The Income Tax Act, 1961 (‘IT Act’) has all along ensured that any income received by an assessee by way of winnings from lotteries, races, card games, etc are brought to tax. Section 115BB of the IT Act provides for a separate taxing mechanism for these winnings. A corresponding liability for tax deduction at source is also provided under Section 194B of the IT Act.
Considering the peculiar nature of online games and their recent popularity, the Legislature, vide Finance Bill, 2023 has proposed to introduce specific provisions regarding tax deduction (Section 194BA) and taxability of online games (Section 115BBJ). The authors in this article would be dealing with various implications of the newly introduced provisions.
Section 115BBJ of the IT Act provides that where the total income of the assessee includes any income by way of winnings from any online game, the income tax shall be payable on the amount of net winnings from such online game at the rate of 30%. Separate rules for calculating the net winnings are proposed to be prescribed. This provision once effected will be applicable w.e.f 01.04.2024.
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The term ‘Online game’ is proposed to be defined as a game that is offered on the internet and which is accessible by a user through a computer resource including telecommunication device. This definition is likely to bring within its ambit, any game which is played on the internet.
Section 194BA provides for TDS on net winnings from online games in user account at the end of the Financial year (‘FY’). The event of deduction is triggered either at the time of withdrawal or on the remaining amount at the end of the FY. User account has been defined to mean any account of a user registered with an online gaming intermediary. An obligation has also been cast on the payer to ensure that tax has been paid by the recipient when the winnings are given in kind. This provision once effected will be applicable w.e.f 01.07.2023.
It is pertinent to note that till 30.06.2023, the obligation to deduct tax at source for winnings from online games would continue under Section 194B of the IT Act. The said section 194B prescribes a threshold of Rs.10,000, which is now proposed to be applied on a financial year basis, for invoking the tax deduction liability. On the other hand, the new section 194BA mandates tax deduction on net winnings from online games without any threshold.
Categorization of income from online games
The proposed amendment is structured to levy tax on ‘net winnings’ from online games. The term ‘net winnings’ is not presently defined but it is expected that Rules will be notified in due course for determining the manner of computing net winnings. It is useful to bear in mind that the winnings from online games is not an entirely new source of income that is brought to tax only now.
Section 2(24)(ix) includes within the scope of the term ‘income’ any winnings from lotteries, crossword puzzles, races, card games and other games of any sort or form of gambling or betting of any form or nature whatsoever. Therefore, income from such activity is expressly considered as income of an assessee. The said winnings were hitherto taxable in terms of Section 56(2)(ib) which provides that income referred to in Section 2(24)(ix) shall be chargeable to tax under the head ‘Income from other sources’ (‘IFOS’). Hence, the winnings from online games would also fall under the head IFOS.
At present, winnings from games including online games are taxable under Section 115BB at a flat rate of 30%. Considering the distinctive nature of online games, the Legislature intends to separately tax winnings from online games under proposed Section 115BBJ. However, the rate of tax remains the same (i.e) 30%. Consequential amendment to Section 115BB has also been proposed to exclude winnings from online games from its ambit.
Claiming of deduction for expenditure incurred
At this juncture, it would be pertinent to analyze if any expenditure incurred for playing online games would be allowed as a deduction. Section 58 of the IT Act provides for certain amounts which shall not be deductible in computing the income chargeable to tax under the head ‘IFOS’. Section 58(4) provides that no deduction in respect of any expenditure or allowance in connection with such income shall be allowed in computing the income by way of winnings from lotteries, crossword puzzles, races, card games and other games of any sort or form of gambling or betting of any form or nature whatsoever.
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Considering the specific bar provided for claiming deduction of expenses for the said activity under Section 58(4) of the IT Act, the authors are of the view that it may be difficult to claim deduction of any expenditure in computing winnings from online games. However, one may argue that since the proposed Section 115BBJ starts with a non-obstante clause, the restriction provided under Section 58(4) may not be applicable and that if any deduction is permitted in computing ‘net winnings’, the same would be allowed. One may have to await the computation mechanism which is expected to be rolled out for arriving at the ‘net winnings’ which may better clarify the intent of the Legislature in separately carving out a taxing mechanism for online games while retaining the tax rate at the existing level.
Set-off of loss
Another pertinent question which arises for discussion is whether loss from one game can be set-off against income from another game. Ideally, we may expect that set-off of losses of one game from another may be permitted in the computation of net winnings itself. It may also be essential to note that even if the same is not included in computing net winnings, there is no express bar under the IT Act to restrict set-off of losses within games. Further, it may also be interesting to note that there is also no express bar under the IT Act to set-off of losses of a particular year arising from online games against income from other sources/ heads and vice versa. Certain restrictions exist only in respect of carry forward of losses to subsequent years. Therefore, intra and inter source/head set off of current year losses must be permissible in computing income from online games.
Implications w.r.t User Accounts
Section 194BA provides for TDS on net winnings from online games in user account at the end of the FY. Explanation (d) to the proposed Section 194BA provides that ‘user account’ means account of a user registered with an online gaming intermediary. Clause (b) provides that ‘online gaming intermediary’ means an intermediary that offers one or more online games. Therefore, one may infer that user account shall include all accounts registered with an online gaming intermediary. In determining the liability for tax deduction, the following scenarios may require additional clarity:
- If an assessee has a consolidated wallet for general and gaming purposes, how will it be ensured that tax is ultimately deducted only on the net winnings from online games?
- Cases where an initial amount required to be deposited before playing: For example, let us assume that a user deposits an initial amount of Rs.100 to play a game and that after playing series of games, a total amount of Rs.500 is available as balance in his wallet at the end of the year. His winnings in this case are only Rs.400, the balance Rs.100 represents the initial amount that was deposited. The question here would be, is tax required to be deducted on Rs.500 or Rs.400 at the year end?
- If winnings between April to June 2023 are less than Rs. 10,000 and are withdrawn in July 2023, then whether TDS u/s. 194BA is required to be deducted?
- If an assessee is given a car as the winning prize, what is the mechanism that the online gaming intermediary would adopt to ensure that tax has been paid. It is pertinent to note that non-compliance in ensuring payment of tax on this transaction can attract penalty and prosecution.
The intention behind introducing Sections 115BBJ & 194BA seems to be to ensure that winnings from online games are taxed separately. One may be able to understand the true scope of these provisions only after the rules for computing the net winnings is prescribed. As discussed above, clarifications from the CBDT on certain aspects may be required to mitigate unnecessary future litigation.
(By Raghavan Ramabadran, Bharathi Krishnaprasad and Abhinov Vaidyanathan. The authors are partners at Lakshmikumaran & Sridharan Attorney. Views expressed are personal)