Recently, the Central Board of Direct Taxes (“CBDT”) has issued rules to calculate “net winnings” in case of online games and issued guidelines in relation to the same for further clarification. As background, the Finance Act, 2023 introduced a new provision under the Income Tax Act, 1961 (“Act”) – Section 194BA (applicable from July 1, 2023) for deduction of tax at source on winnings from “online games”. Simultaneously, a new Section 115BBJ (applicable from April 1, 2023) has also been introduced to provide for a tax on winnings from online games which shall be calculated at a rate of 30% on the amount of net winnings from such online games. Consequently, amendments have also been made to Section 194B and Section 115BB to exclude income from winnings from online games from the purview of the said sections.

Section 194BA of Act provides that withholding on ‘net winnings’ should take place in the user account at the end of the financial year. In case there is a withdrawal from the user account during the financial year, tax shall be deducted at the time of such withdrawal on net winnings. In addition, income tax shall also be deducted from the remaining amount of net winnings in the user account at the end of the financial year. Computation of net winnings was to be prescribed in due course and the same has now been prescribed.

Introduction of Rule 133

The CBDT has by way of notification introduced Rule 133 to the Income-tax Rules, 1962 (“Rules”) to calculate the manner in which ‘net winnings’ for the purposes of Section 194BA and Section 115BBJ of the Act is to be calculated. As mentioned in the section, tax is supposed to be deducted at the time of each withdrawal during the financial year and also at the end of the financial year. Accordingly, Rule 133 takes that into account and provides for its calculation. Here is a quick summary:

A = Aggregate amount withdrawn by the user account during the financial year.

B = Aggregate amount of non-taxable deposit made in the user account by the owner of a such account during the financial year.

C = Opening balance of the user account at the beginning of the financial year.

D = The closing balance of the user account at the end of the financial year.

E = Net winnings comprised in the earlier withdrawal or withdrawals.

The above formulae is to be applied by the gaming operator who would be liable to withhold tax in respect of withdrawal made by the player. Consequently, formula for Section 115BBJ has also been prescribed for the player to calculate her / her net winnings for paying taxes. The formula for calculation for the user is: (A + D) – (B + C).

In all cases, where the total amount withdrawn is equal to or less than the other amounts as calculated by the formula, net winning shall be considered to be zero and no tax should be payable.

The Rules also define some of the terms that have been used:

• “Non-taxable deposit” means the amount deposited by the user in his user account which is not taxable.
• “Taxable deposit” means any amount deposited in the user account which is not a non-taxable deposit and includes any amount paid directly to the user, not through the user account.
• “Withdrawal” means any amount withdrawn by the user from any user account.

User account has been clarified to include every account of user, by whatever name called, which is registered with the online gaming intermediary and where any taxable deposit, non-taxable deposit or the winnings made by the user is credited and withdrawal by the user is debited.

The definition of ‘taxable deposit’ is a circular definition making reference to the definition of ‘non-taxable deposit’ and hence unclear of what it includes. However, Explanation 2 under the Rules clarifies that whenever there is deposit made which is in the form of bonus, referral bonus, incentives, promotional money, discount etc. (“Promotional Deposit”) and such deposit can only be used for playing the online games and not for withdrawal or any other purposes, then such deposit should not be used for the purposes of calculating net winning. However, in a situation where they are withdrawable such amount shall be included to calculate net winnings. To give an illustration:

A and B contributed INR 100 each in a game. However, B’s INR 100 comprised of INR 50 which was his own money and the balance INR 50 which comprised of Promotional Deposit which cannot be withdrawn. B won INR 180. His net winnings should be INR 130 – INR 50 = INR 80. This is because the INR 50 which was the Promotional Deposit was not allowed to be withdrawn and hence doesn’t form part of the calculation. If it were, however, allowed to be withdrawn, the net winnings would be INR 180 – INR 50 = INR 130, thereby making the INR 50 of Promotional Deposit taxable.

Guidelines

Various guidelines have been issued under the Central Board of Direct Taxes to resolve ambiguities under Rule 133:

• One user having multiple wallets: In such a case, Rule 133 clarifies that whenever there are multiple user accounts of the same user, each user account shall be considered for the purposes of calculating net winnings and the deposit, withdrawal or balance in the user account shall mean aggregate of deposit, withdrawal, or balance in all user accounts. In this respect, the guidelines provide that in case of a user who has multiple accounts within the registered gaming intermediary the deposit, withdrawal, or balance in the user account shall mean the aggregate of deposits, withdrawals, or balances of all the user accounts. The guidelines further provide that in case of one gaming operator has multiple platforms and it is not technologically feasible to integrate multiple user accounts across platforms then tax may be calculated for each platform separately.

• Transfers within same user accounts: The Rules clarifies that if there is a transfer from one user account to another user account of the same user, maintained with the same online gaming intermediary, it should not be considered as withdrawal or deposit. However, when the amount is withdrawn from the user account to any other account, it shall be considered as withdrawal. Similarly, if the transfer is between different gaming intermediaries it will be considered as a withdrawal and taxable accordingly. If the amount is credited to the user account in the form of coupons, bonuses in kind for the purchase of goods the value of such coupons, bonus etc., shall be termed as withdrawal and tax will be calculated accordingly.

• Taxability and valuation when winnings are in kind: The guidelines clarify that when a user uses money in user account to buy an item in kind which is given to the user, the net winnings should be considered to be in cash only and the gaming operator should be required to withhold tax accordingly. The guidelines further clarify that in a situation where the winning of the game is a prize in kind, the gaming intermediary will need to ensure that tax in respect of the winnings has been paid before releasing the winnings i.e. the user provides proof of payment of such tax (e.g. Challan details etc.) to the deductor. Alternatively, the gaming intermediary can also withhold the relevant taxes and pay to the revenue. As such, the valuation for the winnings in kind is to be calculated on the basis of fair market value except in the following cases where the value will be determined as follows:
  • The online gaming intermediary has purchased the winnings before providing them to the users, the purchase price will be the value of the winning.
  • If the online gaming intermediary manufactures items that are given as winnings to the users, the price that it charges to its customers for such items shall be the value for such winnings.

• Tax deduction on an insignificant withdrawal: The guidelines provide that no tax deduction shall be required to be made in case the withdrawal is less than INR 100 in a month, provided the following conditions are fulfilled:
  • net winnings comprised in the amount withdrawn does not exceed INR 100 in a month;
  • tax not deducted on account of this concession is deducted at a time when the net winnings comprised in withdrawal exceeds Rs 100 in the same month or subsequent month or if there is no such withdrawal, at the end of the financial year; and
  • the gaming operator undertakes responsibility of paying the difference if the balance in the user account at the time of tax deduction is not sufficient to discharge the tax deduction liability calculated in accordance with this Rule.

• Relaxation on penal consequences in the intervening period: Since the Rules and guidelines have been notified after the law has come in place, the guidelines provide that if there is a shortfall in the deduction of taxes the amount of shortfall may be deposited with a tax deduction for the month of May 2023 by the 7^th June 2023 without leading to any penal consequences.

Analysis

Manner of calculation of net winnings and the guidelines clarifying some aspects is a step in the right direction. How to calculate winning has always been the debate of the industry and to see that the CBDT has taken the approach to reduce the pay-in from the winnings withdrawn is definitely a shot in the arm and will help in bringing clarity to this much debated issue.  While the manner of calculation of net winnings is for Section 194BA, the industry can take guidance from the Rules and apply to the other provisions where the meaning of winnings remains unclarified. Clarification with respect to treatment of bonus, referral bonus etc. is also useful as almost all gaming operators provide such bonus, promotional money and the fact the CBDT has understood that there may be situations when such Promotional Deposits are not withdrawable and hence not taxable is a welcome move.

Further, while valuation mechanism in case of in-kind winnings has been prescribed, valuation where where intangible assets are distributed as winnings may be practically challenging. Additionally, prescribing a threshold of INR 100 for non-withholding is miniscule and does not really extend any benefit. In fact by putting the burden on the gaming operator to deposit tax in case of insufficiency in the user account can act as a deterrent.

-Darshit Vora & Ashish Sodhani