500 or Rs. 400?
When April through June 2023 earnings totaling less than Rs. 10,000 are withdrawn in July 2023, must TDS be withheld in accordance with Section 194BA?
What method would the online gaming intermediary use to validate that tax has been paid if the winning prize was a car? A failure to ensure the payment of tax on this transaction may result in fines and legal action.
Conclusion
It appears that Sections 115BBJ and 194BA were inserted to ensure that earnings from online games are taxed separately. One cannot begin to grasp the true scope of these regulations until the procedures for calculating net winnings have been outlined. As previously remarked, the CBDT may need to provide clarifications on certain issues to prevent future litigation that is unnecessary.
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