The Finance Minister, Nirmala Sitharaman, has made an important announcement regarding tax regulations for online gaming in the recently presented Budget 2023.
The new change involves the exclusion of online gaming from section 194B of the Income Tax Act, while a fresh section, 194BA, has been introduced in its place.
This alteration has been in effect since April 1, 2023. Under the new provisions, a Tax Deducted at Source (TDS) of 30%.
will be imposed on the net winning amount received by online gaming winners under section 194BA.
Understanding the Computation of Tax on Net Winnings
The computation of tax on the net winning amount will be carried out in the following two scenarios:
(I) TDS Calculation for Non-Withdrawal from User Account
TDS will be deducted on the net winnings of online gaming from the user account at the end of the financial year.
(II) TDS Calculation for Withdrawals from User Account during the Year
If withdrawals are made during the financial year from the user account, the online gaming company will be required to deduct TDS at the time of each withdrawal from the total amount withdrawn by the user. Additionally, TDS will be deducted on the remaining amount of net winnings in the user account during the transition between financial years. Detailed guidelines explaining the computation of net winnings in this case have been issued.
Clarifications on TDS Calculation for Net Winnings
To address certain unanswered questions stemming from the Finance Act 2023, the Finance Ministry has provided clarifications regarding the calculation of TDS on net winnings. These clarifications include:
1) Computation of Net Winnings in Case of Vidal
For withdrawals made during the year, the net winnings on each withdrawal will be determined using the following formula:
Net winnings = A – (B + C), where
A = amount withdrawn from user account; B = aggregate amount of non-taxable deposits made in the user account by the account owner until the time of withdrawal; and C = opening balance of the user account at the beginning of the financial year.
2) Applicability of TDS on GST Charged by Gaming Portals
TDS will not be levied on the Goods and Services Tax (GST) charged by gaming portals to their users.
3) Understanding Non-Taxable Deposits
Non-taxable deposits refer to deposits made by the user into their account.
4) Taxability of Amounts and Treatment of Other Benefits
Certain amounts will be considered taxable for users based on the following guidelines:
I. Taxable amounts include bonuses, referral bonuses, incentives, etc., offered by the online gaming portal, which are credited to the user account.
Users are required to pay taxes on these deposits, and the online portal will deduct TDS during withdrawal. If no withdrawal is made, TDS will be deducted at the end of the financial year.
II. If the online gaming portal provides coins, coupons, vouchers, counters, or similar items that are equivalent to money.
deposits of such incentives/bonuses in the user’s account will be treated as taxable deposits. However, if these deposits are solely intended for playing games.
cannot be withdrawn or used for other purposes, they will be excluded from the calculation of net winnings.
The online gaming company must maintain a separate account for such deposits. If the company subsequently.
allows users to withdraw these incentives after conversion, the conversion will be taxable.
III. If the online gaming company issues coupons that can be used by users to purchase goods or services.
such coupons will be treated as withdrawals, and the company must deduct TDS accordingly.
IV. If a game’s winnings consist of both cash and prizes, the online gaming portal may request users to deposit the tax.
themselves and provide proof to the gaming portal. Alternatively, the gaming portal may deduct the tax and pay it as tax deducted on net winnings.
5) Calculation of TDS for Online Gaming Companies with Multiple Portals
If an online gaming company operates multiple portals with different Tax Deduction and Collection Account Numbers (TANs), TDS will be calculated separately for each TAN.
6) TDS Deduction for Users with Multiple Accounts
For users with multiple wallets:
(I) Deposits, withdrawals, and balances will be consolidated by linking all user accounts with the online gaming portal, and net winnings will be calculated accordingly.
(II) If a user transfers money from one account to another within the same gaming portal TAN.
it will not be treated as a withdrawal or deposit. However, TDS will be deducted on such withdrawals if the portal has different TANs.
Exemption from TDS and Shortfall by May 2023
No TDS will be deducted if the withdrawal amount in a month is less than Rs. 100. However, if subsequent months’
withdrawals exceed Rs. 100, the online gaming portal must deduct TDS on the previously paid amounts.
Furthermore, if there is any discrepancy in TDS after the implementation of this circular from June 7, 2023, online gaming portals will be granted concessions in payment.
Conclusion
The release of these long-awaited guidelines by the Finance Ministry brings clarity to the online gaming industry.
With the surge in the popularity of online gaming in recent years, many professional gamers have entered the scene, earning significant amounts of money.
The guidelines outlined above aim to address the queries of gamers and gaming companies alike.
