The Finance Act of 2023 introduced a new section called 194BA in the Income-tax Act of 1961. This new section, which came into effect on April 1, 2023, states that anyone responsible for paying winnings from online games must deduct income tax from the net winnings in the user’s account. The tax should be deducted when making withdrawals and at the end of the financial year. The computation of net winnings is outlined in Rule 133 of the Income-tax Rules 1962, as notified in the Notification 28/2023 dated 22/05/2023.
Under section 194BA(3), the Central Board of Direct Taxes (CBDT) is authorized to issue guidelines, with prior approval from the Central Government, to address any difficulties that may arise. These guidelines/clarifications are binding on the income-tax authorities and individuals responsible for deducting income tax:
CBDT Income Tax Circular 5/2023 dated 22/05/2023: Clarifications/Guidelines for TDS u/s 194BA on Winnings from Online Games
1. How is “net winnings” calculated when a user has multiple wallets?
According to Rule 133, a user account includes every account registered with an online gaming intermediary where deposits, winnings and withdrawals are recorded. Each qualifying wallet is considered a user account for calculating net winnings.
Rule 133 further states that when a user has multiple accounts, each account is considered separately for calculating net winnings. The deposits, withdrawals and balances of all user accounts are aggregated.
For example, if a user has multiple accounts under one deductor, each account is considered for calculating tax deductions under section 194BA. Deposits in any of these accounts are considered as taxable or non-taxable deposits and withdrawals from any account are considered as withdrawals.
To calculate net winnings for tax deductions under section 194BA, the following formula is used:
Net winnings = A – (B + C)
Where:
A = Amount withdrawn from the user account
B = Aggregate amount of non-taxable deposits made in the user account by the owner during the financial year, until the time of withdrawal
C = Opening balance of the user account at the beginning of the financial year
For calculating amount B, non-taxable deposits in all user accounts under the same deductor are aggregated. The same principle applies to other calculations under Rule 133.
However, if the deductor has multiple platforms and integrating user accounts across platforms is not technologically feasible, the deductor may choose to calculate tax deductions separately for each platform. But even in that case, all user accounts under one user in one platform must be considered for calculating net winnings according to the formulas in Rule 133.
It’s important to note that Rule 133 clarifies that transfers between user accounts maintained with the same online gaming intermediary and the same user are not considered as withdrawals or deposits. However, if the deductor is deducting tax separately for each platform, transfers between user accounts under the same online gaming intermediary across platforms are considered as withdrawals or deposits for calculating net winnings under Rule 133.
2. Is it taxable to deposit borrowed money into a user account?
To be considered a non-taxable deposit, the amount the person deposits must come from income that has already been taxed or is not subject to taxation. If a person borrows money and puts it in their user account, it will be considered a non-taxable deposit.
3. How will bonuses, referral bonuses and incentives be handled?
Bonuses, referral bonuses and incentives are provided by the online game platform to the user. According to Rule 133, they are considered taxable deposits. These taxable deposits increase the user’s account balance but cannot be deducted when calculating net winnings. Only non-taxable deposits can be deducted. Therefore, any deposit in the form of a bonus, referral bonus or incentive will be included in the net winnings and will be subject to tax under section 194BA. This tax will be deducted at the time of withdrawal and at the end of the financial year.
Some deposits may also be in the form of money equivalents, such as coins, coupons, vouchers or counters. In such cases, the equivalent monetary value of these deposits will be treated as taxable deposits and will contribute to the user’s account balance.
However, there are some incentives or bonuses that are credited to the user’s account solely for the purpose of playing and cannot be withdrawn or used for other purposes. Rule 133 states that these deposits should be excluded when calculating net winnings. Therefore, they should not be considered non-taxable deposits, opening or closing balances of the user’s account or part of the net winnings. However, the person responsible for deducting tax under section 194BA of the Act must keep separate records of these deposits.
Furthermore, if these incentives or bonuses are later recharacterized and allowed to be withdrawn, they will be treated as taxable deposits at the time of recharacterization. Therefore, they will be included in the net winnings in the year of recharacterization.
4. When do we consider an amount to be withdrawn?
To determine if an amount has been withdrawn, we need to consider the following points:
i) According to Rule 133, transferring funds between user accounts within the same online gaming platform for the same user does not count as a withdrawal or deposit. However, if the amount is taken out of the user account and transferred to another account, it is considered a withdrawal.
ii) Additionally, for the deductor, any user account not registered with the online gaming platform they are associated with is considered a non-user account and any transfer from a user account to such an account is treated as a withdrawal.
iii) Furthermore, if the amount in the user account is used to obtain coupons or services or if items in kind are issued, those transactions are also considered withdrawals. It is the responsibility of the person who needs to deduct tax at source under section 194BA to ensure that the required tax is deducted before issuing such coupons or items in kind.
It’s important to keep in mind the clarification provided in response to Question 1. It states that if the deductor is deducting tax separately for each platform under section 194BA, transferring funds between user accounts across platforms within the same online gaming intermediary will be considered withdrawals or deposits when calculating net winnings under Rule 133.
5. Any relaxation from TDS Compliance?
Many gamers play with small amounts and withdraw small amounts as well. Deducting tax for each small withdrawal under section 194BA of the Act can make it difficult for the tax deductor to comply. Is there a possibility of relaxing the rules to make compliance easier? The answer is that to address the difficulty of deducting tax for insignificant withdrawals under section 194BA, it is clarified that tax may not be deducted if the following conditions are satisfied:
(i) The net winnings included in the withdrawn amount do not exceed Rs 100 in a month.
(ii) If the tax is not deducted due to this concession, it should be deducted when the net winnings in a withdrawal exceed Rs 100 in the same month or subsequent month. If there are no such withdrawals, the tax should be deducted at the end of the financial year.
(iii) The deductor is responsible for paying the difference if the balance in the user account at the time of tax deduction under section 194BA is not enough to cover the calculated tax deduction liability according to Rule 133.
6. TDS on Winnings in Kind?
When the winnings are received in kind or in the form of goods instead of money, how does the tax deduction work under section 194BA? To begin with, if the money in a user’s account is used to purchase such goods and then given to the user, it is considered as cash winnings. In such cases, the entity responsible for payment is required to deduct tax at the source according to section 194BA(1).
However, there might be situations where the winnings of a game are in kind or in the form goods or non-monetary prizes. In these cases, the provisions of sub-section (2) of section 194BA come into effect. According to this provision, if the net winnings are entirely in goods or partly in cash and partly in goods, but the cash portion is not enough to cover the tax deduction liability for the entire net winnings, the person responsible for payment must ensure that the tax has been paid before releasing the winnings. In such situations, the deductor will release the non-monetary winnings once the recipient provides evidence of tax payment, such as Challan details. This year, Form 26Q has also included provisions for reporting such transactions under section 194BA, as stated in Notification 28/2023 dated 22/05/2023.
Alternatively, to simplify the process and address any difficulties, the deductor can deduct the tax under section 194BA and pay it to the government. In Form 26Q, the deductor will need to indicate this as the tax deducted on net winnings under section 194BA of the Act.
7. Valuation of Winnings in Kind?
Next important question is that how will the assessment of the value of non-monetary prizes be done? CBDT has clarified that the assessment will be based on the fair market value of the non-monetary prizes, unless the following situations apply:
(i) If the online game intermediary has bought the prizes before giving them to the user, then the purchase price will be considered as the value of the prizes.
(ii) If the online game intermediary manufactures the items given as prizes, then the price charged to customers for those items will be considered as the value of the prizes.
It is important to note that the Goods and Services Tax (GST) will not be included when determining the value of the prizes for Tax Deduction at Source (TDS) purposes under Section 194BA.
8. Any relaxation from Penalties?
The guidelines and rules relating to winnings from online games have been issued after 01/04/2023, when the law u/s 194BA became effective. Stakeholders may think of whether there will be any relaxation regarding penalties in the intermitant period?
CBDT has clarified thet taxpayers were expected to deduct taxes at the source according to section 194BA, even before the issuance of Rule 133 or this circular containing guidelines/clarifications. It is assumed that they fulfilled this responsibility. However, if there was a delay in issuing Rule 133 or this Circular, resulting in a shortfall in tax deduction for the month of April 2023, that shortfall can be deposited along with the tax deduction for the month of May 2023 by June 2023. In this case, there will be no penal consequences.