Is the Government Waging War on the Gaming Industry with Direct Taxes?

[Aratrik Banerjee]

The Rationale Behind the Indian Government's Increase in Tax on Online Winnings Under Section 115BBJ

Introducing Section 115BBJ, in the Income Tax Act, of 1961, to impose tax on the winning amounts online is a great step taken by the government of India, that seeks to regulate the booming online gaming & gambling sector in the country. This shift in taxation policy isn’t without reasons, there are several other issues of concern with the government regarding the social influence of the new emergence of online gaming platforms in recent years. The argument for increasing the taxation on winnings won on the Internet is anchored on three main points:

1. The need for equitable tax treatment

2. Revenue generation

3. Social responsibility.

Growing Digital Economy and Need for Equitable Tax Treatment

Another rationale for the enactment of Section 115BBJ is the desire to provide fairly just taxation of revenue receipts resulting from online services. People have been getting involved in various forms of games including newly developed online games, poker, fantasy sports, and betting apps to purposefully spend their time and possibly make money. A large number of users have been making good sums of money from online gambling, many of whom have not even paid any taxes since the legal structure for taxing such income was not properly established. The government, therefore, understood that any money earned from online games, as much as they are earned in virtual spaces, should be taxed similarly to cash income, whether the amount earned comes from wages, or self-employment, among others.

Earlier, Section 115BB applied to online gaming winnings where players were charged a flat rate of 30% on lotteries, betting, and gambling. However, this older provision failed to consider the different types of online gaming that have come to exist or the characteristics of the modern digital economy, characterized by quick, arm’s length, and sometimes untraceable transactions. The government has been very considerate to have a different provision for winnings from the Internet so that all income received by individuals, whether from physical or virtual means is captured under the taxation regime.

However, the government’s action to raise the tax rate under Section 115BBJ to 30% also fits with a general policy of taxing gains from non-productive or speculation activities more than wages for ordinary work. Having established that the Kenyan Government currently levies a uniform tax rate of 30% on all online games, this paper now turns its attention to analysing the effects of the current taxation regime on speculative behaviour by players who are frequent participants in high-stakes online games. Through the policy, the government intends to fight the vice of tax evasion while at the same time ensuring that every contributor to the digital economy especially through online gaming platforms is taxed effectively and expounded.

Revenue Generation for the Government

Other benefits of higher taxes on online winnings include also meeting the government’s doubled need for improved revenue collection. Increased fiscal deficit poses risks to India; the numbers have become a cause for worry in recent years due to the impact of pandemic expenditures, stimulus packages, and infra spending. As the online gaming business emerged and expanded in 2023 marking more than $1.5 billion, the government saw a gold mine that needed its share of taxes. A higher tax on winnings made online is possible so that the government can get a share of the huge profits made in this sector to complement the government’s revenues.

It also fits into the bigger picture of enhancing the tax compliance level. Online platforms provide the government with the facility to track winnings and transactions easier to recover taxes. It is worth paying that several online gaming platforms are now compelled to deduct taxes at source (TDS) if the winnings exceed a specific amount that would enable the government to see that taxes are collected on the winners in big amounts. Through raising the tax on betting winnings through the internet the government wants to optimize this sector for revenues, thereby enhancing the tax yields given to the state and ensuring more rigidity in customers who offer their services in online betting.

Thirdly, there is a rationale to fix increased tax rates due to the enormous amount of traffic in online gaming companies. In contrast to conventional skill-based or pure gambling games, online games work in a constant and more rapidly growing system with millions of transactions daily. Hence, the level of monetary exchange in online gaming is high, and hence, by guaranteeing that a portion of this income is liable to taxation, the government can capture a large stream of income, which otherwise would be non-declared or under-declared.

Social Responsibility and Gambling Deterrence

Another excellent reason why the government has had to add the tax on the winnings obtained online is to help control compulsive betting. Thus, for instance, there are certain concerns concerning addiction, especially when it comes to children. Some people waste lots of time and money on these platforms encouraged by a wish to make a big win thus neglecting their financial and psychological well-being. The authorities seeing that such behaviour is dangerous for society and the economy, try to regulate it through taxes in the sphere of online gaming.

For instance, by increasing the tax rates for online winnings, the government wants to frustrate the perception many individuals have about getting rich through online gambling. People who are aware that 30% of their winnings will be chucked as tax, will think twice before spending time and money more on online games. This will act as a form of check to reckless gambling since those involved in gambling gain big bonuses and SMA’S will not be in a position to exhaust their accounts.

The government’s action is also in harmony with its other public health and social policy directions. Gambling addiction is a big problem that can easily occur when using easily accessible internet sites, and results in financial losses, mental health illnesses, and other vices. This discourages people who are extremely involved with the game to a degree that the government feels they have to increase the tax rate on the winnings to protect vulnerable people in the community.

Technological Advancements and Enhanced Compliance

The government also has its reasons to increase the tax on online winnings including advancements in technology that enhanced tracking of people who participate in betting. The operations of online gaming platforms are so open to showing details of the transactions that in return the government can easily track winnings for taxation. It also means that platforms are now obliged to keep records of transactions, winnings, and payments for sharing with the tax authorities. Due to this enhanced flow of information, the government is in a position to make sure that correct taxes are being deducted and paid on online winnings thus eradicating the chance of fraudulently.

Technology assistance in the tax collection procedures has been instrumental in implementing compliance and ensuring online gaming companies incorporate in Section 115BBJ. It is therefore not only a case of the government wanting to get its hands on more cash, it is also a statement about the fact that with modern technology enforcing such taxes has become possible. This move is in line with the changes taking place globally shifting towards digital tax administration where the government introduces anything from e-filing of returns to sharing of data between online entities and the tax administrators.