Impact of Tax Deduction at Source on Online Gaming

[Devan Gupta]

CBDT has issued a notification dated 22.05.2023 to insert the Rule in Income Tax to calculate Net winning from Online Gaming and Clarification on Net Winning and Tax implications on Online Gaming dated 22.05.2023

The new section 194BA has been inserted in the Income Tax Act, 1961 under the provision of Finance Act 2023 with effect from the 1^st April 2023.

Section 194BA of the Income Tax (Amendment) Act, 2023

1. Notwithstanding anything contained in any other provisions of this Act, any person responsible for paying to any person any income by way of winnings from any online game during the financial year shall deduct income-tax on the net winnings in his user account, computed in the manner as may be prescribed, at the end of the financial year at the rates in force:
2. In a case where the net winnings are wholly in kind or partly in cash, and partly in kind but the part in cash is not sufficient to meet the liability of deduction of tax in respect of whole of the net winnings, the person responsible for paying shall, before releasing the winnings, ensure that tax has been paid in respect of the net winnings
3. If any difficulty arises in giving effect to the provisions of this section, the Board may, with the previous approval of the Central Government, issue guidelines for the purposes of removing the difficulty.
4. Every guideline issued by the Board under sub-section (3) shall, as soon as may be after it is issued, be laid before each House of Parliament, and shall be binding on the income-tax authorities and on the person liable to deduct income tax.

Further, the CBDT has inserted Rule 133 of the Income Tax (Fifth Amendment) Rules 2023 vide notification no. 28/2023/ F.No. 370142/12/2023-TPL dated 22.05.2023 to calculate the Net winning from online gaming.

Rule 133 of the Income Tax Rules

1. Net winnings from online games during the previous year, for the purposes of section 115BBJ, shall be calculated using the following formula, namely:–

Net winnings = (A+D)-(B+C)

2. Net winnings comprised in the first withdrawal during the financial year, for the purposes of section 194BA, shall be calculated using the following formula, namely:–

Net winnings =A-(B+C), where –

3. Net winnings in the formula given in sub-rule (2) shall be zero, if the sum of amounts B and C is equal to or greater than the amount A.
4. Net winnings comprised in each subsequent withdrawal during the financial year, for the purposes of section 194BA, shall be calculated using the following formula, namely:–

Net winnings =A-(B+C+E)

5. Net winnings in the formula given in sub-rule (4) shall be zero, if the sum of amounts B, C and E is equal to or greater than the amount A.
6. Net winnings comprised in the user account at the end of the financial year, for the purposes of section 194BA, shall be calculated using the following formula, namely:–

Net winnings = (A+D)-(B+C+E)

7. Net winnings in the formula given in sub-rule (6) shall be zero if the sum of amounts B, C and E is equal to or greater than the sum of amount A and D

The complete ample of the alphabet A to E of the formula where –

A = Aggregate amount withdrawn from the user account during the financial year;

B = Aggregate amount of non-taxable deposit made in the user account by the owner of such account during the financial year;

C = Opening balance of the user account at the beginning of the financial year;

D= Closing balance of the user account at the end of the financial year; and

E= Net winnings comprised in the earlier withdrawal or withdrawals computed under sub-rule (2), or sub-rule (4), during the financial year if tax has been deducted in accordance with the provision of section 194BA on winnings comprised in such withdrawal or withdrawals

In the perusal of the above Rule, let us discuss this with an example for ease of understanding:-

For Example: - Mr. X playing an online game has a user account in the ‘ABC Game’. At the start of the new financial year, he has an Opening balance of ₹1,00,000 in his user account then he deposited ₹50,000 in his user account. Thereafter, he has withdrawn ₹1,70,000 and He has deposited ₹5,000 again started playing the game on the gaming platform and before year-end he has again withdrawn ₹1,00,000. However, the closing balance in his user account is ₹40,000.

Transaction of the case has been iterated below:-

1. Opening Balance: 1,00,000
2. Additional Deposit: 50,000
3. Amount Withdrawal: 1,70,000
4. Additional Deposit: 5,000
5. Withdrawal Amount: 1,00,000
6. Closing Balance: 40,000

Now let us know about the Implication of TDS in terms of said Rule:-

In the First Scenario:-

Calculation of Net winning during the first withdrawal of the Financial Year as per clause 2 of Rule 133

Net Winning = A-(B+C)

A = ₹1, 70,000

B = ₹50,000

C = ₹1, 00,000

Let put the formula: Net Winning = 1, 70,000 - (50,000+1, 00,000)

Net Winning = 20,000

In the Second Scenario:-

Calculation of Net winning shall be computed on each subsequent withdrawal during the FY as per clause 4 of Rule 133

Net Winning = A-(B+C+E)

A = ₹2, 70,000 - Aggregate of Total Withdrawal

B = ₹55,000 – Total deposit

C = ₹1, 00,000 – Opening Balance

E = ₹20,000 – Total of earlier Net winning

Let put the digit in the Formula: Net Winning = 2, 70,000-(55,000+1, 00,000+20,000)

Net Winning = 95,000

In the Third Scenario:-

Calculation of Net winning shall be computed at the end of the FY as per clause 6 of Rule 133

Net Winning = (A+D)-(B+C+E)

A = ₹2, 70,000 - Aggregate of Total Withdrawal

D = ₹40,000 – Closing Balance

B = ₹55,000 – Total deposit

C = ₹1, 00,000 – Opening Balance

E =₹ 1, 15,000 – Total of earlier Net winning (20,000+95,000)

Let put the digit into the Formula: Net winning = (2, 70,000+40,000)-(55,000+1, 00,000+1, 15,000) = 3, 10,000- 2, 70,000

Net Winning = 40,000

Therefore in nutshell, TDS will be deducted 3 times during the Financial year. In case of First Withdrawal TDS will be deducted on the Amount of ₹20,000, for second time in case of subsequent withdrawal TDS will be deducted on the amount of ₹95,000, and for third time at the end of the Financial year TDS will be deducted on the amount of ₹ 40,000.

Further, according to the exercise of the power conferred by sub-section 3 of section 194BA of the Income Tax Act, the CBDT has also issued guidelines dated 22.05.2023 for clarification on Net Winnings and Income Tax Implications on Online Gaming for removal of difficulties with the previous approval of the Central Government.

• According to the new section of the Income Tax, an individual or entities responsible for paying income to any person by way of winnings from online gaming during the financial year is required to deduct income tax on the net winnings in the person’s user account
• The Tax is required to be deducted at the time of withdrawal as well as at the end of the financial year.
• Net winning is required to be computed in a manner as prescribed under Rule 133 of the Income Tax Rules, 1962 which was inserted by the notification dated 22.05.223.

The CBDT has issued the following guidelines as mentioned below:-

Q.1. Where there are multiple wallets held by one user then how Net winning is computed with respect to multiple wallet.

Ans.

• It is said that all the account of user, by whatever name called, which is registered with online gaming intermediary in which deposits or winning are credited and withdrawals are debited shall be considered for the purpose of computing Net Winning.
• Whenever there are multiple user account of same user each user account shall be considered for the purpose of computing Net Winning. The Deposit, Withdrawal or balance in the user account shall mean aggregate of `deposits, withdrawals or balances in all user account.

For Example: - USER 1 have three user Account Namely Account 1, Account 2, Account 3.

The Total amount of Deposit for Purpose of Net Winning will be equal to the aggregate of the Individual amount of winning, deposit and withdrawal in each Account.

Net Winning=A-(B+C)

A=Amount withdrawn from the account.

B=Aggregate Amount of Non Taxable Deposit made by owner of such account during the financial year, till the date of withdrawal.

C=Opening Balance of user account at the beginning of the financial year.

However where the one deductor (One TAN) has multiple platforms and it is not technologically feasible for him to integrate multiple user accounts then the deductor can opt to deduct TDS on net winning for each platform separately. But even in that case, all user accounts under one user in one platform need to be considered for the purpose of calculating net winning in the formulas provided by Rule 133.

For Example: - One Deductor is having two Platform Namely Platform 1 and Platform 2 and both are having a common user who is operating with two Different user account under both the Platforms, As User Account 1 and User Account 2 under Platform 1, User Account 3 and User Account 4 under Platform 2.

For Platform 1 the amount of winning, deposit and withdrawal will include the aggregate of both the user accounts (that is User Account 1 and User Account 2), and same in case of Platform 2(that is User Account 3 and User Account 4).

The transfer from User account 1 to User account 2 will not be considered as deposit, withdrawal, But the transfer of the amount from User Account 1 to User Account 3 or User Account 4 will be considered as Withdrawal if the Deductor opt to deduct the TDS for Platform 1 and 2 separately.

Q.2. If a user borrows money and deposits it in his user account, will it be considered a taxable deposit or a Non-taxable deposit?

Ans. For a non-taxable deposit, it is necessary that the amount deposited by the user is not taxable as the deposit amount must be already taxed. However, where the amount of the deposit is already taxed income, it shall be considered as non-taxable deposit.

Q.3. How will Bonus, Referral Bonus, incentives, etc. be treated under this provision?

Ans. These all provided by the intermediary shall be considered as taxable deposits. It shall not be deducted for the purpose of computing net winning and will increase the balance in the user account. However, any deposit in the form of a Bonus, Referral Bonus or Incentive would be a part of Net Winning, and tax under section 194BA shall be liable to be deducted at the time of withdrawal as well as at the end Financial Year.

Some Deposits which are money equivalent like coins, coupons, vouchers, counters, etc also be considered taxable deposits.

However, the incentives which are credited only for the purpose of playing games and cannot be withdrawn or used for another purpose Rule 133 has provided that such deposit shall be ignored for the calculation of net winnings. Thus such deposits shall not form the part of opening balance, or closing balance, and are not to be included in the non-taxable supply. However, the person required to deduct tax under 194BA must keep a separate account of such deposits.

Further, if these deposits are renewed and allowed to be withdrawn, they will be taxed during the renewal period and will be part of the earnings in the requalification years.

Q.4. At what point, we consider the amount has been withdrawn?

Ans. The transfer by the user from his one account to another and such other user account is not registered with the same online gaming intermediary then such transfer will be considered as withdrawal.

 Let us understand this with the help of Example.

For Example: - User is having Three Different User Account which are as follows:-

User Account 1:- Registered with the Online Gaming Intermediary.

User Account 2:- Registered with the Online Gaming Intermediary.

User Account 3:- Not registered with the same Online Gaming Intermediary.

Transfer from User Account 1 to User Account 2 will not be considered as withdrawal. But transfer from User account 1 or User Account 2 to User Account 3 will be considered withdrawal.

• When in consideration of the amount in the user account any coupons etc. for the purchase of goods and services or items in kind is issued that will also be considered as a withdrawal. It is the duty of the deductor to ensure that tax has been deducted before the issuance of such coupons.
• The clarification provided in answer to Q 1 shall also be kept in mind. When the amount of tax is deducted for each platform separately then the amount transferred from one user account to another user account across the platform shall also be considered as a deposit.

Q.5. Large no. of gamers play with very insignificant amounts and withdraw also very small amounts. Deducting tax at source under section 194BA of the Act for each insignificant withdrawal would increase compliance for tax deductor. Can there be relaxation to ease compliance?

Ans. In order to remove the difficulty in deducting tax at source under section 194BA of the Act for insignificant withdrawal, it is clarified that tax may not be deducted on withdrawal on the satisfaction of all of the following conditions, namely:-

1. net winnings comprised in the amount withdrawn does not exceed Rs 100 in a month;
2. tax not deducted on account of this concession is deducted at a time when the net winnings comprised in withdrawal exceeds Rs 100 in the same month or subsequent month or if there is no such withdrawal, at the end of the financial year; and
3. the deductor undertakes the responsibility of paying the difference if the balance in the user account at the time of tax deduction is not sufficient to discharge the tax deduction liability calculated in accordance with Rule 133.

Q.6. When net winning is in kind how will tax deduction under 194BA operate?

Ans. At the outset, it may be clarified that where money in a user account is used to buy an item in kind and given to the user then it is net winnings in cash only and the deductor is required to deduct tax at source. However, there could be a situation where winning is in kind sub section 2 to section 194BA will operate.

 According to this where the net winnings are wholly in kind or partly in cash, and partly in kind but the part in cash is not sufficient to meet the liability of deduction of tax in respect of whole of the net winnings. In these situations, the person responsible for paying, shall, before releasing the winnings, ensure that tax has been paid in respect of the net winnings. In the above situation, the deductor will release the net winnings in kind after the deductee provides proof of payment of such tax (e.g. Challan details etc.). This year Form 26Q also has included provisions for reporting such transactions under section 194BA of the Act.

In the alternative, as an option to remove difficulty if any, the deductor may deduct the tax under section 194BA of the Act and pay to the Government. In the Form 26Q the deductor will need to show this as tax deducted by him on net winning under section 194BA of the Act.

Q.7. How will the valuation of winning in kind be required to be carried out?

Ans. The valuation will be based on Fair market value except in the case of:-

5. The online game intermediary has purchased the winnings before providing it to the user. In that case, the purchase price shall be the value of winnings.
5. The online game intermediary manufactures such items given as winnings. In that case, the price that it charges to its customers for such items shall be the value for such winnings.

It is further clarified that GST will not be included for the purposes of the valuation of winnings for TDS.

Q.8. As the law comes into force with effect from the date of 1.04.2023 on Online gaming but the Rule and the guidelines of the calculation of Net winning are issued later. In this scenario, will there be any relaxation on penal consequences in the intervening period i.e., from 1^st April 2023 till the date of issuance of Rule and guidelines?

Ans. Taxpayer were expected to deduct the TDS under Section 194BA even before issuance of Rule 133 or this guidance. Expecting that tax payer has carried out their responsibility of deducting TDS under section 194BA before the issuance of Rule 133. However, if there is any shortfall due to time lag in issuance of Rule 133 or this Circular for the month of April 2023 that may be deposited with the Tax deduction for the month of May 2023 by 7^th of June 2023. In that case, there will be no penal consequences.

However, the CBDT has clarified that the tax may not be deducted on withdrawal on the satisfaction of all three conditions that are as follows:-

First Condition: Where the net winning comprises the amount withdrawn does not exceed INR 100 in a month

Second Condition: Tax not deducted on account of this concession is deducted at a time when the net winnings in withdrawal exceed INR 100 in the same month or subsequent month or if there is no such withdrawal at the end of the FY

Third Condition: The deductor undertakes the responsibility of paying the difference if the balance in the user account at the time of tax deduction under section 194BA is insufficient to discharge the TDS liability calculated per the new Rule 133 inserted in the Income Tax Act.

GST is not included for the purpose of valuation of winning for TDS under section 194BA of the act.

Rule 133 has also clarified that transfer from one user account to another user account, maintained with the same online gaming intermediary, of the same user shall not be considered a withdrawal or deposit, as the case may be. However, if the deductor is deducting tax under section 194BA for each platform separately transfer from one user account to another user account under the online gaming intermediary across platforms shall be considered as withdrawal or deposit for the purposes of calculation of net winnings in accordance with the Rule 133 of the Income Tax Rules.

Devan Gupta Comments:

The concept of Net winning has been introduced for the first time for online gaming with effect from the date of 1^st April 2023 and the applicability of the TDS on online gaming vide section 194BA of the Income Tax Act. The purpose of this section is fro calculation of Net winning is required to be made at the time of each withdrawal and also at the end of the FY.

The Rule for computing Net winning has not been constituted till the date of 22^nd May 2023. However, the gaming industry is waiting for the rule from the CBDT where online gaming users of more than 20 crores are confused about to computation of tax deductions on online gaming.

Further, On the power exercised from section 194BA of the act, the CBDT has issued a clarification for all the online gaming users who are confused about computing the amount of TDS to removable of the doubt due to the lack of a Rule notified till the date of 22.05.2023.

In this clarification, the department removes all confusion about the application of the formula in the state of all the aspects of the online gaming industry including reward points, referral bonus, quality rewards, and the tax deduction process. Thereafter, it also clarified that now the users who have multiple accounts at gaming companies will not be exempt from the tax deductions the rule clearly stated that the user content must be combined and TDS has been deducted on all the Net winnings as prescribed in the new inserted Rule 133.

However, to maintain the initial limit of TDS or withholding tax of INR 100 of the profit of the income argues that it is better to monitor the amount excluded from the business and keep the time under control. Transferring from one user account to another managed by the same online gaming site for the same user, as the case may be will not be considered as a cancellation or refund.

These practices by the industry will become more complicated for the users at the time of filing Income Tax Returns, especially for those months when the rules have not been issued. At that time, they would need to reconcile TDS deducted across platforms and arrive at the appropriate tax liability. The intention of the department is to issue the guidelines for clarity to both the industry as well the users as the delay in issuance of the rules is only creation which creates more confusion for the users of online gaming for calculation of the TDS amount