Direct Tax Alert - CBDT notifies Rules and issues guidelines on winnings from Online Games

Background:

Prior to the Finance Act 2023, winnings from games including online games were taxable at a flat rate of 30% under section 115BB of the Income-tax Act, 1961 (IT Act). The Finance Act 2023 introduced section 115BBJ in the IT Act to tax net winnings from online games at the rate of 30% w.e.f. Fiscal Year (FY) 2023-24. It further inserted section 194BA in the IT Act to bring the winnings from online gaming within the fold of tax withholding w.e.f. 1 April 2023. As per the section, a person¹ who is responsible for paying to any person any income by way of winnings from any online game during the FY is required to deduct income-tax (TDS) on the net winnings in the person’s account at the time of withdrawal and at the end of the FY. The manner of computing net winnings was not prescribed by the Finance Act 2023. Further, section 194BA(3) of the IT Act authorised Central Board of Direct Taxes (CBDT) to issue guidelines for the purposes of removal of difficulties. In this regard, recently, the CBDT vide a notification² inserted Rule 133 in the Income-tax Rules, 1962 (IT Rules) which prescribes a formula for calculating net winnings. It further issued guidelines³ in the form of FAQs for providing clarity on various aspects. We, at BDO in India, have analysed and summarised the said notification as well as the guideline and provided our comments on its impact hereunder:

1. Rule 133 of IT Rules 

a. The Rule provides formula to calculate net winnings under various scenarios as below:

i. During the FY for the purpose of section 115BBJ of the IT Act

Net winnings= (A+D)-(B+C), where-

A= Aggregate amount withdrawn from the user account during the FY;

B= Aggregate amount of non-taxable deposit made in the user account by the taxpayer during the FY;

C= Opening balance of the user account at the beginning of the FY; and

D= Closing balance of the user account at the end of the FY.

ii. At the time of first withdrawal during the FY for the purpose of section 194BA of the IT Act

• Net winnings= A-(B+C), where-

A= Amount withdrawn from the user account;
B= Aggregate amount of non-taxable deposit made in the user account by the owner of such account during the FY, till the time of such withdrawal; and

C= Opening balance of the user account at the beginning of the FY.

• Net winnings in the above formula shall be zero, if the sum of amounts B and C is equal to or greater than the amount A.

iii. At the time of subsequent withdrawal during the FY for the purpose of section 194BA of the IT Act

• Net winnings= A-(B+C+E), where-
  A= Aggregate amount withdrawn from the user account during the FY till the time of subsequent withdrawal including the amount of such subsequent withdrawal;
  B= Aggregate amount of non-taxable deposit made in the user account by the owner of such account during the FY, till the time of such subsequent withdrawal;
  C= Opening balance of the user account at the beginning of the FY; and
  E= Net winnings comprised in the earlier withdrawal or withdrawals computed under (ii) above, during the FY till the time of subsequent withdrawal.

• Net winnings in the above formula shall be zero, if the sum of amounts B, C and E is equal to or greater than the amount A.

iv. At the end of FY for the purpose of section 194BA of the IT Act

• Net winnings= (A+D)-(B+C+E), where-
  A= Aggregate amount withdrawn from the user account during the FY;
  B= Aggregate amount of non-taxable deposit made in the user account by the owner of such account during the FY;
  C= Opening balance of the user account at the beginning of the FY;
  D= Closing balance of the user account at the end of the FY; and
  E= Net winnings comprised in the earlier withdrawal or withdrawal computed under (ii), or (iii) above, during the FY till the time of subsequent withdrawal.

• Net winnings in the above formula shall be zero, if the sum of amounts B, C and E is equal to or greater than the sum of amount A and D.

b. The Rule has defined certain terms as below:

• Non-taxable deposit- the amount deposited by the user in his user account and which is not taxable;

• Taxable deposit- 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; and

• Withdrawal- any amount withdrawn by the user from any user account.

c. The Rule provides certain clarifications for removal of doubts as listed below:

• User account shall include every account of user 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 is debited.

• In case where user receives payment outside the user account in kind or in cash, or partly in kind and partly in cash, the net winnings shall be calculated by deeming that the money equivalent to such payment has been deposited in the user account and equivalent amount has been withdrawn from the user account at the same time. Accordingly, such amount shall be included in Amount A.  

• In case user has multiple accounts-

  • aggregate of all such user accounts shall be considered for the purpose of calculating net winnings.

  • Transfer from one user account to another maintained with same online gaming intermediary shall not be considered as withdrawal or deposit (as the case may be) for the purpose of deducting tax under section 194BA of the IT Act.

• Deposit in form of bonus, referral bonus, incentives, promotional money, discount-

  • In case where such deposit can only be used for playing the online games and not for withdrawal or any other purposes, the same shall be ignored for the purposes of calculating net winnings and shall not be included in amount B, or amount C or amount D; and

  • If aforementioned deposit is subsequently recharacterized and allowed to be withdrawn, it shall be deemed as taxable deposit at the time of recharacterization and the equivalent amount shall be considered as deposited in the user account at that time.

d. The Rule shall come into effect from 22 May 2023.

2. Guidelines for removal of difficulties

a. How “net winnings” is to be computed with respect to multiple wallets of one user?

• Each wallet which qualifies as user account shall be considered as user account for the purposes of computing net winnings. Further, the deposit, withdrawal or balance in the user account shall mean aggregate of deposits, withdrawals or balances in all user accounts.

• For illustration, a user has multiple user accounts under one deductor (one TAN). For the purposes of calculating TDS under section 194BA of the IT Act, each of these user accounts is to be considered. However, if the deductor (one TAN) is having multiple platforms and it is technologically not feasible for him to integrate multiple user accounts across platforms then he may, at his option, calculate TDS under section 194BA of the IT Act for each platform separately. Even in this case, all the user accounts under one user in one platform needs to be considered for the purposes of calculating net winnings in the formulas provided in Rule 133 of the IT Rules.

• As discussed above, if the deductor is deducting tax under section 194BA of the IT Act for each platform separately, transfer from one user account to another user account under same online gaming intermediary across platforms shall be considered as withdrawal or deposit for the purposes of calculating net winnings under Rule 133 of the IT Rules.

b. If a user borrows some money and deposits in his user account, will it be considered taxable deposit or non-taxable deposit?
In a case where user borrows the money and deposit in his user account, it shall be considered as non-taxable deposit.

c. How will bonus, referral bonus, incentives etc. given by online game intermediary to the user be treated?

• They are to be considered as taxable deposit which will increase the balance in user account and is not allowed to be deducted in calculation of net winnings as only non-taxable deposits are allowed to be deducted. Thus, any deposit in form of bonus, referral bonus, incentives etc. would form part of net winnings and tax under section 194BA of the IT Act is liable to be deducted at the time of withdrawal as well as at the end of the FY.

• Some deposit like coins, coupons, vouchers, counters etc. shall be considered as taxable deposit and its equivalence in money would accordingly form part of balance in user account.

• In case where some incentives/bonus is credited in user account only for the purposes of playing and they cannot be withdrawn or used for any other purposes, such deposit shall be ignored for calculating net winnings. Such deposit shall not be included in non-taxable deposit as well as in opening balance or closing balance. Deductor must keep separate accounts of such deposits.

• If and when the aforementioned incentives/bonus are recharacterized and they are allowed to be withdrawn, they would be treated as taxable deposit at the time of recharacterization and will become part of net winnings for that year.

d. At what point we consider that amount has been withdrawn?

• When the amount is withdrawn from the user account to any other account (any account of the user not registered with the online game intermediary i.e., deductor), it shall be considered as withdrawal.

• When in consideration of amount in user account, some coupons etc. are issued for purchase of goods or services, or some item in kind is issued, it shall be considered as withdrawal. Deductor is required to ensure that TDS under section 194BA of the IT Act is deducted before issuing such coupons or items in kind.

• If TDS is deducted under section 194BA of the IT Act by deductor for each platform separately, transfer from one user account to another user account under same online gaming intermediary across platform shall be considered as withdrawal or deposit for the purposes of calculating net winnings.

e. Can there be relaxation to ease compliance of TDS under section 194BA of the IT Act where gamers play with and withdraw very insignificant amount?

In order to remove difficulty, it is clarified that tax may not be deducted on withdrawal upon satisfaction of all the following conditions:

• Net winnings comprised in the amount withdrawn does not exceed INR 100 in a month;

• Tax not deducted on account of aforementioned concession is deducted at a time when the net winnings comprised in withdrawal exceeds INR 100 in the same month or subsequent month or if there is no such withdrawal, at the end of the FY; and

• The deductor undertakes responsibility of paying the difference if the balance in the user account at the time of TDS under section 194BA of the IT Act is not sufficient to discharge TDS liability in accordance with Rule 133 of the IT Rules.

f. How will TDS under section 194BA of the IT Act operate in case of net winnings in kind?

• In case where money in user account is used to buy an item in kind and given to user then it is net winnings in cash only and the deductor is required to deduct TDS under section 194BA of the IT Act.

• There can be a case where winning of the game is a prize in kind, or partly in cash and partly in kind but the part in cash is not sufficient to meet the liability of TDS in respect of whole of net winnings. In such case, the deductor shall release the net winnings in kind after ensuring that tax has been paid and deductee has provided proof of payment of such tax (e.g., challan details etc.). From this year, Form 26Q has included provisions for reporting such transactions under section 194BA of the IT Act.   

• As an alternative to above, the deductor may deduct and pay tax under section 194BA of the IT Act. In Form 26Q, the deductor will need to show this as tax deducted by him on net winnings under section 194BA of the IT Act.

g. How will the winnings in kind be valued?

The valuation would be based on fair market value of the winnings in kind except in following cases:

• Online game intermediary has purchased the winnings before providing it to user- Purchase price of such winnings shall be the value for winnings.

• ​Online game intermediary manufactures such items given as winnings- price that it charges to its customers for such items shall be the value for winnings.

Further, for the purposes of valuation of winnings, GST is not to be included.       

h. These guidelines have been issued after 1 April 2023 whereas the law has come into effect from FY starting 1 April 2023. Will there be any relaxation on penal consequences in the intervening period i.e., between 1 April 2023 and the date on which the rules/guidelines are issued?

Taxpayers are required to deduct TDS under section 194BA of the IT Act from 1 April 2023 even if Rules/guidelines are issued later. It is expected that they have carried out that responsibility. However, in case of any shortfall in TDS for the month of April 2023 due to time lag in issuance of Rule 133 of the IT Rules, such shortfall may be deposited with the TDS for the month of May 2023 by 7 June 2023. In that case there will not be any penal consequences.

BDO India Comments:

This circular along with guidelines issued by CBDT provides much needed clarification and endeavours to remove any unwarranted confusion. Further, it has also given relaxation by providing deadline of 7 June 2023 to deposit TDS liability of April 2023 and not levying any penalty in cases where TDS was deducted under section 194BA of the IT Act for the month of April 2023. Having said this, it would be pertinent for the online gaming companies to revamp their system in a short period of time to implement the withholding tax mechanism as prescribed so as to be compliant with the provisions. Rule 133 of the IT Rules and guidelines issued along with the recently amended⁴ the Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Rules, 2021 in relation to online gaming will provide boost to the online gaming sector industry in India.   

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