On 22nd May 2023, the Central Board of Direct Taxes (CBDT)[1] issued a new circular under section 194BA (3) of the Income Tax Act 1961 (the Act). Section 194BA is a new section that was inserted in the Income Tax Act by the Finance Act of 2023. Section 194BA came into effect on 1st April 2023. Section 194BA talks about winning from online games. It provides that any income arising by way of winnings from any online game during a financial year shall be subject to income tax. The income tax is deducted from the net winnings in the user account. The person responsible for paying any person the income from the net winnings is also responsible to deduct income tax on net winnings. The computation of income tax on net winnings is done in the prescribed manner at the end of the financial year.
Section 194BA (3) of the Act permits the CBDT to issue guidelines for removing difficulties arising from winnings from online games. Exercising this power, the CBDT issued guidelines for removing difficulties arising from winnings from online games vide Circular No. 5 of 2023 dated 22nd May 2023. Let’s see what the difficulties are removed by the CBDT vide by circular.
Computation of “net winnings” where one user has multiple wallets
A user account means every account of the user registered with the online gaming intermediary. It includes any account where a taxable deposit, non-taxable deposit, or the winning of the user is credited and any withdrawal has been debited. So every wallet qualifies as a user account and shall be considered as a user account to compute net winnings. It has been further classified by Rules 133 of the Income Tax Rules 1962 that in case of multiple user accounts of one user, each user account shall be considered for calculating net winnings. Any deposit, withdrawal, or balance in a user account means the aggregate of deposits, withdrawals, or balances in all the user accounts.
User borrowings in the user account: Taxable deposit or non-taxable deposit?
If the amount deposited by the user is not taxable, which means that it is already taxed income, then it is a non-taxable deposit and is not chargeable to tax. Additionally, when a user borrows money and deposits in his user account, it is treated as a non-taxable deposit.
Treatment of bonus, referral bonus, incentives, etc
The online game intermediary gives bonuses, referral bonuses, and incentives to the users. The bonus, referral bonus, incentives, etc increase the balance of the user account but they are not permitted to be deducted in the calculation of net winnings. Only taxable deposits are allowed to be deducted. They are also taxed under section 194BA of the Act and are liable to be deducted at the time of withdrawal or the end of the financial year. Deposits in the form of money or money equivalents like coins, coupons, vouchers, counters, etc are considered taxable deposits and, accordingly, also form a part of the balance in the user account.
In cases of some incentives or bonuses where the user account is credited only to play and cannot be withdrawn or used for any other purpose such deposits are not considered for the calculation of net winnings. They are not considered a part of net winnings. They are considered non-taxable deposits and are included in the opening balance or closing balance of the user account. Further. Persons liable to deduct tax under section 194BA must keep separate accounts of such deposits. However, if such incentives or bonuses are recharacterized and are not allowed to be withdrawn, then it will be treated as a taxable deposit and will become a part of net winnings in the year of recharacterization.
Withdrawal of amount
When an amount is transferred from one user account to another user account of the same user maintained on one online gaming intermediary, then it is not considered a withdrawal or deposit. If however, this amount is withdrawn from the user’s account to any other account, then it is considered a withdrawal. Any account which is not registered with an online game intermediary is an account that is not a user account. Any transfer from a user account to an unregistered account will be considered a withdrawal. The purchase of goods or services or issue of some item in kind will be considered as a withdrawal. Before issuing coupons or items in kind, the person responsible to deduct tax at source under section 194BA of the Act is required to ensure that the tax required to be deducted is deducted. Additionally, for removing difficulties arising from winnings from online games, if the deductor is deducting tax under section 194BA of the Act for each platform and then transfer from one user account to another user account under one online gaming intermediary platform, then it shall be considered as withdrawal or deposit for computation of net winnings under Rule 133.
Relaxation to ease compliance in insignificant withdrawals
For insignificant withdrawals, tax may not be deducted on the satisfaction of the following conditions:
- When the net winnings inclusive of the amount withdrawn do not exceed INR 100 in a month;
- When the tax not deducted on account of concession is deducted at the time when net winnings inclusive of withdrawal exceeds INR 100 in the same month or subsequent month or where there is no withdrawal at the end of the financial year; and
- When the deductor undertakes the responsibility to repay the difference in case the balance in the user account at the time of tax deduction under section 194BA is not sufficient to discharge the tax deduction liability calculated as per Rule 133.
Operation of Tax Deductions when net winnings are in kind
When money in a user account is used to buy an item in kind and is given to the user then it will be considered as net winnings in cash and the deductor will have to deduct tax at source under section 194BA of the Act. Where in some situations, the winning of a game is a prize in kind, then section 194BA (2) will operate. As per section 194BA (2) where the net winnings are entirely or partly in kind and the part in cash is not sufficient to meet the liability of deduction of tax in respect of the whole of the net winnings, then the person responsible for paying shall ensure that the tax in respect of net winnings has been paid before the release of winnings. In these cases, the deductor releases the net winnings in-kind post the deductee provides proof of payment of such tax. In this regard, the CBDT issued notification no. 28/2023 dated 22nd May 2023. As per this notification, Form 26Q has been introduced, which is going to be used for reporting such transactions under section 194BA. As an alternative option to removing difficulties arising from winnings from online games, the deductor may deduct tax under section 194BA of the Act to pay to the Government. In Form 26Q, the deductor will have to show tax deducted by on net winning under section 194BA of the Act.
Valuation of winnings in kind
The valuation of winnings in kind will be based on the fair market value of the winnings in kind except in the following cases:
- Where the online game intermediary has purchased the winnings before providing them to the user. In such cases, the purchase price shall be the value of winnings.
- Where the online game intermediary manufactures items given as winnings. In such cases, the price charged by it to the customers for such items shall be the value of such winnings.
For further clarification, it is provided that GST will not be included in the valuation of winnings for TDS under section 194B of the Act.
Relaxation on penal consequences in the intervening period between 1st April 2023 and 22nd May 2023
The taxpayers are expected to deduct tax at source under section 194BA of the Act before the issuance of Rule 133 or this circular. It will be considered that that responsibility has been carried out and if there is any shortfall in deduction of tax due to time lag in the issuance of Rule 133 or this circular. Then for April 2023 that shortfall will be deposited with the tax deduction for May 2023 by 7th June 2023. For removing difficulties arising from winnings from online games, no penal consequences will arise.
Conclusion
In conclusion, it can be said CBDT is making attempts in removing difficulties arising from winnings from online games and is trying to remove complexities in online gaming and this is exactly that. By removing difficulties arising from winnings from online games, CBDT is making it easier to do online gaming.