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Understanding the Amended Income Tax Rules

The amended income tax rules aim to establish a streamlined and accurate system for calculating tax liabilities on winnings derived from online gaming activities. The rise in popularity of online gaming platforms has prompted tax authorities to revise and adapt their regulations to address this evolving landscape. Let’s explore the key aspects of the amended rules. 

Inclusion of Online Gaming Winnings

Under the amended income tax rules, winnings from online gaming have been explicitly included in the purview of taxable income. This means that individuals who receive income from online gaming activities are required to declare and pay taxes on their winnings.

Meaning of Online Gaming

the term “online gaming” refers to activities where individuals participate in games or contests conducted over the internet or electronic platforms. These games typically involve players competing against each other or a computer-generated opponent.

Online gaming can encompass a wide range of activities, including but not limited to:

1. Skill-based Games: These are games where the outcome is primarily determined by the player’s skill, knowledge, strategy, or decision-making abilities. Examples include online poker, rummy, chess, fantasy sports, etc.
2. Casino-style Games: These are games that simulate traditional casino games such as roulette, blackjack, slot machines, and other games of chance that are played online.
3. Virtual Currency and In-Game Purchases: Many online games allow players to purchase virtual currency, items, or upgrades within the game. These transactions may also fall under the purview of TDS regulations.

Guideline for removal of difficulties under section (3) of section 194BA of income-tax Act, 1961.

Finance Act 2023 inserted a new section 194BA in the Income-tax Act, 1961 (hereinafter referred to as “the Act”) with effect from 1st April 2023. As per CBDT circular No. 5 of 2023 dated 22nd of May, 2023.

the latest section necessitates the designation of an individual who assumes the responsibility of disbursing payments to any recipient. These payments are constituted by the proceeds derived from various online games within a given fiscal year. To ensure compliance, the designated person is obliged to deduct income tax from the net winnings accumulated in the recipient’s user account. This tax deduction is not only applicable upon withdrawal but also at the end of the financial year. The determination of net winnings, under the prescribed methodology, has now been explicitly outlined in Rule 133 of the Income-tax Rules 1962. This comprehensive set of guidelines aims to streamline the process and foster transparency in the realm of online gaming taxation.

Guidelines issued by CBDT are as follows:

The first issue addressed by the guidelines, Understanding the Computation of “Net Winnings” for Multiple Wallets under One User.

In the world of online gaming, it is common for users to have multiple wallets across various platforms. However, calculating the “net winnings” for tax purposes can be a complex task. In this article, we will delve into the intricacies of computing net winnings concerning multiple wallets under one user and provide you with a clear understanding of the process.

Understanding User Accounts and Net Winnings

According to Rule 133, a user account encompasses every account registered with an online gaming intermediary where taxable deposits, non-taxable deposits, or user winnings are credited, and withdrawals are debited. This definition implies that each qualifying wallet should be considered a separate user account to compute net winnings.

Accounting for Multiple User Accounts

When a user possesses multiple accounts within the same gaming platform, each account should be taken into account when calculating net winnings. Deposits, withdrawals, and balances across all user accounts must be aggregated to determine the final figures.

To illustrate this, let’s consider a scenario where a user has multiple accounts under one deductor (one TAN). In this case, all the user accounts should be considered when calculating the tax required to be deducted under section 194BA of the Act. Any deposit made in these user accounts would be regarded as a deposit, either taxable or non-taxable, as per the definition in Rule 133. Similarly, withdrawals from any user account would be treated as a withdrawal.

Computing Net Winnings

To calculate net winnings for tax deduction purposes under section 194BA, the following formula should be employed:

Net Winnings = A – (B + C)

Where:

• A represents the amount withdrawn from the user account.
• B signifies the aggregate amount of non-taxable deposits made by the account owner across all user accounts during the financial year until the time of such withdrawal.

• C denotes the opening balance of the user account at the beginning of the financial year.

To determine the value of B, the non-taxable deposits in all user accounts under the same deductor (one TAN) must be consolidated. The same principle applies to calculating all other amounts required for the computation under Rule 133.

Considerations for Multiple Platforms/intermediary

In cases where a deductor (one TAN) operates multiple platforms, integrating user accounts across all platforms might not be technologically feasible. In such instances, the deductor has the option to calculate tax deductions separately for each platform concerning section 194BA. However, it is crucial to note that all user accounts under one user on a single platform must be considered when computing net winnings using the formulas provided in Rule 133.

Additionally, Rule 133 clarifies that transfers from one user account to another, maintained within the same online gaming intermediary and belonging to the same user, should not be considered withdrawals or deposits. However, if the deductor is deducting tax under section 194BA for each platform separately, transfers between user accounts across platforms within the same online gaming intermediary shall be deemed as withdrawals or deposits for net winnings calculation.

The second issue addressed by the guidelines, Understanding the Tax Implications of Borrowed Money Deposits in User Accounts.

To establish whether a deposit is taxable or non-taxable, we must first delve into the concept of non-taxable deposits. A non-taxable deposit refers to an amount of money that is acquired from already taxed income or is not subject to taxation. In the context of a user borrowing money and subsequently depositing it into their account, this particular scenario is considered a non-taxable deposit.

Rationale Behind Non-Taxable Deposits

The underlying principle behind considering borrowed funds as non-taxable deposits stems from the fact that taxation is imposed on the income earned rather than the borrowed funds themselves. When an individual borrows money, it does not represent an addition to their income; rather, it signifies an external liability. Consequently, when these borrowed funds are deposited into a user’s account, they retain their non-taxable nature as they are not directly tied to taxable income.

The third issue addressed by the guidelines, Demystifying Bonus, Referral Bonus, and Incentives in Online Gaming: A Taxation Perspective

When it comes to bonuses, referral bonuses, incentives, and similar forms of rewards provided by online game intermediaries, they are categorized as taxable deposits under Rule 133. It’s important to note that taxable deposits increase the balance in the user’s account and cannot be deducted in the calculation of net winnings. Only non-taxable deposits are eligible for deduction.

Therefore, any deposit received in the form of a bonus, referral bonus, incentives, and the like should be considered part of the net winnings. As per section 194BA of the Act, tax is liable to be deducted at the time of withdrawal and the end of the financial year.

Money Equivalent Deposits

In certain cases, deposits provided as bonuses, referral bonuses, or incentives may also be in the form of money equivalents such as coins, coupons, vouchers, or counters. In such situations, the monetary value equivalent to these deposits should be considered taxable deposits, which will consequently become part of the balance in the user’s account.

Incentives and Bonuses for Gaming Purposes Only

While some incentives or bonuses are credited to the user’s account solely for gaming purposes and cannot be withdrawn or used for any other reasons, Rule 133 provides guidance on the treatment of such deposits for the calculation of net winnings. These deposits should be excluded from non-taxable deposits and should not be included in the opening or closing balance of the user’s account. Therefore, they do not contribute to the net winnings.

However, it is essential for the person responsible for deducting tax under section 194BA of the Act to maintain separate accounts for these types of deposits to ensure accurate tax compliance.

Recharacterization of Incentives and Bonuses

In certain instances, incentives or bonuses that were initially restricted to gaming purposes may be recharacterized, allowing users to withdraw them. When such recharacterization occurs, these incentives and bonuses will be treated as taxable deposits in the year of the recharacterization. As a result, they will become part of the net winnings, subject to applicable tax regulations.

The fourth issue addressed by the guidelines, Understanding Withdrawals in Online Gaming: At What Point is an Amount Considered Withdrawn? 

To begin, it is essential to establish the parameters of what constitutes a withdrawal. According to Rule 133, as clarified in the context of online gaming, a withdrawal occurs when funds are transferred from a user account to any other account. This transfer signifies the removal of funds from your gaming account, which is subsequently reflected as a withdrawal.

User Account Transfers and Withdrawal Exceptions

While transfers between user accounts within the same online gaming intermediary do not qualify as withdrawals or deposits, it is important to note that the exception only applies when the accounts belong to the same user. In other words, if you transfer funds from your account to another user’s account within the same online gaming intermediary, it will not be considered a withdrawal or deposit.

However, any transfer from a user account to an account that is not registered with the online game intermediary (for which you are a deductor) is indeed deemed a withdrawal. This provision emphasizes the distinction between transfers within the gaming platform and transfers to external accounts, acknowledging the latter as withdrawals.

Considerations for Tax Deductions

In the realm of online gaming, certain transactions involving user accounts require careful attention to tax deductions. Section 194BA of the Act mandates tax deduction at source, and it is the responsibility of the deductor to ensure compliance. Notably, if the deductor is deducting tax under section 194BA separately for each platform, transfers between user accounts under the same online gaming intermediary across platforms are considered withdrawals or deposits for the purpose of calculating net winnings under Rule 133.

Moreover, it is imperative to recognize that when the amount in a user account is utilized to acquire coupons, goods, services, or items in kind, it is also classified as a withdrawal. In such instances, the person responsible for deducting tax must ensure that the required tax is deducted before issuing these coupons or items in kind. This provision emphasizes the importance of adhering to tax regulations and maintaining transparency in gaming-related transactions.

The fifth issue addressed by the guidelines is the Optimization of Tax Deduction Compliance for Insignificant Withdrawals in Online Gaming.

To address the compliance challenges associated with the deduction of tax at the source for insignificant withdrawals, we propose the following relaxation measures, which take into account the interests of both the gamers and the tax deductors:

Condition 1: Net Winnings Limit

• The net winnings comprised in the amount withdrawn should not exceed Rs 100 in a month. This condition ensures that withdrawals of very small amounts, which fall within the defined threshold, are exempt from tax deductions. By setting a reasonable limit, the compliance burden for both gamers and tax deductors is significantly reduced.

Condition 2: Deferred Tax Deduction

• In cases where tax is not deducted due to the aforementioned concession, it should be deducted at a later time when the net winnings comprised in a withdrawal exceed Rs 100 in the same month or subsequent month. Alternatively, if there are no subsequent withdrawals, the tax should be deducted at the end of the financial year. This provision ensures that the tax liability is met when the net winnings reach a level that justifies tax deductions, thereby maintaining compliance.

Condition 3: Responsibility of the Deductor

• The tax deductor assumes 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 insufficient to discharge the tax deduction liability. This provision ensures that the tax deductor accounts for any shortfall and promptly fulfills the tax obligations, thereby promoting compliance within the online gaming ecosystem.

The sixth issue addressed by the guidelines, Tax Deduction under Section 194BA for Net Winnings in Kind.

Section 194BA addresses two distinct scenarios based on the nature of net winnings:

Scenario 1: Net Winnings Wholly in Kind

When the net winnings are entirely in kind, the deductor must ensure that tax has been paid in respect of the net winnings before releasing them to the recipient. This implies that the deductor should request proof of payment of the applicable tax from the deductee before releasing the winnings in kind. Proof of payment may include details such as Challan receipts or other relevant documentation.

To streamline reporting procedures, the latest version of Form 26Q has incorporated provisions for reporting transactions falling under section 194BA. These updates were introduced via Notification no. 28/2023 dated 22nd May 2023, enhancing transparency and compliance in the tax deduction process.

Scenario 2: Net Winnings Partly in Cash and Partly in Kind

In situations where the net winnings consist of both cash and kind, but the cash portion is insufficient to cover the entire tax liability, further steps need to be taken. The person responsible for paying the winnings must ensure that the tax has been paid in respect of the entire net winnings before their release.

To navigate this scenario, the deductor can choose to deduct the tax amount under section 194BA and remit it to the government. This approach offers a practical solution, allowing the deductor to fulfil their tax obligations while ensuring the release of the net winnings. In the updated Form 26Q, the deductor should report this deduction as “tax deducted on net winnings under section 194BA of the Act.”

The seventh issue addressed by the guidelines, How to Determine the Value for Tax Purposes?

The basic thumb rule for the valuation of winning in kind is to value a winning in-kind on a Fair market value basis, however, there are certain exceptions for the same as well.

If an Online gaming intermediary is a trading concern of such items then 

• Winning shall be valued at a purchase price of the kind before providing it to the user.

If an Online gaming intermediary is a Manufacturing concern of such an item than

• the price that it charges to its customers for such items shall be the value for such winnings

It additionally noted that GST will not be included for the purposes of the valuation of winnings for TDS under section 194BA of the Act.

The eighth issue addressed by the guidelines, Navigating Penal Consequences: Relaxations Between Law Enforcement and Guideline Issuance

Since the implementation of the tax law on April 1, 2023, taxpayers have been required to deduct tax at source as per Section 194BA. However, due to a time lag in the issuance of Rule 133 or relevant Circular, taxpayers may have encountered challenges in fulfilling their tax deduction responsibilities for the month of April 2023.

Relaxation on Penal Consequences

To address the potential shortfall in tax deductions during the aforementioned period, the tax authorities have provided a relaxation for taxpayers. If taxpayers have been unable to fulfil their tax deduction obligations due to the delay in the issuance of Rule 133 or the relevant Circular, they are given the opportunity to rectify the situation without incurring penal consequences.

Recommended Action

Taxpayers who experienced a shortfall in tax deductions for the month of April 2023 can rectify the situation by depositing the shortfall along with their tax deductions for the month of May 2023. This must be done by the end of June 2023 to ensure compliance and avoid any penal consequences.

Importance of Timely Compliance

It is crucial for taxpayers to promptly address any tax deduction shortfalls to maintain compliance with the tax regulations. By depositing the shortfall within the specified timeframe, taxpayers can mitigate the risk of penalties and ensure smooth tax operations.

For complex or specific cases, it is advisable to seek professional guidance from tax experts or chartered accountants. They can provide valuable insights and ensure accurate compliance with TDS provisions.

Posted By: Salman Khan

www.linkedin.com/in/ksalman873