Analysis of amendments proposed under the Union Budget 2023 on taxation on winnings from online gaming

he Finance Minister of India, on February 1, 2023, announced the latest Union Budget for the financial year commencing from April 1, 2023. While there is a plethora of amendments to the Income Tax Act, 1961 (‘Act’) by the introduction of the latest Finance Bill, 2023 (‘Bill’), we’ve explained the specific amendments which will affect taxation in the online gaming industry. 

The erstwhile Income Tax Act, 1961 contained the following provision pertaining to tax deductions on winnings from online games:

‘194B Winnings from lottery or crossword puzzle

The person responsible for paying to any person any income by way of winnings from any lottery or crossword puzzle [or card game and other game of any sort] in an amount exceeding [ten thousand rupees] shall, at the time of payment thereof, deduct income-tax thereon at the rates in force:

[Provided that] in a case where the winnings are wholly in kind or partly in cash and partly in kind but the part in cash is not sufficient to meet the liability of deduction of tax in respect of whole of the winnings, the person responsible for paying shall, before releasing the winnings, ensure that tax has been paid in respect of the winnings.]’

The implication of the aforementioned provision was that online gaming winnings would only attract tax liability if a particular amount exceeded INR 10,000. Since most games are played in a series by the players, each standalone winning was categorised as a separate winning and thus was interpreted to be outside of the purview of the aforementioned provision’s application.

It seems that in order to tackle this situation in online gaming law, the Finance Ministry introduced the following amendments to the Act.

Clause 83 of the Finance Bill seeks to insert the following new section 194BA in the Income-tax Act relating to winnings from online games:

‘194BA. Winnings from online games

1. Notwithstanding anything contained in any other provisions of this Act, any person responsible for paying to any person any income by way of winnings from any online game during the financial year shall deduct income-tax on the net winnings in his user account, computed in the manner as may be prescribed, at the end of the financial year at the rates in force:

Provided that in a case where there is a withdrawal from user account during the financial year, the income-tax shall be deducted at the time of such withdrawal on the net winnings comprised in such withdrawal, as well as on the remaining amount of net winnings in the user account, computed in the manner as may be prescribed, at the end of the financial year. 

2. In a case where the net winnings are wholly in kind or partly in cash, and partly in kind but the part in cash is not sufficient to meet the liability of deduction of tax in respect of whole of the net winnings, the person responsible for paying shall, before releasing the winnings, ensure that tax has been paid in respect of the net winnings. 

3. If any difficulty arises in giving effect to the provisions of this section, the Board may, with the previous approval of the Central Government, issue guidelines for the purposes of removing the difficulty. 

4. Every guideline issued by the Board under sub-section (3) shall, as soon as may be after it is issued, be laid before each House of Parliament, and shall be binding on the income tax authorities and on the person liable to deduct income-tax.

Explanation.–– For the purposes of this section––
(a) “computer resource”, “internet” and “online game” shall have the meanings respectively assigned to them in section 115BBJ;
(b) “online gaming intermediary” means an intermediary that offers one or more online games; (c) “user” means any person who accesses or avails any computer resource of an online gaming intermediary;
(d) “user account” means account of a user registered with an online gaming intermediary.’

As per the aforementioned provision, the winnings from an online game will now be deducted by the person making the payment either at the end of the financial year or at the time of withdrawal of net winnings from the user’s account whichever is earlier.

Further the provision specifies that in case the winnings are wholly in kind or ‘partly in cash and partly in kind’ but the part in cash is not sufficient to meet the liability of deduction of tax in respect of whole of the net winnings, the person responsible for paying shall, before releasing the winnings, ensure that tax has been paid in respect of the net winnings.

The Finance Bill also seeks to introduce Section 115BBJ to clarify the calculation of tax on winnings from online games. 

‘Section 115BBJ Tax on winnings from online games

Notwithstanding anything contained in any other provisions of this Act, where the total income of an assessee includes any income by way of winnings from any online game, the income-tax payable shall be the aggregate of— 

1. the amount of income-tax calculated on net winnings from such online games during the previous year, computed in the manner as may be prescribed, at the rate of thirty per cent.; and 

2. the amount of income-tax with which the assessee would have been chargeable had his total income been reduced by the net winnings referred to in clause (i).

Explanation.—For the purposes of this section,––

(a) “computer resource” shall have the same meaning as assigned to it in clause (e) of the Explanation to section 144B;
(b) “internet” means the combination of computer facilities and electromagnetic transmission media, and related equipment and software, comprising the interconnected worldwide network of computer networks that transmits information based on a protocol for controlling such transmission;
(c) “online game” means a game that is offered on the internet and is accessible by a user through a computer resource including any telecommunication device.’

In light of the above, it is to be noted that the winnings from online games shall no longer be governed by the erstwhile Section 194B of the Act and will instead be governed by the provisions of Sections 194BA and 115BBJ. The provisions (upon taking effect) would mean that each online game winning would attract a tax a of 30%.

It is pertinent to note that the newly introduced provision 194BA will take effect From July 1, 2023, while Section 115BBJ will take effect from April 1, 2023. 

While the online gaming industry was mostly unregulated until this year, the introduction of the aforementioned provisions as well as the proposed inclusion of the online gaming intermediaries under the fold of the Information Technology (Intermediary Guidelines and Digital Media Ethics Code), 2021 will ensure that the industry and its key players will have a more defined and dedicated regulatory landscape regarding online gaming law to abide by.