New TDS provisions for Online Gaming likely to pose compliance challenges for users & industry: Report

A report by Lakshmikumaran & Sridharan provides a detailed overview of the new taxation regime announced during Financial Bill 2023

India, March 2, 2023: Lakshmikumaran & Sridharan (LKS), a premier full-service Indian law firm specializing in taxation, has in a comprehensive white paper analyzed the proposed TDS changes announced for the Online Gaming Industry in the Union Budget 2023. The white paper welcomes the Government’s initiative to provide clarity on direct taxation of online gaming and highlights the potential challenges, their impact on users and industry and proposes solutions to address the same.

The online gaming industry till now was deducting TDS on winnings under section 194B, which had a threshold of INR 10,000 per game post which the tax was deducted at the rate of 30%. In the Union Budget 2023, the Finance Minister announced a separate new section 194BA for TDS on online gaming. Under the new section, the Online gaming platforms are expected to deduct 30% TDS on net winnings. The computation of ‘net winnings’ shall be prescribed separately.

While this has been a welcome move for the industry, it has posed a conundrum as well. This is because the current section 194B is being amended and while the amendments in the section 194B come into effect starting April 01, 2023 the new section 194BA comes into effect only on July 01, 2023.

This essentially means that for a period of 3 months between April 01- June 30th, 2023, the online gaming industry will have to comply with the amended 194B and undergo two different compliance framework changes  within three months. This can cause a lot of confusion for the users and pose a huge compliance challenge for the industry.

Current – Has a threshold of Rs 10,000 on per game basis for tax deduction on winnings Ends March 31, 2023
New – The threshold is removed and TDS calculations to be done on net winnings in the financial year Effective from July 1, 2023
Interim – Has the threshold of Rs 10,000 on financial year basis for tax deduction on winnings Effective from April 1, 2023-June 30, 2023

Commenting on the report, L Badri Narayanan, Executive Partner, LKS, said, “While the new proposed TDS changes bring in the much needed recognition for online gaming, the compliance complexities do pose a challenge. The application of two different tax deduction changes within the same financial year may result in massive confusion for players who may inadvertently not be able to comply or end up losing money. It may also lead to a mismatch between the winnings reported by OGIs and actual taxable net winnings of the users. Additionally, it would require significant education of the 20+ crore online gaming players, which would be an arduous task.”

He added, “Historically, when such changes are carried out, only one regime change is prescribed to allow for sufficient time to implement. The Government should ideally conduct industry consultations to understand their concerns and notify the rules accordingly.”

According to the whitepaper, the proposed solution to these probable issues would be that threshold amendments to Section 194B should be brought into effect from July 1, 2023 for a smooth transition as has been the practice for earlier amendments. It is also crucial that the tax return filing process for users at the end of the financial year remains seamless. The report also proposes certain principles that may be adopted for calculation of net winnings, reflecting upon the intent of bringing these amendments.

The government and the industry can reap the benefits of this sunrise sector, provided all the concerns are addressed in a holistic manner. India has emerged as a pioneer in the online gaming industry, contributing over INR 22,000 crore in revenue to the exchequer. With a projected Compound Annual Growth Rate (CAGR) of 38%, the industry has the potential to empower the “Make in India” and “Brand India” vision.

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