Winnings from online gaming could come under stricter income tax scrutiny. The Finance Ministry is understood to be reviewing the current income tax norms on online gaming and could expand its scope to ensure that winners in such games winning less than Rs 10,000 may also be brought under the tax deducted at source (TDS) net.

“There continue to be certain loopholes in the taxation of online gaming. It is being seen how these can be addressed so that the due amount is paid as tax,” said a person familiar with the development. The proposal is expected to be a part of the Union Budget 2023-24.

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According to sources, there are two issues at hand. The TDS provisions currently kick in for winnings of Rs 10,000 and above. However, some online gaming companies tweak the prize amount into two or multiple installments to avoid TDS. This threshold may be lowered further to ensure that the tax is not avoided.

Second, some online gaming companies offer vouchers or coupons along with the cash prize to split the winning and keep it below the Rs 10,000 cap . These vouchers can be encashed for the next game. The government is exploring how such items can be brought under the tax net.

Under the current income tax laws, winnings from online game are taxed at the rate of 30%. If it is above Rs 10,000, the payer or company has to deduct tax on it. According to section 194B of the Income-tax Act, 1961, the person responsible for paying to any person any income by way of winnings from lotteries or crossword puzzles will deduct income tax at the rate in force. Income from such cash prizes in online gaming is taxable under Section 115B of the Income Tax Act at the rate of 30%. No deduction or set off is allowed for such winnings.

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Tax experts believe that there is need for more clarity on the taxability of these games.

Saurrav Sood, Practice Leader – International Tax & Transfer Pricing, SW India noted that the withholding tax provisions on winning from lottery and crossword puzzles need some more elaboration for better applicability of the provisions. “Further, the withholding provisions also does not specify the point at which such tax is required to be deducted. It mentions ‘paying to any person’ which is in itself not sufficient to decide when such withholding needs to be done, thus giving ample room for the gaming companies to define their own terms for such trigger point of tax withholding,” he said, adding that the withholding tax provisions also mentions the term ‘winning’ which has not been defined under the IT Act.

Online gaming firms have also been under the radar of the income tax department for some time. Recently, Central Board of Direct Taxes Chairman Nitin Gupta had noted that players associated with just one gaming portal had been found to have netted Rs 58,000 crore in the three years through 2021-22 as the gross winning amount. The department has urged winners of such games to disclose earnings in their income tax returns.