The Finance Act 2023 introduced a new section, 194BA, in the Income-tax Act, 1961, which mandates the deduction of income tax on net winnings from any online game.
The guidelines issued vide Circular No. 5/2023 dated 22/05/2023 by the CBDT aim to provide clarity on the computation of net winnings, treatment of different types of deposits, withdrawal points, and tax deduction obligations under section 194BA.
These guidelines are binding on income-tax authorities and individuals responsible for deducting income tax.
Q There are multiple wallets under one user. How "net winnings" is to be computed with respect to multiple wallets of one user?
A According to Rule 133, every user account registered with an online gaming intermediary is considered for the calculation of net winnings.
If a user has multiple wallets under one deductor (one TAN), each user account must be considered individually. The deposit, withdrawal or balance in the user account shall mean aggregate of deposits, withdrawals or balances in all user accounts.
The calculation of net winnings for tax deduction purposes is as follows:
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A = Amount withdrawn from the user account;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 financial year, till the time of such withdrawal; [Non-taxable deposits consist of amounts not subject to tax or derived from already taxed income.]
and C = Opening balance of the user account at the beginning of the financial year
The non-taxable deposits in all user accounts under one deductor must be aggregated. However, if the deductor has multiple platforms and integrating user accounts is not feasible, tax deduction can be calculated separately for each platform. In that case, all user accounts under one user on a single platform should be considered for calculating net winnings.
Q If a user borrows some money and deposits in his user account, will it be considered taxable deposit or non-taxable deposit?
A When a user borrows money and deposits it in their user account, it is considered a non-taxable deposit.
Q How will bonus, referral bonus, incentives etc. be treated?
A Bonuses, referral bonuses, incentives, etc., provided by the online game intermediary are considered taxable deposits. These deposits increase the user account balance and should not be deducted when calculating net winnings. Only non-taxable deposits are allowed to be deducted. However, if incentives/bonuses are credited solely for playing purposes and cannot be withdrawn or used for other purposes, they are ignored for net winnings calculation. Thus they shall not be included in non-taxable deposit and they shall also not be included in opening balance or closing balance of user account. However, person liable to deduct tax under section 194BA of the Act must keep separate accounts of such deposits
If these incentives/bonuses are recharacterized and allowed to be withdrawn, they become taxable deposits in the year of recharacterization.
Q At what point we consider that amount has been withdrawn?
A Transfers between user accounts maintained with the same online gaming intermediary are not considered withdrawals or deposits. However, when the amount is withdrawn from a user account to any other account not registered with the online gaming intermediary, it is considered a withdrawal. Similarly, when coupons, vouchers, or items in kind are issued as part of winnings, they are also treated as withdrawals. The deductor must ensure that tax is deducted before issuing such coupons or items in kind.
Q There are a large number of gamers who play with very insignificant amount and withdraw also very small amount. Deducting tax at source under section 194BA of the Act for each insignificant withdrawal would increase compliance for tax deductor. Can there be relaxation to ease compliance?
A To ease compliance for tax deductors regarding insignificant withdrawals, tax may not be deducted if the net winnings in the amount withdrawn do not exceed Rs 100 in a month.
If this concession applies, tax should be deducted when the net winnings in a withdrawal exceed Rs 100 in the same or subsequent month, or at the end of the financial year if there are no such withdrawals. The deductor is responsible for paying the difference if the user account balance is insufficient to cover the tax liability.
Q When the net winnings is in kind how will tax deduction under section 194BA operate?
A If the net winnings are wholly or partly in kind and the cash component is insufficient to meet the tax deduction liability, the person responsible for payment must ensure that tax has been paid before releasing the winnings. The deductor can release the net winnings in kind after the deductee provides proof of tax.
In case the deductee fails to provide proof of tax deduction payment, the deductor is required to deduct tax at the prescribed rate before releasing the net winnings in kind.
Q How will the valuation of winnings in kind required to be carried out?
A The valuation of winnings in kind will be based on the fair market value of the items won, except in certain cases. If the online game intermediary has purchased the winnings before providing them to the user, the purchase price will be considered as the value for the winnings. Similarly, if the online game intermediary manufactures the items given as winnings, the price charged to customers for such items will be considered as the value for the winnings. It's important to note that the valuation should not include GST for the purpose of tax deduction at source under section 194BA of the Act.
Q These guidelines have been issued after 1.4.2023 while the law has come into effect from 1.4.2023. Will there be any relaxation on penal consequences in the intervening period i.e. between 1.4.2023 and the date on which the Rules/guidelines are issued?
A Taxpayers were expected to deduct tax at source under section 194BA even before the issuance of Rule 133 or these guidelines. It is assumed that taxpayers have fulfilled this responsibility. However, if there is a shortfall in tax deduction due to the time lag in issuing Rule 133 or these guidelines, for the month of April 2023, the shortfall amount may be deposited along with the tax deduction for the month of May 2023 by 7th June 2023. In such cases, no penal consequences will be imposed.
This Article was authored by Tushant a passionate blogger by .
Co-founded Tax Ninja with the aim to serve knowledge digitally.
He's on a valiant quest to share his knowledge of Income Tax and GST.
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