Guidelines on withholding Tax on Winnings from Online Gaming

Section 194BA of the Income Tax Act, 1961(ITA), compulsorily requires a person, who is responsible for paying to any person any income by way of winning from any online game during the financial year to withhold tax at the rate of 30% on of net winnings in his user account, effective from 1 April 2023.

Tax is required to be deducted at the time of withdrawal of winnings, as well as on the remaining amount of net winnings in the user account, at the end of the financial year.

Net winnings are to be computed as prescribed under Rule 133 of the Income Tax Rules 1962, vide notification no. 28/2023 dated 22^nd May 2023.

Central Board of Direct Taxes (CBDT) issued the guidelines vide Circular No. 05 of 2023 dated 22 May 2023. The key points are as follows:

Question1). There are multiple wallets under one user. How "net winnings" is to be computed with respect to multiple wallets of one user?

Answer: Every wallet/account of the user (by whatever name called) is registered with the online gaming intermediary and where any taxable deposit, non-taxable deposit, and winnings of the user are credited and withdrawals made by the user are debited, shall considered as the account for the purpose of calculating the ‘Net Winnings’

• Further, whenever there are multiple wallets/accounts of the same user, each such wallet/account shall be considered for the purposes of calculating net winnings. The deposit, withdrawal, or balance in the user account shall mean the aggregate of deposits, withdrawals, or balances in all such wallets/ accounts

• For illustration, suppose a user has multiple user accounts/wallets under one deductor (one TAN). For the purposes of calculating the tax required to be deducted, each of these user accounts/wallets is to be considered. A deposit in any of these user accounts would be considered a deposit (non-taxable or taxable as per the definition in Rule 133) and withdrawal from any user accounts would be considered a withdrawal.

Question 2). If a user borrows some money and deposits it in his user account, will it be considered a taxable deposit or a non-taxable deposit?

Answer: For a non-taxable deposit, it is necessary that the amount deposited by the user is not taxable, in a case where the user borrows the money and deposits it in his user account, it shall be considered as a non-taxable deposit.

Question 3). How will bonuses, referral bonuses, incentives, etc. be treated?

Answer: Any deposit in the form of a bonus, referral bonus, incentives, etc would form part of net winnings, and withholding tax under section 194BA of the Act is liable to be deducted at the time of withdrawal as well as at the end of the financial year.

Question 4). At what point do we consider that amount has been withdrawn?

Answer: Transfer from one user account to another user account, maintained with the same online gaming intermediary, of the same user shall not be considered a withdrawal or deposit, as the case may be. However, when the amount is withdrawn from the user account to any other account, it shall be considered a withdrawal.

Question 5). There are a large number of gamers who play with very insignificant amounts and withdraw also very small amounts. 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?

Answer: Section 194BA of the ITA shall not be applicable if all of the following conditions are satisfied:

• net winnings comprised in the amount withdrawn does not exceed Rs 100 in a month;
• Tax not deducted on account of this concession is deducted at a time when the net winnings comprised in withdrawal exceeds Rs 100 in the same month or subsequent month or if there is no such withdrawal, at the end of the financial year; and
• The deductor undertakes the responsibility of paying the difference if the balance in the user account at the time of tax deduction under section 194BA of the Act is not sufficient to discharge the tax deduction liability.

Question 6). When the net winnings are in kind how will tax deduction under section 194BA operate?

Answer: where the net winnings are wholly in kind or partly in cash, and partly in kind and the part in cash is not sufficient to meet the liability of deduction of tax in respect of the whole of the net winnings. In these situations, the person responsible for paying, shall, before releasing the winnings, ensure that tax has been paid in respect of the net winnings.

In the above situation, the deductor will release the net winnings in kind after the deductee provides proof of payment of such tax (e.g. Challan details, etc.).

Question 7). How will the valuation of winnings in kind be required to be carried out?

Answer: The valuation would be based on the fair market value of the winnings in kind except in the following cases:-

• The online game intermediary has purchased the winnings before providing them to the user. In that case, the purchase price shall be the value of winnings.
• The online game intermediary manufactures such items given as winnings. In that case, the price that it charges to its customers for such items shall be the value for such winnings.

Question 8). 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 I guidelines are issued?

Answer: if there is a shortfall in the deduction of tax due to a time lag in the issuance of Rule 133 or this Circular, for the month of April 2023 that shortfall may be deposited with the tax deduction for the month of May 2023 by 7^th June 2023. In that case, there will not be any penal consequences.

Last updated: 01/06/2023

Article contributed by:

Direct Tax Team

MBG Corporate Services