For tax purposes, an online game is defined as one that is available on the internet and can be accessed by users using a computer etc.
Reetu | Apr 23, 2024 |
Taxation on Online Gaming: Detailed view by Income Tax Department; Let’s look into it
Online gaming refers to any video game that allows players to communicate with one another online. Video games were previously classed using an Online Content PEGI descriptor to indicate whether or not they were online. However, because most games now include internet interactions, this distinction is no longer relevant.
For tax purposes, an online game is defined as one that is available on the internet and can be accessed by users using a computer or any telecommunications device such as a mobile phone, tablet, console, and so on.
To clarify taxation treatment of income from online gaming in a more comprehensive manner, an amendment in the Income-tax Act, 1961 was carried out in Feb 2023.
This amendment to the Income-tax Act of 1961 added a new section 158BJ, which deals with income earned from winnings in online gaming.
According to this section, if in a financial year, a taxpayer’s total income includes winnings from online gaming, the total income tax payable will be the sum of the following:
a) Income tax computed at a rate of 30% on the net winnings from online gaming.
b) Income tax that would have been applicable to the taxpayer if his total income was reduced by the net winnings from online gaming.
Previously, income from online gaming was taxed under section 115BB of the Income-tax Act 1961, and tax needed to be deducted under section 194B of the Act. However, due to the significant increase in the number of users of online games and the diverse range of games being played, there was a need to include specific provisions regarding the taxability of online gaming due to its unique nature, being easily accessible via internet and computer resources, and offering a variety of playing and payment methods. Consequently, separate provisions were enacted for online gaming.
The Finance Act of 2023 added a new section 194BA to the Income-tax Act of 1961, effective April 1, 2023, that allows for a 30% tax deducted at source (TDS) on “net winnings” from online games, both at the time of withdrawal and at the end of the financial year.
If the net winnings are fully in kind or a combination of cash and kind, but the cash element is inadequate to meet the required tax deduction for the entire net winnings, the entity responsible for payment must confirm that the tax has been settled before disbursing the money.
In such cases, the deductor will release the net winnings in kind only when the recipient provides proof of paying the applicable tax.
The valuation of winnings in kind would be based on the fair market value of the winnings in kind except in the following cases:
(i) The online game intermediary has purchased the winnings before providing it to the user. In that case, the purchase price shall be the value of winnings.
(ii) The online gaming intermediary creates the items given as the winnings. In that case, the price charged to customers for such things will be equal to the value of the winnings.
It is further emphasized that GST will not be included in the valuation of wins for TDS under Section 194BA of the Act.
To simplify the process of deducting tax at source under section 194BA of the Act for insignificant withdrawals, it is now clear that tax cannot be deducted if all of the following conditions are satisfied:
(i) Net winnings comprised in the amount withdrawn does not exceed Rs. 100 in a month;
(ii) Tax, not deducted due to this exemption, is deducted when the net winnings involved in a withdrawal surpass Rs.100 either in the same month or the subsequent month or, in the absence of any withdrawal, by the end of the financial year:
(iii) The deductor is responsible for paying the difference if the balance in the user account at the time of tax deduction under Section 194BA of the Act is inadequate to meet the computed tax deduction liability as per Rule 133.
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