Finance Act, 2023 inter alia introduced changes to withholding tax obligations for winnings from lottery, crossword puzzles and horse races under Sections 194B and 194BB, IT Act, 1961. Finance Act, 2023 also introduced a new provision, i.e., Section 194BA, IT Act, 1961 to deduct taxes on winnings from online games apart from introducing a new charging provision, i.e., Section 115BBJ for such winnings. The Central Board of Direct Taxes (‘CBDT’), on 22 May 2023 issued a Circular[1] containing Guidelines for implementation of Section 194BA. This post is an attempt to examine the above mentioned changes and highlight how winnings from online games are being categorized separately under the IT Act, 1961.
Changes Introduced by the Finance Act, 2023
Prior to Finance Act, 2023, Section 194B, IT Act, 1961 provided that the person responsible for paying to any person any income by way of winnings from any lottery or crossword puzzle or card game and other games of any sort in an amount exceeding ten thousand rupees shall at the time of payment thereof, deduct income tax at the rates in force. Section 194BB imposed a similar obligation on the person responsible for making a payment of any income by way of winnings from any horse race or from wagering or betting in any horse race.
The Finance Act, 2023 amended both the above provisions to clarify that the deduction of tax under the aforesaid provisions shall be on the amount or aggregate of amounts exceeding ten thousand rupees during the financial year. The State claimed that the deductors under Section 194B and Section 194BB were splitting winnings into various transactions below Rs 10,000 – presumably to avoid withholding tax obligations under Section 194B and Section 194BB – which was contrary to legislative intent and the amendments were an attempt to plug this loophole.
Equally, Section 194B was amended to include ‘gambling or betting of any form or nature whatsoever’ but exclude online games from its purview. A new provision, i.e., Section 194BA was introduced to govern deduction of taxes on winnings from online games and which provides that taxes shall be deducted on net winnings in the user account at the end of the financial year. Simultaneously, a separate charging provision for winnings from online games was introduced, i.e., Section 115BBJ, IT Act, 1961 while winnings from other games continued be charged under Section 115BB.
The cumulative effect of the above changes introduced by the Finance Act, 2023 is that withholding tax obligations and tax liabilities of winnings from online games have their own specific provisions – Section 194BA and Section 115BBJ, IT Act, 1961 – and will not be governed by generic provisions relating to winnings from games.
Clarifications Issued Via the CBDT Circular
On 22 May 2023, Central Board of Direct Taxes (‘CBDT’) issued guidelines in exercise of its powers under the newly inserted Section 194BA, IT Act, 1961. Simultaneously, Rule 133 was added to the Income Tax Rules, 1962 which prescribed a relatively straightforward formula to calculate net winnings under Section 115BBJ, IT Act, 1961.
The CBDT Guidelines are meant to clarify certain aspects of the deductor’s obligations under Section 194BA. For example, the Guidelines state that a user account shall mean every account of the user, by whatever name called, which is registered with the online gaming intermediary. Further, that where a user has multiple user accounts on different platforms of a single deductor then each user account shall be considered on an aggregate except where such aggregation is not possible due to technological reasons. There are a few other clarifications; however, in my view, to understand the contours of the Section 194BA, IT Act, 1961 four aspects of the Guidelines are vital:
First, any bonus, winnings, incentives provided to players would be considered as part of net winnings and liable to deducted under Section 194BA. Except when such bonus is credited in the user account only for playing and cannot be used for any purpose then it will not be considered as part of net winnings. Further, if the latter is recharacterized and allowed to be withdrawn then they shall be treated as taxable deposit at the time of their characterization. Determining the time of characterization may not prove to be straightforward. Will it be the date the winner is informed or the date the winner can withdraw the bonus?
Second, Section 194BA(2) provides where winnings are partly in kind and partly in cash, but the cash component is not sufficient to meet the withholding liability, then payer responsible for paying shall ensure that the tax has been paid in respect of the net winnings. The Guidelines add that the net winnings shall be released only after the deductee has provided proof of payment of tax. But then it curiously adds that the deductor to avoid difficulty may deduct the tax under Section 194BA and pay to the Government. But, if cash component is not sufficient to deduct the tax, how will the tax deduction take place?
Third, an issue that is likely to be confusing under this provision is when winnings are in kind. While their valuation will be as per their fair market value, a concept that has been long recognized by the IT Act, 1961. But, where money in user account is used to buy something in kind then it will be considered as ‘net winnings in cash’ and deductor is required to deduct tax at source. Guidelines are not entirely clear on how deductor/payer will compute withholding tax liability in this scenario.
Fourth, the Guidelines clarify that Section 194BA does not apply to insignificant amounts, i.e., where the net winnings in the amount withdrawn do not exceed Rs 100 a month. But tax needs to be deducted when net winnings cross Rs 100 in the same month or subsequent month. And the deductor ‘undertakes responsibility of paying the difference’ if the balance in the user account is not sufficient at the time of deduction. The minimum threshold of Rs 100 in net winnings is thus not a simple exemption but requires the deductor to be careful when and how to deduct tax, else the deductor becomes liable for the amount that escapes tax.
The Guidelines offer clarity on a few other aspects and seem comprehensive and well-drafted to provide sufficient information to deductors – in this case online game intermediaries – about their tax withholding liabilities under the new provision.
There are only two major areas of concern regarding Section 194BA read with its Guidelines: first, that the threshold limit is too low implying that the withholding liability of deductors is likely to be triggered for a large no. of transactions on their platforms significantly adding to their tax compliance burden; second, in case of winnings involving cash and kind, the withholding tax obligations of the deductor are not straightforward and may cause confusion.
Conclusion
It is obvious that via the Finance Act, 2023 an attempt has been made to create a distinct tax regime for winnings from online games under the IT Act, 1961. Prima facie, there is nothing qualitatively different about the nature of winnings from offline games vis-à-vis online games. Further, the tax obligations/tax rates also for winnings from online vis-à-vis offline games do not differ to require standalone provisions for online games. However, the State seems to think differently. As explained:
There is a need to bring in specific provisions regarding TDS and taxability of online games due to its different nature, being easily accessible vide the Internet and computer resources with a variety of playing options and payment options. (Explanatory Memorandum to Finance Bill, 2023, page 27) (emphasis added)
Currently, we do not know the fully import of the phrase ‘different nature’. While the variety of payment options, recent popularity of online games played may have motivated the State to create a separate set of tax provisions for their winnings. It remains to be seen if the justification for a different set of provisions is borne out once these provisions are implemented.
[1] https://incometaxindia.gov.in/pages/communications/index.aspx (Accessed on 23.05.2023).