👍👍👍*[Tax on Gaming]The right bet on taxation? | The Financial Express

Clipped from: https://www.financialexpress.com/opinion/the-right-bet-on-taxation/2983970/

Budget FY24 provisions on taxing the winnings in online games impose a large cost on gaming companies, in the form of a heavy and complex compliance burden

The right bet on taxation?The gaming companies have been vested with a responsibility to withhold taxes on winnings paid to the players.

By Pranay Bhatia

Budget 2023 proposes to overhaul the regime for the taxability of winnings (including withholding taxes on the same). The industry has witnessed spectacular growth over the last few years and has been an outlier amongst other industries.

The gaming companies have been vested with a responsibility to withhold taxes on winnings paid to the players. As per the existing provisions of the Income-tax Act, 1961 (I-T Act), the gaming companies must withhold taxes under section 194B of the I-T Act upon payment of winnings exceeding Rs 10,000 to the players in card games, lottery, puzzles, etc., at the rate of 30% (plus surcharge and cess).

At present, the winnings earned by players on the gaming platforms are subject to tax in the hands of the person winning the game, under section 115BB of the I-T Act, at a tax rate of 30% of the winnings on a gross basis (without aggregation of losses).

What Budget FY24 proposes

The gaming companies have been entrusted with a responsibility to withhold taxes following the introduction of the new section 194BA in the I-T Act, wherein, beginning July 1, 2023, gaming companies shall have to deduct taxes at the rate of 30% from the net winnings to the players at the end of the financial year (unless the same is preceded by part/full withdrawal).

Thus, the existing provisions of section 194B of the I-T Act, wherein withholding was required to be undertaken, stand amended beginning July 1, 2023, and exclude from their ambit the winnings from online games. Such winnings shall now be governed by section 194BA of the I-T Act.

For lotteries, crossword puzzles games, etc (other than online games), the threshold limit of Rs 10,000 for tax deductible at source (TDS) shall continue but shall apply to aggregate winnings during a financial year.

Further, while section 194BA outlines withholding tax implications for online gaming companies, the players shall be liable to a tax at the rate of 30% on the net winnings from online games as per the new section 115BBJ of the IT Act. For example, if a player plays a game and wins an amount of Rs 1.500, they shall be liable to pay taxes at the rate of 30% on Rs 1,500.

Challenges ahead

– Section 194BA of the I-T Act provides for withholding of taxes on net winnings at the end of the financial year (unless the same is preceded by part/full withdrawal). The gaming companies would face a hassle wherein the withdrawable balance in the user account could be less than the withholding tax.

– The proposed sections 194BA and 115BBJ of the I-T Act state that a computation mechanism shall be prescribed to arrive at ‘net winnings’. Until then, the ambiguity on the interpretation of the term ‘net winnings’ remains. Logically, net winnings should exclude entry fees as contributed by the players as well as platform fees collected by the gaming company.

– Because of the proposed amendment becoming effective from July 1, 2023, the gaming companies—in the case of winnings of players during April-June 2023—shall be required to withhold taxes under section 194B on winnings exceeding Rs 10,000. Where a player wins Rs 7,000 during April-June 2023, there would be no withholding undertaken by the gaming company; however, if the player withdraws the said sum of Rs 7,000 in September 2023, earlier winnings, which were otherwise not subject to withholding, now could be liable to withholding of taxes at the time of withdrawal.

Also Read

Simpler tax regime

The proposed Section 194BA of the I-T Act provides for withholding of taxes on net winnings in the user account at the end of the year/withdrawal (as the case may be).

However, a clarification is expected on the winnings earned on or before June 30, 2023, on which withholding was not undertaken earlier (as not required by law)—on whether the said winnings will be subject to withholding at the time of withdrawal/year-end (wherein user account comprises such winnings). Whether the winnings earned prior to July 1, 2023 (date on which the section shall come into force) will be allowed to be grandfathered for the purpose of withholding of taxes at the time of withdrawal/year end (March 31, 2024) also needs to be clarified.

The proposed amendments impose a large cost on the gaming companies, in the form of a heavy compliance burden, given the entire mechanism will require a revamp to comply with the amended provisions.

It is pertinent to assess how the users would react to the proposed amendments (particularly scrapping of the withholding-tax threshold, presently set at Rs 10,000). Only time will tell as to how this sunrise sector will adapt to the proposed amendments. However, the proposed tax regime will certainly go a long way in providing standardisation in taxes.

(Partner, Tax & Regulatory Services, BDO India)

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