Tax department issues guidelines for calculation of TDS for online gaming

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The Income Tax Department on Monday issued new guidelines (Circular No. 5 dt 22.5.2023) clarifying the manner of calculation of TDS on net winnings from online gaming which came into effect earlier this financial year.

According to the guidelines issued, anyone who is responsible for paying to anyone else any income by way of winnings from any online game during the financial year must deduct income tax on the net winnings from the person’s user account.

On the issue of multiple wallets under one user, the guidelines said the main account must include every account of the user and will be registered with an online gaming intermediary. This wallet is where any taxable deposit, non-taxable deposit or the winning of the user is credited, and withdrawal by the user is debited.

However, one deductor with multiple platforms can at its option calculate the tax required to be deducted for each platform separately. “However, if the one deductor (one TAN) is having multiple platforms and it is not technologically feasible for him to integrate multiple user accounts across platforms then he may, at his option, calculate tax required to be deducted for the purposes of section 194BA of the Act for each platform separately. ”

Further, the guidelines clarified that self-transfer between a user’s multiple accounts on the same platform shall not be considered a withdrawal or deposit. However, the department said that if the deductor is deducting tax for each platform separately, transfer from one user account to another user account under same online gaming intermediary across platforms shall be considered as withdrawal or deposit for the purposes of calculation of net winnings.

The department clarified that where an user deposits borrowed money into a wallet, such amount is not subject to TDS.

The guidelines said that any deposit in the form of a bonus, referral bonus, incentives, etc, would form part of net winnings and is liable for tax to be deducted at the time of withdrawal as well as at the end of the financial year. Where deposit is in form vouchers, coupons, etc., the equivalence in money is to be considered.

The department clarified that no tax can be deducted if the net winnings withdrawn do not exceed Rs 100 per month. However, the tax will be deducted when the net winnings from withdrawal exceed Rs 100 in the same month or a subsequent month, or if there is no such withdrawal, at the end of the financial year.

The guidelines clarified that GST is to be excluded for the purpose of calculation of net winnings. Considering there is a time lag between the law coming into force (1 April) and the circular, the department said any shortfall for April 2023 can be remitted with May 2023 remittance.

Here are some industry reactions –

The introduction of new Rule 133 in the Income Tax Rules and guidelines issued by CBDT provide clarity on most aspects of computing tax on net winnings in online games, except perhaps the issue of bonuses and promotions given to users, which may require further clarification from the department.

Although the changes in the TDS provisions in the Finance Act coupled with the new rules and guidelines do not per se reduce the taxation on players and rather increase compliance burden on online gaming platforms, the certainty and clarity in policy is expected to avoid further disputes and litigation on this issue.

– Jay Sayta, Technology & Gaming Lawyer

The new rule to enhance transparency and regulation for the industry will help both users and regulatory bodies to track the winnings and invested amounts conveniently. However, this ruling might have its own drawbacks and may lead to reduced participation. Also, it will take time to observe the far-reaching consequences of these new tax regulations on the gaming industry.

– Bharat Patel, chairman and director, Yudiz Solutions Ltd

Previous sections of taxation had certain loopholes. Current guidelines increase not only taxation on net winnings for users but also liabilities for the gaming platforms. In my view, while this may lead to a certain dip in online gamers/users in general, it showcases the sector being regulated and recognised. As a fantasy platform, we have made necessary changes at the back end to comply and are ready to abide.
– Jaya Chahar, Founder and CEO, TFG