Online Gaming Industry: Deep-Dive Into Recent Amendments In TDS And Tax Regime And Its Ambiguities

The Union Budget of 2023 has introduced several provisions related to tax deduction at source (TDS), aiming to strengthen the country's tax collection mechanism.

However, these provisions have raised ambiguities, particularly in relation to the online gaming industry.

The industry has welcomed the government’s move to recognise the sector and provide clarity.

The government's attempt to tax the booming industry has resulted in confusion regarding the applicability of TDS provisions and the determination of taxable income due to multiple regime changes instead of a single change.

As a result, online gaming companies are grappling with compliance challenges, and industry experts are calling for clarity on the matter.

This article will delve into the complexities surrounding the TDS provisions and the challenges faced by the online gaming industry in India.

Deep-Dive Into Recent Amendments In TDS And Tax Regime

The recent amendments in relation to taxation and TDS of the online gaming industry can be summarized in the following manner:

• Section 194B of the Income Tax Act currently requires TDS to be made on from online gaming, among other industries on winnings exceeding Rs 10,000

• The existing provisions of section 194B are proposed to be amended to provide that the TDS shall be on the amount or the aggregate amount exceeding Rs 10,000 in a financial year. This will be effective 1 April 2023

• A new section 194BA is proposed with effect from 1 July 2023, to provide for TDS on net winnings from online games computed in a prescribed manner

This means that for a period of three months, the online gaming industry may have to comply with the amended rules of section 194B and then comply with section 194BA.

A recent paper by a leading law firm Lakshmikumaran & Sridharan delves deep into the impact of the new withholding tax provisions on the online gaming industry.

In this white paper, it is detailed out with illustrations — the practical issues that would arise for the users, as well as, the online gaming platforms, due to the mismatch in the implementation dates for new TDS provisions.

According to the whitepaper, the potential ambiguity in the implementation of these sections could have an impact on online gaming companies in a number of ways, the most significant being the confusion it may cause among the users and the players.

Firstly, the users are subject to a single method of net winnings for the entire financial year and platforms are subject to two computation methods of winnings and net winnings for the same financial year.

This could lead to confusion and uncertainty around tax liabilities and compliance requirements.

Secondly, the implementation of the new tax regime will require sufficient time to educate the users and also make necessary technology changes, both by the government and gaming platforms.

They may need to invest in new systems and processes to accurately calculate and deduct TDS on user winnings, and to handle situations where users withdraw amounts during the financial year.

This is possible only if there is a smooth and seamless transition to the new regime from the current regime, without the need for an intermittent regime, as has been done historically.

Thirdly, lack of clarity in the transition period may lead to different platforms adopting different approaches, leading to confusion to users who use multiple platforms and also to the tax authorities for verifying the tax returns.

It is also possible that some companies, especially small start-ups with limited resources may not fully understand the implications, leading to non-compliance with the amended provisions.

The new amendment also seeks to remove the annual base limit of INR 10,000 for the deduction of TDS.

A lot of casual players play on multi-gaming platforms and also play fantasy sports and other games especially during IPL season. The winnings of these users range from Rs 1 to Rs 100, and for a lot of these players the cumulative winnings do not exceed Rs 3,000 in a financial year from online games. 

A lack of threshold will add considerable burden on these citizens, who play and win very small amounts in aggregate, usually under INR 3,000 – 5,000.

Notably, almost every provision of withholding tax offers a base limit before any amount of withholding tax may be deducted.

I would be taking this issue up in a detailed article next.

All these amendments could have a significant impact on online gaming companies, particularly in terms of compliance costs and administrative burden.

It is important for the government and tax authorities to provide clear guidance and instructions to ensure that these provisions are implemented effectively and without any ambiguity and allow for a seamless transition.

There is always a possibility of ambiguity while implementing any new tax provisions or amendments.

It is possible that they may decide a common date for making all these amended sections effective on one single date, that is, 1 July 2023. This is one of the solutions recommended by the white paper as well.

Furthermore, tax authorities may need to provide clear instructions to taxpayers on how to comply with the new provisions and how to report their income from online gaming.

Overall, the implementation of these sections may require careful consideration and guidance to ensure that they are implemented effectively and without any ambiguity.