Budget 2023: Big change on taxation for online gaming, net winnings subject to 30% TDS

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As was expected in some quarters, Finance Minister Nirmala Sitharaman announced significant changes to the taxation provisions for online gaming in her budget speech in the Lok Sabha today.

Sitharaman in her budget speech announced certain amendments to the Income Tax Act, 1961 “removing the minimum threshold of Rs. 10,000/- for TDS and clarifying taxability relating to online gaming”. Further, the annexure to the Budget speech of the Finance Minister indicated that the provisions were being amended with the following purpose: “For online games, it is proposed to provide for TDS and taxability on net winnings at the time of withdrawal or at the end of the financial year. Moreover, TDS would be without the threshold of ` 10,000. For lottery, crossword puzzles games, etc threshold limit `10,000 for TDS shall continue but shall apply to aggregate winnings during a financial year.

As per the Finance Bill, 2023 introduced by Sitharaman in the Lok Sabha today, a new provision of Section 115BBJ has been introduced for tax on winnings from online games from Financial Year 2023–24 onwards (applicable from 1st April 2023), making tax applicable on ‘net winnings’ from online games applicable at the rate of 30%.

Further, the provision empowers the government to provide for rules to compute the manner in which ‘net winnings’ are supposed to be calculated.

The Finance Bill has also made another important change in the provision pertaining to Tax Deduction at Source (TDS), adding Section 194BA to the Income Tax Act, making it mandatory for TDS to be deducted at the rates in force (i.e. 30%) TDS on ‘net winnings’ from 1st July 2023 at the end of the financial year or when the user withdraws net winnings from his user account.

The previous requirement of deducting TDS on online gaming winnings used to be triggered if the winnings exceeded Rs 10,000, but has been changed to zero. Tax deducted at source (TDS) of 30% is imposed on winnings from online gaming, even under the current income tax law.

It is to be noted that winnings from online gaming must be reported in an income tax return, and the appropriate amount of income tax must be paid, whether TDS is deducted or not under the new budget.

As reported earlier, these changes have been made after online gaming companies started using the Rs 10,000 thresholds to split the prize money in lower amounts in order to avoid paying taxes properly.

For instance, some online gaming companies give coupons or vouchers in addition to the cash prize, allowing players to share winnings and stay under the Rs 10,000 cap. These coupons are redeemable for subsequent games.

The changes were proposed during the inauguration of the Taxpayer’s Lounge at the India International Trade Fair (IITF) last year by Central Board of Direct Taxes Chairman, Nitin Gupta.

In his statement, Gupta had said, “Online gaming and betting is a new kid on the block and will take a view at the budget preparation stage and see how evasion can be controlled while at the same time making it easy for taxpayers to maintain accounts and pay taxes.”

The statement from Gupta certainly aligns with experts claiming India to be the fastest growing online gaming industry, hence justifying the need for certain and stable taxation policies for the sector.