Online gaming has seen significant growth in India in the past year. But a new tax rule could hamper its future.
Under new Section 194BA, players will have to pay TDS on net winnings in their user accounts at the end of each financial year. This is a major change.
Definition of iGaming
The amendments also propose to clarify the definition of “online money gaming”. It includes all online games where users bet real money or virtual assets, irrespective of whether the game is based on skill or chance. It also stipulates that winnings in the form of cash or virtual assets arising from such games must be taxed at 28%.
The government’s move has sparked an angry response from gamers and investors, who argued that the new 28% tax would hurt growth and stifle innovation in the industry. More than 100 gaming companies and top investors such as Tiger Global and Peak XV have written to the ministry asking it to reconsider the decision.
The Ministry of Finance has said that it will work with the IT ministry on defining permitted games. However, it is unlikely to withdraw the 28% tax on iGaming anytime soon. It is also likely that the ministry will delay the implementation of the new law. This will allow gaming businesses to proactively assess their tax positions and adapt their ERP systems and tax calculation processes accordingly.
Taxation on Net Winnings
Previously, online gaming platforms in India had to deduct TDS on winnings above Rs 10,000. However, the government’s new proposal is expected to offer greater transparency and a more standardised taxation regime. The new rule will define ‘online games’ and levy 30% income tax on net winnings.
The Finance Minister Nirmala Sitharaman introduced this change on February 1 during her Budget presentation. Earlier, the IT Act only regulated winnings from lotteries, races and card games, but now a separate section for online gaming has been included. All the latest gambling news and online casinos reviews in India can be found at BestIndianCasinos.co.in.
Under this, online game platforms must deduct 30% of net winnings at the time of withdrawal or at the end of a financial year. Moreover, it is also mandatory to notify users about this. Furthermore, a player can transfer his or her funds to another account within the same gaming platform. However, this transfer should be made using a single wallet which qualifies as user account for the purpose of computing TDS.
Taxation on Deposits
Online gamers will now be subject to 28% indirect tax on the money they deposit and winnings they receive from their gaming platforms. This could have an impact on the growing industry. Several gaming companies have already expressed concern over the new rules, which will affect their bottom lines and stifle innovation in the sector.
The amendment to Section 194B removes the monetary threshold of Rs 10,000 and makes it clear that gaming is included in the scope of this section. It also clarifies that winnings are taxed either at the time of withdrawal or at the end of the financial year, depending on the user’s choice.
While the move is welcomed by gamers, it will add a significant cost to the gaming industry. Some companies may have to pass on the extra expense to their customers, which could cause an increase in prices. This higher tax rate also makes it more difficult for Indian gaming companies to compete with foreign ones.
Taxation on Payments
Until now, GST had been levied on online gaming only at the rate of 18%. The new amendments, through the substitution of Section 194B with Section 115BBJ, introduce a new deduction of tax at 30% on ‘net winnings’ available in the user account on online gaming intermediaries.
While the new clause does eliminate the differential GST rates based on the games’ nature (skill-based versus chance), it has not provided clarity around how this ‘net winnings’ will be calculated by an online gaming intermediary. This will have a significant impact on the way gaming platforms will structure their products and the cash flow of their players.
The new clause has also made it mandatory for gaming intermediaries to report the details of winnings of players to the tax authorities. This will make it harder for players to claim tax exemption by splitting their winnings into multiple transactions. This will have a negative impact on the gaming industry.