Budget's new tax norms for gaming to impact casual gamers

The government's proposal to remove the minimum threshold of ₹10,000 for levying tax deduction at source (TDS) on the net winnings from online gaming may end up hurting the industry's prospects by discouraging online casual gamers, who account for a major portion of the revenue of most local gaming platforms, from playing more to avoid paying more tax on their net winnings.

Till now, TDS was not applicable to those winning less than ₹10,000. However, under the new tax proposal introduced in the Union Budget on 1 February, the government has proposed that tax should be levied on the net winnings and that TDS can be calculated either at the end of the financial year or at the time of withdrawal by the player. Thus, if a user makes a partial withdrawal, TDS will be deducted from the entire amount of net winnings.

Moreover, the rules earlier said firms were to levy TDS on winnings, which didn’t take into account entry fees and other payments players made to enter online gaming tournaments or competitions. Finance Bill 2023 added two new sections to the Income-Tax Act. Section 115BBJ proposes that income tax of 30% should be calculated on a player’s net winnings, while Section 194BA allows tax to be deducted at the end of the year or at the time of the withdrawal of winnings.

In real-money gaming and fantasy sports, players pay a small amount as a participation fee, which makes up the total prize pool from which the winnings are distributed after the platform provider deducts a commission. The money won by players is put in their wallets on the gaming platform, which they can withdraw when they want. The actual profit made by a player from a stake is the net winning. Hence, if a player paid ₹30 to play in a game where the prize money is ₹100, the net winning would be ₹70.

Two senior executives from top gaming firms, who requested anonymity, explained that most platforms in India get 80-90% of their revenue from players who pay less than ₹10 at a time, since they’re playing for entertainment. Such gamers may be deterred if they see tax being deducted from their winnings, they added.

“Typically these players would withdraw money after a couple of games. That behavior will be affected now,” one of the executives said. The second executive noted that it will be a while before platforms realize the full effect, but the scales could tip to either side — user numbers may drop as it did for crypto firms last year after the government introduced TDS, or user engagement may go up as players withdraw funds less frequently.

Further, some experts said that this could also increase the compliance burden on platforms, and add to costs. The proposed amendment of the IT (Intermediary Guidelines and Digital Media Ethics Code) Rules 2021 last month to to bring online gaming under its ambit, has already added to compliance costs, they said. “The platforms will now have to do KYC, take the pan card, and file TDS  returns, even for small transactions. That will increase their compliance burden,” said Jay Sayta, a technology and gaming lawyer.

That said, the gaming industry has appreciated the fact that the Finance Bill recognized online gaming as a separate category from gambling or betting.

Paavan Nanda, co-founder of Winzo Games, said “introduction of ‘net winning’ in place of just ‘winning’ is definitely a respite and more practical from a player’s standpoint”. But he added that removing the TDS threshold will have a significant impact on the company’s 100 million casual gamers, who typically spend ₹300 per month, and most of their winnings are less than ₹500 per month or ₹6000 per annum. “Removal of the threshold will discourage smaller players but they also get benefits of set-off of losses for the calculation of net winnings,” said Sayta. 

Sayta believes that some players will realize that withdrawing the funds is not a prudent option and might keep the funds lying to play more. 

“This signals the government’s recognition of the unique nature of each (gaming and gambling) and the need for separate tax policies,” said Vikash Sureka, chief financial officer of gaming unicorn Mobile Premier League (MPL).

Rahul Tewari, chief financial officer, Games24x7 said that the amendment provides the much-needed rationalization of the TDS regime for winnings arising from online games and takes into account the fact that the core gameplay in this sector is different from others.