“The battlefield is a scene of constant chaos. The winner will be the one who controls that chaos, both his own and the enemies,” Napoleon Bonaparte once said. Bonaparte could not have been more correct. Cut to the modern world, the battlefield today is the mobile phone and the chaos is on the screen. The winner controls the chaos online, which is why online games have seen phenomenal growth in the last two to three years. But with growth comes uncertainty. It is here that the industry seems to be at a cross-road. At this year’s Budget Finance Minister, Nirmala Sitharaman announced that come next financial year and in effect from July 01, 2023, under the new taxation policy, the threshold of Rs 10,000 will be removed and a 30% tax deduction at source (TDS) will be applied on net winning.
Separate rules for calculating the net winnings are proposed to be prescribed. This provision once rolled out will be applicable from April 01, 2024
For the online gaming industry, it means that three times it has to change its ways of functioning when it comes to the deduction of TDS. Between April 01, 2023, to June 30, 2023, gaming companies have been asked to deduct TDS as per Section 194B (amended) of the IT Act. Under this, online gaming companies can deduct a 30% TDS on winnings which are at a threshold of Rs 10,000. Now here is the slippery slope. For a user who wins Rs 5,000 on April 09, 2023, and requests a withdrawal, no tax will be levied. However, if the user a few days later after winning for a second time an amount worth Rs 6,000 decides to withdraw, a TDS of 30% will be levied. This is mainly due to the fact that the aggregate amount would have crossed Rs 10,000. But the user would have less money in her account. In this case, the platform would have incurred the additional liability.
Another situation could be that if amounts won between April to June 2023 are less than Rs. 10,000 and are withdrawn in July 2023, then whether TDS under 194BA is required to be deducted? “What one should not forget is that an online gamer plays across platforms and may have net winnings on some and net losses on others. TDS deduction at the highest rates on all net winnings by each of the platforms without any possibility of reconciliation of losses on other platforms would mean that substantial money would remain withheld with the tax department till the end of the year when returns would be filed and refund would be possible, leading to cash flow issues which is a critical working capital requirement for serious gamers,” Sandeep Chilana, managing partner, Chilana & Chilana Law Offices told BrandWagon Online.
Secondly, implementing such kind of change in taxation means the upgradation of infrastructure. Industry experts opine that the government in this case should provide online gaming companies with ample time to upgrade infrastructure as opposed to doing a rushed job.
Next, in line is how gamers may suffer because of the current confusing system. With the removal of the threshold now TDS is applicable on all winnings including micro-transaction ranging between Rs 2-100. This policy may prove to be a deterrent for players who typically play small amounts or win smaller amounts. Additionally, the implementation of three different regimes in the coming months will only lead to more confusion for players. India recorded about 390 million online gamers in 2021, as per market research firm Statista. This was an eight percent growth from the previous year and is likely to reach over 450 million by 2023. About 95 million of these gamers reportedly paid for online games that year.
According to a player on the condition of anonymity, under the proposed amendments to Section 194B and, new Section 194BA, and Section 115BBJ of the IT Act, users are not aware of their winning rights and tax liabilities, especially during the period April o1, 2023 to June 30, 2023. “Moreover, no time is provided for the players to understand the applicability of the provisions and thereafter make an informed decision. Moreover, during the said period the withholding tax rate will be deducted as such winnings are at par with betting and gambling and for the purpose of calculation of tax and advance tax liability, the provisions of the newly proposed section i.e., Section 115BBJ of the IT Act will be applicable,” Shivani Jha, director, eSports Players Welfare Association (EPWA) said.
Not to mention, the new regime does not provide any expense deduction to gamers who purchase gameplay equipment.