India: Manner of Computation of Net Winnings Prescribed for Online Gaming Companies!

Published by the national law review

  • The Finance Act, 2023 prescribed that an OGI was required to deduct income tax on the net winnings from any online game from a user account.
  • Now, the CBDT has prescribed the manner of computation of net winnings through guidelines.

  • The Guidelines clarify that

    • Non-taxable deposits allowable as deduction in computation of Net Winnings

    • Losses incurred during FY can be adjusted while computing Net Winnings

    • Transfer between user accounts of same user with the same platform of the OGI not considered as withdrawal or deposit

    • Clarity on treatment of bonus, referral bonus, incentives, promotional money and discount provided


BACKGROUND

The Finance Act, 2023 overhauled the tax regime for income from online games and created a distinction between taxation of online and offline games. In this regard, section 115BBJ was introduced in the Income-tax Act, 1961 (“ITA”) to provide for 30% tax on net winnings from ‘online game’. ‘Online game’ is defined to mean a game that is offered on the internet and is accessible by a user through a computer resource, including any telecommunication device.1 Hence, the obligation is applicable to all types of online games, i.e., games of skill or games of chance. The obligation to withhold tax will apply even in cases where the players do not make an deposit for participating in the game.

Section 194BA was also introduced to impose an obligation to withhold tax on the person responsible for paying any income by way of winnings from any online game during a financial year (“FY”) at the rates in force. These provisions were effective from April 1, 2023.

In a much-awaited move, the Central Board of Direct Taxes (“CBDT”) has now inserted a new Rule 1332 to the Income-tax Rules, 1962 (“ITR”) which prescribes the manner of computation of net winnings (“Net Winnings”) for the purpose of applying Section 194BA. In addition, CBDT has also issued detailed guidelines for removal of any difficulty in giving effect to provisions of section 194BA of the ITA (“Guidelines”).3

1. Computation of Net Winnings for the purpose of withholding tax under section 194BA of ITA 

Section 194BA imposes the obligation to withhold tax on the ‘Net Winnings’ component (i) at the time of any withdrawal from the user account and (ii) at the end of the FY on the remaining amount of Net Winning in the user account. Rule 133 accordingly bifurcates computation of Net Winnings in three stages as elaborated below:

See the charts and read the rest of the story at

https://www.natlawreview.com/article/manner-computation-net-winnings-prescribed-online-gaming-companies