As per Lumikai report, the industry clocked a revenue of $2.6 billion in financial year 2021-22 and is likely to cross $8.6 billion by financial year 2026-27. The Animation, Visual Effects, Gaming and Comic (AVGC) Promotion Task Force was announced in Budget 2022 to boost the domestic capacities and develop the opportunity landscape for the world. The industry expects a positive push in Budget 2023 to make India a global hub for gaming as recommended by AVGC Task Force in their report Realising AVGC-XR Sector Potential in India, released on 26.12.2022.
The report provided the framework to boost the online gaming sector and legislative enablers for the same. Among various recommendations of the task force, it was proposed to formulate a national framework for online skill gaming that protects interest of the users and self-regulation. The formalisation of self-regulatory regime along with National AVGC-Extended Reality Mission can be expected in the Budget 2023. Steps have already been taken with respect to notifying the nodal ministry for online gaming and e-Sports; draft rules for gaming intermediaries notified for public comments. The report also discussed commissioning of a ‘Game Development Fund’ along with the industry to promote and educate players on responsible gaming, wherein the companies contribute 1% of their annual net profits to promote and educate stakeholders.
It is anticipated that Budget 2023 will also allocate funds for implementation of the recommendations of the AVGC Task Force as well as setting up of the ‘Game Development Fund’. It is also anticipated the Budget 2023 will lay a road map for further developments in the online gaming sector and the direction for the self- regulatory development in the sector. The sector requires positive regulatory support along with progressive taxation for next phase of growth.
Taxation for the online gaming sector
As recommended by the AVGC Report, progressive taxation based on best international practices should be adopted for online gaming. Progressive income tax laws need to be adopted in light of the business dynamics and ease of cross border operation of the gaming companies. The UK and France made progressive legislative changes to attract gaming operators. Earlier online gaming operators moved to offshore locations due to regressive income tax regimes in these countries. The change in taxation laws helped the UK economy by shifting the gaming operators’ base to UK.
Increasing the threshold for Tax Deduction (TDS) on winnings from online games
The Central Board of Direct Taxes (CBDT) Chairman Nitin Gupta in media interactions said that Budget 2023 would bring about some tweaks in the TDS provision for online gaming to check tax evasion. There are two important parts to the tax provisions under the Income-tax Act, 1961 in relation to the online gaming sector.Firstly, the winnings from online games, are deemed to be income of the players and are taxed under the head income from other sources in the hands of the players (winners) as per current income tax laws. Secondly, an online gaming company is required to deduct tax on these winnings at the rate of 30% on winnings exceeding a prescribed threshold of Rs 10,000 per game. This means that every time an individual plays a game and wins more than Rs 10,000, TDS at the rate of 30% would be deducted from the amount won.
Currently, if an individual pays Rs 5000 to play an online game and wins Rs 35,000 then TDS will be applicable only on Rs 30,000 (Rs 35,000 – Rs 5,000). in an online game net of entry fee , tThe company will deduct tax at 30% on Rs 30,000, i.e., Rs 9,000, and deposit against the PAN of the individual with the government. The balance Rs 21,000 will be deposited into the individual’s bank account.
The tax deduction from winnings serves not only as a method of advance tax collection but also enables the taxman to track the winnings and ensure that the players include these winnings in total income declared in his/her income tax return.
There are concerns in the sector that reduction in threshold for tax deduction may reduce the user participation on gaming platforms and may act as a deterrent to growth of the sector.
Further, this measure will not only increase compliance burden (return filings and reconciliations) but also result in significant tax deduction in cases where the winnings are not taxable (due to set-off in the hands of player or income taxable at nil or lower rates).
Taking a pragmatic view, if tax is deducted on nominal winnings (which may not even be taxable in the hands of players), the players will be disincentivised from playing these online games. This will not only stunt the flourishing sector but will also lower revenue collection.
Thus, any such the amendment may be counter-productive to the desired objective. It is also worth mentioning here that there are various unorganised platforms which allow players to participate in various kinds of games. These platforms operate in a parallel economy and thereby do not contribute towards taxes and employment. If players suffer high tax deduction on income, they may be discouraged from participating in games on organised platforms. Thus, subjecting users to tax deduction on nominal winnings and that too, without allowing set-off may act against the interest of the sector.
TDS clarification needed
The sector also expects clarification on the applicability of TDS on winnings from games and compliance to be undertaken by the gaming operators. Tax authorities had initiated enquires on PAN data, maintained by the operators, of the players. One would argue that the gaming operators should not be obligated with correctness of data submitted by the players. Amendments clarifying the scope of provisions may go a long way in providing certainty of taxation for the gaming companies and the users.
The said ambiguities result in divergent practices across different categories of games. There also exist ambiguities on the timing when the tax is required to be withheld especially in the prevailing wallet system in online gaming. Further, there are also ambiguities regarding requirement of tax deduction under section 194R by online gaming companies and specially bifurcation of benefits/perquisites provided to casual users and professionals. Clarification of these ambiguities will surely be a welcome move and will provide certainty to both the industry and the players.
GST rate and valuation: Budget expected to maintain status quo
The Union government will await the recommendations of the GST council on the report submitted by the Group of Ministers (GoM) before announcing any changes in the Budget. The status quo will continue on the GST Rate and Valuation issues investigated by the department. Most countries including USA, UK, Australia, Singapore, follow Gross Gaming Revenue (GGR) tax model.
Any increase in tax which increases the tax liability for gaming companies which will make the industry unviable. Such detrimental impact on a sunrise sector may increase the number of illegal portals in grey market. The sector also eagerly awaits the decision of the High Court of Karnataka in the Gameskraft matter.
Overall, the gaming sector’s expectations from the forthcoming budget are: Formalization of self-regulatory regime, AVGC-Extended Reality Mission and mechanism for Setting up of Game Development Fund as recommended by AVGC taskforce and progressive tax regime for games of skill.