Tax implications of online gaming under income tax & GST

What are the tax implications of online gaming?

Introduction:

In this article we are giving a clear overview of the taxability of online winnings before the introduction of specific sections in the Income Tax Act, and then introduces the provisions of sections 115BBJ and 194BA, which were brought in to address the taxation of income from online games. Before the introduction of sections 115BBJ and 194BA of the Income Tax Act, the taxability of online winnings was governed by section 115BB (taxability of income from lottery, crossword puzzles, etc.) and section 194B (TDS on income from lottery, crossword puzzles, etc.). Considering the unique nature of online games, the government decided to establish separate provisions for the taxation of winnings from these games. These provisions aim to streamline the taxation process for online gaming activities, ensuring compliance and revenue generation for the government.

Taxability of Online gaming: (Taxation u/s 115BBJ )

Online games are defined as games offered on the internet and accessible by users through various devices, including computers, tablets, and mobile phones.

The taxation of money made from spin-the-wheel games, which fall under the category of online games, is governed by Section 115BBJ of the Income Tax Act, 1961.

Taxation under Section 115BBJ: Winnings from online games, including spin-the-wheel games operated by e-commerce websites, are considered as income from games of chance. Such winnings are taxed at a flat rate of 30%, plus cess and surcharge (if applicable), as per Section 115BBJ of the Income Tax Act. This provision came into effect from the financial year 2023-24 onwards.

• Tax Rate: The rate of tax on online games winnings is set at 30%, excluding surcharge and cess.
• Applicability: This section came into effect from 1st April 2023, meaning any income from online games from this date onwards falls under its purview.
• Considering the distinctive nature of online games, the government decided to separate the taxability of tax winnings from online games.
• In summary, money made from spin-the-wheel games and other online games is taxed at a flat rate of 30% under Section 115BBJ of the Income Tax Act, with cess and surcharge applicable. This provision applies from the financial year 2023-24 onwards, while winnings from online and offline games until March 31, 2023, were taxed under Section 115BB.

Taxability of Offline gaming (Taxation u/s 115BB )

• In online gaming tournaments, participants often receive various merchandise as rewards, and winners may receive cash or gift prizes. The taxation of these rewards depends on the status of the recipient and the value of the merchandise received. Here’s how the distribution throughout the gaming tournaments is typically taxed:

Winnings from Gaming Tournaments:

• For participants classified as professionals, the winnings from gaming tournaments are treated as income from business and profession. These winnings are subject to taxation based on the participant’s regular income tax slab rates.
• For other participants, the winnings are taxed under Section 56(2) of the Income Tax Act. However, taxation under this section is applicable only if the total market value of the merchandise received exceeds ₹50,000.

Taxation of Merchandise:

• For professionals, any merchandise received as rewards is taxable under the head “Income from business & profession,” regardless of the market value of the merchandise.
• For non-professional participants, the merchandise received is taxable under Section 56(2) of the Income Tax Act if the total market value of the merchandise received exceeds ₹50,000. If the total value does not exceed ₹50,000, the merchandise is not subject to taxation.

Tax Rate for Online Gaming Winnings:

• Winnings from online gaming tournaments are taxed at a flat rate of 30% under Section 115BB of the Income Tax Act.

Offline gaming contests refer to those competitions that occur in physical spaces and do not rely on internet or telecommunication services or devices for participation.

• Winnings from offline gaming contests are treated as income from games of chance and are taxed under Section 115BB of the Income-tax Act. This section imposes a flat income tax rate of 30%, in addition to cess and surcharge (if applicable), on the winnings.
• Section 115BB specifically addresses the taxation of income derived from gambling or betting activities, including winnings from offline gaming contests. Regardless of whether the game is conducted online or offline, Section 115BB applies to income earned from games of chance.
• In summary, winnings from offline gaming contests held at physical locations without the need for internet or telecommunication services/devices are taxed at a flat rate of 30%, along with cess and surcharge, under Section 115BB of the Income-tax Act. This provision covers all income earned from offline gambling or betting activities. In summary, the taxation of winnings and merchandise received in gaming tournaments varies based on the recipient’s status and the value of the merchandise. It’s important for participants to be aware of these tax implications and to ensure compliance with the relevant provisions of the Income Tax Act.

TDS Applicability of online gaming platforms (Section 194BA)

• TDS Requirement: Any person responsible for paying winnings from online games during the financial year must deduct income tax at a rate of 30% at the time of withdrawal, without any threshold.
• Definition of “Any Person”: This includes entities making payments of winnings or acting as online gaming intermediaries.
• Calculation of “Net Winnings”: Net winnings are determined as A – (B + C), where A is the amount withdrawn, B is the aggregate of non-tax deposits made by the user until the time of withdrawal, and C is the opening balance at the beginning of the financial year. Online gaming companies are required to deduct TDS at a rate of 30% from winnings if they exceed the threshold of ₹100. This means that if the winnings are ₹100 or less, TDS deduction is not mandatory.
• Definition of “User Account”: Refers to a user registered with an online gaming intermediary, participating in one or more online games.
• Applicability: Effective from 1st July 2023, tax shall be deducted from any income derived from online games from this date onward.
• In summary According to Section 194BA, online gaming platforms must deduct TDS from a player’s net winnings in a financial year. The TDS rate is 30% under Section 194BA of the Income-tax Act This means that when a player withdraws their winnings from an online gaming platform, the platform is obligated to deduct 30% of the net winnings as TDS before disbursing the remaining amount to the player.

Taxability of online games:

Applicability of GST on online gaming

• • 28% GST on the full value of the bets placed in Online Gaming importantly, this tax will be levied on the full value of the bets placed, rather than on the gross gaming revenue.
  • This clarification aims to ensure consistency and transparency in the taxation of online gaming activities, providing clear guidelines for both taxpayers and tax authorities. It’s essential for businesses and individuals involved in online gaming to adhere to these updated regulations to remain compliant with GST requirements.