The Gaming Industry Is Staring At A TDS Conundrum, Can Be Solved Through Simple Changes

We have seen tremendous activity around the online gaming sector recently, with the government finally recognising the significance and contribution of this sunrise sector in the AVGC-XR Task Force report, as well as the draft MeitY rules to regulate the sector, released in January. Union Budget 2023 and the proposed Finance Bill 2023 that followed finally distinguished online gaming from gambling and betting activity adding further clarification to upcoming regulation and laying a strong foundation for future growth.

Following this, there have also been clarifications to the tax code – something that has been discussed at length by the industry stakeholders and watchers. However, developing regulation is a complex process and while changes to the structure of Tax Deductible at Source (TDS) has been largely welcomed by the gaming industry, it also poses a conundrum, and potentially, difficulties for the future.

So what has changed?
In the Finance Bill, the CBDT has proposed amendments to the existing section 194B of IT Act to exclude online gaming and created a new section 194BA to tax “net winnings” from online gaming. A new separate section 115BBJ has also been proposed with the rate of taxation for online gaming at 30%. Additionally, the amendment to section 194B proposes to change the taxation methodology from 30% winning over 10,000 to 30% on aggregate winning over 10,000 in the financial year.

How does this impact the industry
While the amendment to 194B is effective 1st April 2024, the new section 194BA kicks in only starting July 01, 2024. This means that the online gaming industry may have to completely overhaul its compliance framework in accordance with the amendment in 194B for three months i.e. from 1st April 2023 to 30th June 2023, before doing it all over again for section 194BA in July. This will entail a huge compliance cost burden for the industry.

And that’s just one of the problems:

The challenge is also that between 1 April 2023 and 1 July 2023, taxation changes in a significant manner. As per the amended section – 194B, online games are to be taxed on “aggregate winnings” above Rs 10,000 at the rate of 30%. And post 1st July, 2023 the users are taxed on net winnings, there may arise a situation where reconciliation may become an issue for both users and platforms, leading to short deductions in case of user withdrawals.

Platforms are not equipped to recover TDS amounts from users who have varying withdrawal and winning patterns.

Now multiply this by tens of crore players, and it is clear that this interim three-month period is going to create chaos and confusion. And this doesn't even begin to consider the mass confusion that is almost guaranteed among the users.

Difficulty of doing business
For online gaming platforms, the potential issues are many. For one, if such an interim 3-month changeover period is mandated, processes will have to quickly be overhauled to account for the interim taxation changes. And this will have to be done for just three months, after which the process will change once again, to tax winnings on “net winnings”.

The costs for such a changeover are likely to be significant, and one cannot forget that platforms are responsible to their users – crores of gamers will need to be educated about changes in taxes applicable to them, twice in three months.

User confusion
For online gamers, the interim 3-month period poses other challenges. For one, there is the confusion it will cause, and this will likely put casual gamers off the games entirely. A second, more significant point of friction is the fact that this taxation changeover happens twice in next 4 months. For the first three months of that financial year, users will pay tax based on one type of calculation which is different from current, and for the rest of the year, tax will be calculated in a different way. Tax refunds are not allowed for taxes on winnings from online games, so any discrepancies between April-June and June-March cannot be reconciled in players’ tax returns. In some cases, it will cause losses for players for no fault of theirs.

A simple fix
A good approach seems to be to simply continue with the existing regime of TDS applicable over Rs 10,000, and apply the new regime on net winnings without a threshold from 1 July 2023. Any potential revenue benefit within those three months will imperil future revenues, as players will surely drop off due to the confusion.

The online gaming sector is growing, but it is also a hotbed of start-up innovation. Smaller players that are creating new IPs in India may not be able to navigate this regulatory compliance burden.