TDS On Online Gaming Winnings From April 1: Here's How It Will Impact Platforms

The compliance challenge for online gaming operators has gone a level higher. Starting April 1, 30% tax deducted at source will apply on withdrawals of net winnings.

The new rules were expected to come into effect from July 1. However, this changed after the announcement of the Finance Bill, 2023 amendments last week. That gives a shorter window to gaming platforms.

Apart from this, challenges lie in the larger systemic changes expected from companies, including tracking and reporting.

Prior to the 2023 budget announcement, platforms had to contend with taxing winnings above the threshold of Rs 10,000 on a per game basis. Sections 194BA and 115BBJ of the Finance Bill removed the threshold and prescribed a rate of 30% to be levied on the net winnings.

Net winnings are calculated after deducting principal entry amount and on tallying individual wins and loss at multiple games.

The previous provision allowed a user to rack up multiple lower individual winnings (below the threshold of Rs 10,000) and not face tax deduction. Without tax deduction at source, the responsibility of tax payment fell entirely on the user who had to file the return, calculate their net winnings and pay the tax at the end of the year.

The new amendment has three changes, according to S Vasudevan, executive partner, Lakshmikumaran & Sridharan Attorneys.

• No TDS applicability at each instance of winning. TDS is calculated only on net winnings.

• Option to offset loss against win is now allowed.

• The payment of TDS can be deferred till the time of actual withdrawal from the gaming wallet to the bank account.

If a user decides to keep some of his/her money parked in the wallet, then the operator will calculate the TDS only for the amount withdrawn, Vasudevan said. The wallet balance will also attract a TDS, but only at the end of the financial year.

“So, by default TDS deduction will happen at the end of the year. In case the user decides to withdraw the winnings during the year, then it will be calculated at the time of withdrawal,” Vasudevan said. "The calculations will take into account the amount that is already withdrawn and suffered a tax. That will not suffer a tax again."

The latest TDS amendment places the onus of compliance on the company or gaming platform, as they need to calculate net winnings at the time of withdrawal and submit the TDS, according to Mitesh Gangar, co-founder and director at PlayerzPot Media Pvt., a fantasy sports and casual gaming app.

“The user will not need to worry about computing their tax liability which was not the case before," he said.

Gangar's concern is the lack of a minimum threshold amount. Without a threshold, even smaller values on withdrawal will be taxed. Since many users deal in small amounts, compliance will become a little difficult for companies who have to deal with the TDS computation for an increased number of users, he said.

PlayerzPot experiences a daily footfall of 25,000-30,000 users, which goes up to even 3.5 lakh during major cricket tournaments.

WinZO Games, a social gaming platform, which has a monetisation model led by these micro-transactions, also faces a similar challenge which distinctly pertains to its target audience. Over 80% of its user base utilises the application in vernacular languages and participates from tier 2 to 5 five cities, according to WinZO.

“A majority of the users of gaming platforms such as WinZO undertake micro-transactions. On average players spend Rs 200-300 per month on the platform. Most users of WinZO pay anywhere from Rs 1 to Rs 50,” said Saumya Singh Rathore, co-founder, WinZO.

While she views the development as a positive one, the compliance increase would outweigh the benefits without a meaningful contribution to the tax revenues for a company like WinZO, which sees billions of monthly micro-transactions, according to her.

“This will cast an unprecedented compliance burden for crores of users to ensure deduction, deposit, reporting of TDS, reconciliation, and issuance of TDS certificates for a substantially high number of transactions, regardless of winnings earned,” Rathore said.

She expects the government to reconsider the introduction of a de-minimus threshold for section 194BA.

PlayerzPot's Gangar also feels a minimum threshold of Rs 1,000 or Rs 2,000 would help segregate smaller transactions and reduce the load on companies.

Bringing the change into effect would necessitate keeping track of each game played and ensuring each user is know your customer compliant.

“The ability to collect data or track every transaction is going to be a hurdle, especially because there is no threshold now. Doing KYC-related formalities for each transaction, such as getting PAN details, address proof, etc., is going to be a huge exercise for the industry,” according to Madhukar Dhakappa, partner, Price Waterhouse & Co.

The advancement of the applicability of the new tax provision to April 1 comes with challenges in setting up systems and integrating it with the withholding function from the first day of the fiscal, Dhakappa said.

According to Gangar, there is a small risk that a 30% tax might be perceived as a big amount for users who are looking to withdraw a small amount. This could hamper their motivation to participate.

While it's a challenge, Gangar said his company welcomes the move. "What remains to be seen is how users will react to it."

The E-Gaming Federation, however, does not foresee micro-transactions to be a big hassle given the evolving nature and the agility of the industry.

In fact, this is where the concept of net winnings becomes relevant, according to Malay Kumar Shukla, secretary, EGF.

“It is not an individual game-based regime anymore and one would have to see it from a time period perspective, where tax is calculated at the time of withdrawal or at the end of the financial year,” Shukla said.

He is confident that operators will be able to comply with these provisions with some additional engineering effort.

“Even if the transactions are micro-transactions, their systems will be able to handle it as they already deal with millions of transactions on a real time basis throughout the day,” he said. “Withdrawals also happen usually when there is a substantial amount to withdraw. Historically, users wait to accumulate sufficient winnings before withdrawing."

All that remains now are the guidelines on calculating net winnings for the purpose of TDS, which will be issued by the Central Board of Direct Taxes.

Attorney Vasudevan is optimistic that there is a silver lining for each stakeholder through this amendment.

The amendment is designed to help the government track the users, their winnings and ensure due tax is paid. “To some extent, the final tax regime (paid at the end of the year by users on income earned) and the operator enforced TDS regime are getting synchronised,” Vasudevan said.

The decision provides a lot of clarity for operators, according to him. This is because they had to deduct and deposit at the end of every game’s winning before.

For users, TDS will now be based on net winnings with a provision to offset loss against total winnings, he said.