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Tax Implication on profit earned by playing Online Games
Ravindra Tribhuvan
The online gaming industry has experienced tremendous growth in recent years due to a younger population, higher disposable income, low-cost internet data, the introduction of new gaming genres, and an increasing number of smartphone users. According to global audit firm KPMG, the Indian mobile gaming industry is expected to be worth around Rs 29,000 crore by 2024-25. This newly developed and booming form of earning also poses questions regarding its legality, taxation and other socio-economic aspects involved.
Legality of Online Gaming
In India, betting and gambling are generally prohibited, with exceptions in certain states. According to the constitution, only state governments have the authority to enact laws related to betting and gambling. However, the lack of a clear definition of "games of skill" and the inconsistent use of terminology have often resulted in the regulation of games of chance being applied to games of skill in most states.
The determination of whether a game is one of skill or chance is often based on the degree of skill required to play it. In the case of Ravindra Singh Chaudhary V. Union of India, ((2020) 4 RLW 3322 (Raj), the Rajasthan High Court held that the fantasy games such as Dream 11 involve skills that must be employed by the player in order to win. It was argued that playing these fantasy games requires knowledge and strategy related to the real-life game and players, and the outcome of the fantasy game is based on this knowledge and strategy rather than the outcome of the real-world game or event.
In the case of State of Bombay v. R.M.D. Chamarbaugwala & Anr., (AIR 1957 SC 699), the Supreme Court determined that contests that require a significant level of skill do not constitute gambling activities as the supreme court has believed that the citizens od India should thrive for skills than for luck.
Income Tax on Prize Money
According to income tax law, any income earned from online games, including but not limited to lotteries, crossword puzzles, card games, horse races, betting, and gambling, is considered taxable under the category of "Income from Other Sources" as outlined in section 115BB of the Income Tax Act, 1961 (hereinafter as ITA, 1961). This provision applies to all types of games, regardless of whether they involve skill or chance, and the tax rate for these winnings is set at 30%. It is important to note that at the time the ITA, 1961was enacted, Indian jurisprudence did not distinguish between games of skill and chance, which is why all types of games are included in this monolithic category. According to section 115BB of ITA, 1961–
"Tax on winnings from lotteries, crossword puzzles, races including horse races, card games and other games of any sort or gambling or betting of any form or nature whatsoever.
Where the total income of an assessee includes any income by way of winnings from any lottery or crossword puzzle or race including horse race (not being income from the activity of owning and maintaining race horses) or card game and other game of any sort or from gambling or betting of any form or nature whatsoever, the income-tax payable shall be the aggregate of—
(i) The amount of income-tax calculated on income by way of winnings from such lottery or crossword puzzle or race including horse race or card game and other game of any sort or from gambling or betting of any form or nature whatsoever, at the rate of thirty per cent; and
(ii) The amount of income-tax with which the assessee would have been chargeable had his total income been reduced by the amount of income referred to in clause (i)."
No Deduction of Expenditure Allowed
It is important to note that under Indian tax laws that income tax must be paid on the full amount of any winnings from fantasy sports games, and no deductions for expenses or allowances are permitted when calculating this income. Also, Section 58(4) of the ITA, 1961states that no deductions or expenses can be claimed in relation to this type of income. It is worth noting that users of these games often incur participation costs, which some stakeholders believe should be deductible from the taxable amount. However, the ITA, 1961 does not explicitly allow for this exemption for "games of skill," leaving the interpretation of this provision up to the discretion of tax authorities, and in case of disputes, upon courts. According to section 58(4) of ITA, 1961: -
"In the case of an assessee having income chargeable under the head" Income from other sources", no deduction in respect of any expenditure or allowance in connection with such income shall be allowed under any provision of this Act in computing the income by way of any winnings from lotteries, crossword puzzles, races including horse races, card games and other games of any sort or form, gambling or betting of any form or nature, whatsoever."
As an example, consider a scenario where a player (X) participates in five fantasy sports contests in a single live match, betting INR 1,000 in each contest. X loses four contests but wins one, receiving a prize of INR 5,000. In total, X has spent INR 5,000 on the contests, but because the winnings are considered taxable income under Indian tax law, X must pay a tax of 31.2% on the INR 5,000 prize money. According to Section 58(4) of the ITA, 1961, no deductions for expenses (such as the entry fees in this case) can be claimed against this type of income. Even though X has not actually earned any money in this scenario, he is still required to pay tax on the prize money he received.
TDS on prize money/ winnings
According to section 194B of the ITA, 1961, the platform responsible for distributing winnings will be required to deduct tax at the source if the amount of the winnings exceeds INR 10,000 per contest. The platform will provide information about the tax deduction at source (TDS) in the Form-26AS. The users will be able to claim credit for the TDS when filing their income tax return. Section 194B of ITA, 1961 states-
“Winnings from lottery or crossword puzzle.―
The person responsible for paying to any person any income by way of winnings from any lottery or crossword puzzle or card game and other game of any sort in an amount exceeding ten thousand rupees shall, at the time of payment thereof, deduct income-tax thereon at the rates in force.”
References:
https://www.ikigailaw.com/wp-content/uploads/2021/03/IL-and-IAMAI_Digital-gaming-report_02032021.pdf
https://taxguru.in/income-tax/fantasy-sports-taxation.html
https://www.taxmann.com/post/blog/6426/winnings-from-online-games-might-have-to-pay-higher-tax/?amp
Sophie Asveld
February 14, 2019
Email is a crucial channel in any marketing mix, and never has this been truer than for today’s entrepreneur. Curious what to say.
Sophie Asveld
February 14, 2019
Email is a crucial channel in any marketing mix, and never has this been truer than for today’s entrepreneur. Curious what to say.