The proposed TDS or tax deducted at source proposal for income from online gaming, announced in Budget 2023-24 has to a great extent provided certainty on direct taxation of winnings. The proposal to rationalise the direct tax structure in the online gaming industry – will usher in transparency, accountability, a clear legal identity, and clarity of taxation of the sector. The finance ministry’s move to introduce two new sections – 194BA for TDS of winnings from online games for online intermediaries and 115BBJ for computation of taxes for those who earn income from winnings of online games – were the key highlights for the industry in the recent budget.
With the new provisions, the industry has finally found the recognition it deserved as a distinct new age industry. The Centre’s proposal of creating new tax provisions for the online gaming industry in a way has cemented the industry as a distinct technology-driven legitimate gaming and entertainment segment. There are certain aspects of the proposal, if not clarified, pose a big threat to the operators and users of online gaming.
The Finance Ministry has proposed to remove the current Rs 10,000 threshold for deduction of TDS by platforms and tax net winnings from the gaming platforms taxable at the highest rate of 30%. This move will impact casual gamers who engage on these platforms for entertainment purposes, with low entry ticket sizes. While the proposal to tax net winnings in a financial year is a welcome move, deduction of TDS on every withdrawal irrespective of the withdrawal amount will impose a significant compliance burden for small ticket winnings. Also, much has been left to be prescribed in the rules for computation of net winnings, which is making both the industry and users anxious. The only silver lining is that the government has proposed to hold industry consultations before finalising the same.
If the government’s intent was to plug the revenue leakages from income escaping assessment, it could have been achieved through a robust mechanism without removing the threshold of Rs 10,000 for the deduction of TDS. The proposed regulatory mechanism prescribes RBI mandated KYC mechanism for users of online gaming, which will create a robust database even for the tax authorities. The players are likely to be dissuaded from engaging on legitimate online gaming platforms with the idea of a 30% TDS deduction on every withdrawal.
Further, there is lack of clarity around taxation of users without PAN cards, while the current provisions exempt online gaming from penal clauses to deduct TDS at 60% for users without PAN Cards, the same has not been extended to Section 194BA for online gaming, while users of betting or gambling platforms continue to be exempt from this clause. Section 206AB was primarily introduced for sectors where lower TDS rates were applicable, however, since online gaming is taxed at the highest rate of 30%, this has to be clarified.
While the intent of providing the industry three months to comply with changes by prescribing the effective data as 1st July for new TDS regime appears to be pragmatic, to allow for technology changes, it has also created further confusion on applicable tax regime between April to June. The industry cannot be expected to comply with three tax regimes in a span of three months, creating more confusion and chaos to the 20+ crore Indian online gamers.
India is poised to be the online gaming capital of the world. The potential for the industry is immense given the country is poised to have one billion smartphone users by 2026.
Against this backdrop, the industry is keenly awaiting the fine print on the TDS proposal and the computation mechanism so that the proposed amendment is put into practice. Additionally, the proposed changes in the GST regime are looming large on the industry.
In fact, the proposal of levying GST on the total prize pool should now be viewed in conjunction with the proposed TDS framework, as this will lead to repeated taxation of the same prize pool contribution every time they enter a game or have winnings.
A detrimental taxation framework – including repeated taxations on the prize pool, taxing every transaction, and a steeper tax structure – is akin to killing the sunrise sector of the Indian gaming industry.
A conducive taxation regime is the need of the hour to ensure the Prime Minister’s vision of India becoming the global capital of the AVGC sector is realised.
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