19 February 2019

Taxes on Online Gaming: Resolving the TDS Anagram

By Neha Sharma

Online gaming combines both traditional as well as innovative games, in which players or users are engaged by the portals/ operators using technology and internet. Though online gaming and offline/ live versions have significant functional equivalence in the manner in which the game is played, the challenges in tax laws are slightly different. Tax law governing winnings from games was introduced at a time when online gaming was never thought of. This article examines the income-tax provisions that concern the online gaming sector in India.

Section 2(24)(ix) of the Income-tax Act, 1961 (‘the Act’) defines income to include any winnings from games of any sort. Such income is subject to tax in the hands of the person winning the game, on gross basis, @ 30% of the winnings, under section 115BB of the Act. Though the ultimate tax liability is on the winner, to ensure that there is no tax leakage, section 194B of the Act casts a duty on the payer to discharge the tax liability on such income by deduction of tax at source (‘TDS’) before paying the winnings to the recipient.  As per section 194B of the Act, the payer is to deduct TDS [See endnote 1] at the time of payment on the amount of winnings from any game, if the same exceeds Rs. 10,000/-, at the rate of 30%. The terms used in section 194B of the Act which would be of relevance in online gaming are explained below:

Person responsible for paying

The responsibility of deducting tax under section 194B of the Act is cast on the person responsible for paying the winning. As defined in section 204(iii) of the Act, the expression person responsible for paying means the payer himself.  In the context of online gaming, the winner would not be having any knowledge about the identity of the other participants in the game. The operator of the game undertakes to mobilise the pay in from the participants and pay out the winnings to the winner. Though the operator himself is not the participant in the game, under a contractual arrangement between the participants, the operator undertakes to pay the winnings to the winner.  Hence, the operator would be regarded as the person responsible for paying and would be required to comply with section 194B of the Act.

Any person

Section 194B of the Act requires deduction of tax on payment to ‘any person’ being a winner of the game. The section does not distinguish between a resident and a non-resident. Hence, a non-resident winner would also suffer TDS under section 194B of the Act, and not under section 195 of the Act. A question may arise as to whether the liability to withhold taxes would apply even if the winnings is not taxable in India, by virtue of the game being conducted outside India and the winner being a non-resident. The place of accrual of such winnings have to be determined based on the facts of each case, like the place where the game was conceptualised, the place where the game is being organised, the place where the game is marketed, etc. There is however no straight jacket answer to this question yet.


The term ‘income’ mentioned in the section should be read with the concerned computation provisions of the Act as it is the ‘income by way of winnings.’ Accordingly, the question arises whether the income and losses across games could be set off against each other, i.e. whether a loss from one game can be set off against the income from another game. Such set off was permissible prior to insertion of Section 58(4)[See endnote 2] of the Act in 1987.  The legal position now, after 1987 is that the income is to be computed on gross basis for each game without aggregating the losses from other games, even if they are of the same nature.

Winnings from…game

Both the terms ‘winnings’ and ‘game’ have not been defined in the Act and therefore, the words have to be understood in a way they are understood commercially. It is to be noted that the central point of section 194B are the words ‘winnings from…game’ and the de minimis threshold of ten thousand rupees is linked to the term ‘winnings’ and thus, the TDS liability is to be calculated on the amount of winnings from a game. The amount of winnings is to be construed as receipts less expenses, i.e. gross winnings less pay-in. In common parlance, a game is understood to begin at the entry point and end at the exit point. The gaming portals can frame rules and lay down terms and conditions governing the entry and exit point, provided the substance test is met, so as to determine their own point of taxation.
  1. Amount exceeding ten thousand rupees: It is the current threshold[See endnote 3] up to which an operator is not required to deduct tax at source on the amount of winnings. However, the person winning the game is obligated to include the winnings in his taxable income and pay taxes thereon from his end. Though exemption from applicability of TDS on winnings upto Rs. 10,000/- is provided, there is no exemption from taxation in the hands of the person winning the game.
  2. Payment: Having not been defined in the Act, payment could be said to be made when the amount payable is put at the disposal of the payee, even though the actual payment is not made. That is, ‘payment’ is made when the amount is put within the unfettered control and disposal of the user, allowing him to use the same as per his wishes.
  3. Rates in force:  Section 194B of the Act requires deduction of tax at rates in force. Though section 115BB of the Act provides that the income from winnings will be subject to tax at 30%, section 194B of the Act does not prescribe a specific rate at which tax is to be deducted. The phrase ‘rates in force’ in relation to Section 194B of the Act has been defined in section 2(37A) of the Act to inter alia mean, rate or rates of income-tax specified in this behalf in the Finance Act of the relevant year. Part II of Schedule I of the Annual Finance Act has been providing for the ‘rates in force’ for the purpose of Section 194B of the Act to be 30%. 
To conclude, the statute has given certain room to the operator of the game to define when the liability to deduct tax would arise. The operator can define the terms ‘game’, ‘winnings’ and ‘payment’ in a manner that would pass the substance test and ensure compliance with the TDS provisions accordingly. Further, while defining these three terms, the gaming portal has to necessarily see that each term is in alignment with the other so as to arrive at a coherent understanding of law and practice.

[The author is an Associate, Direct Tax Team, Lakshmikumaran & Sridharan, Mumbai]

End Notes:-

  1. Tax is to be deducted at the ‘rates in force’. The phrase is defined in Section 2(37A) of the Act, read with Part II of Schedule I of the Finance Act, as per which the rate is 30%.
  2.  “58. … (4) 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 from gambling or betting of any form or nature, whatsoever….”
  3. Substituted for “five thousand rupees” by the Finance Act, 2010, w.e.f. 1-7-2010. Earlier “five thousand rupees” were substituted for “one thousand rupees” by the Finance Act, 1986, w.e.f. 1-6-1986.

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