By Shivani Jha
In February 2023, it was reported that over 10,000 e-gamers in India received income tax notices, bringing to the forefront the issue of the direct tax liability of online gaming earnings. As the landscape continues to evolve with new regulations and amendments, it is crucial to understand the implications and challenges faced by online gamers. Although current year data on the number of notices issued is unavailable, it is essential to follow up on the previous developments and address the ongoing concerns in this sector.
Legal Background and Changes
Before the amendments introduced by the Finance Act, of 2023, the taxability of online gaming winnings was governed by Section 2(24) and Section 115BB of the Income Tax Act, 1961. These sections provided an inclusive definition of ‘income,’ encompassing winnings from lotteries, crossword puzzles, races, card games, and other forms of gambling or betting. The tax rate on such income was set at 30%, with no provision for setting off losses against winnings since the Finance Act, 1986, specifically deleted Section 74A and introduced Section 58(4), prohibiting deductions of expenses related to such winnings.
The Finance Act, of 2023, brought significant changes to this framework, specifically addressing the growing online gaming sector. The introduction of Section 115BBJ marked a shift, taxing net winnings from online games at a flat rate of 30%. This amendment, effective from April 1, 2024, applies to the assessment year 2024-25 and subsequent years, clearly delineating the tax treatment for online gaming as distinct from other forms of gaming and betting.
Challenges and Issues
The new tax provisions pose several challenges for online gamers. One of the primary issues is the difficulty in setting off losses against winnings. Under the previous regime, losses in gaming activities could not be offset against winnings, leading to a higher tax liability on gross winnings. The current amendment maintains this stance, further complicating the financial landscape for gamers.
Additionally, Section 58(4) restricts deductions of any expenditure related to gaming income, which means that expenses incurred during gaming activities, such as entry fees or purchases of in-game items, cannot be deducted from taxable winnings. This leads to a situation where gamers are taxed on their gross winnings without considering the net effect of their gaming activities, resulting in a disproportionate tax burden.
Need for Clarity and Resolution
The need for clarity extends to the mechanism for calculating net winnings, as prescribed by Rule 133 of the Income Tax Rules. This calculation must be transparent and equitable, taking into account the expenses incurred and the actual earnings of gamers. Without such clarity, the risk of disputes and litigation increases, burdening both the taxpayers and the tax authorities.
For some gamers, online gaming is not just a hobby but a full-fledged profession. These professional gamers often go on to win medals and bring accolades to the country, yet they struggle under the heavy burden of the highest tax rate of 30%. Adding to their financial strain, they do not receive any input credit on indirect taxes, further compounding their expenses. The inability to set off losses against their winnings exacerbates this burden, leaving these dedicated professionals with a disproportionate tax liability that fails to reflect the economic realities of their profession.
Constitutional and Legal Recourse
In light of the stringent tax provisions, it is imperative to explore potential legal recourse for gamers. Challenging the constitutional validity of certain provisions, such as Section 115BB and Section 58(4), may be necessary to address the issue of taxing notional income where no real economic income has been earned. The argument against taxing gross winnings without considering expenses and losses is rooted in the principle of fairness and economic reality.
Moreover, it is crucial to advocate for policy changes that recognize the unique nature of online gaming. Unlike traditional forms of gambling, online gaming often involves significant expenditures and strategic investments, which should be reflected in the tax treatment. A balanced approach that allows for the deduction of legitimate expenses and the setting off of losses would ensure a fair and equitable tax regime.
The amendments introduced by the Finance Act, of 2023, represent a significant shift in the regulatory landscape, posing new challenges for gamers. The lack of provision for setting off losses against winnings leads to heavy tax demands at the end of the financial year, solely based on gross winnings. This has resulted in frequent and numerous cases of gamers facing disproportionately high tax liabilities. This highlights the urgent need for more awareness among users and provisions for loss set-off to ensure a fairer tax regime.
Clear guidelines, equitable regulations, and strategic legal advocacy are essential to protect the interests of online gamers and ensure a fair tax regime. As the sector continues to grow, it is imperative to address these concerns and foster an environment that supports both the players and the industry.
The author is the director of EPWA (Egamers and Players Welfare Association)
(Views expressed are the author’s own and not necessarily those of financialexpress.com)