Taxation of Online Gaming Income

Taxation of online gaming income

An Introduction to Online Gaming in Brief: What It Entails?

Typically, online gaming adheres to a subscription-based model where users are only charged if they opt to access premium features or make in-app purchases. Although certain games are enjoyed solely for their entertainment value, there exist others that offer players the opportunity to win actual money.

In essence, online gaming is segregated into two categories: ‘Game of Skills’ and ‘Game of Chances.

  • The Supreme Court’s case of K.R. Lakshmanan v. State of Tamil Nadu, established that a “GAME OF SKILLS” entails the player’s exceptional knowledge, training, attention, experience, and adroitness for success. Golf, horse race betting, and chess are a few examples.
  • Conversely, games that involve probability are categorized as “GAME OF CHANCES.” In this article, we provide a concise overview of the fast-growing online gaming industry in India, its legality, revenue generation, and tax on online gaming from an income tax standpoint.

Is the operation of online gaming considered lawful in India?

One of the primary considerations for readers regarding online gaming in India is its legality. This aspect pertains to the matter of whether the practice conforms to legal regulations.

In the case of Manoranjithan Manamyil Mandram v. State of Tamil Nadu (2005), it was determined that the classification of a game as one of chance or skill is a matter of fact that must be decided based on the specific facts and circumstances of each individual case.

What is the basis for revenue collection and tax chargeability in online gaming, from a taxation perspective?

Calculation of Contest Entry Fees and Overall Gaming Revenue

According to a recent notification dated 08-12-2022, there have been reports that the upcoming GST Council may propose a 28 % Goods and Services Tax (GST) on the total amount instead of the current practice of levying 18 % on GGR and not just on CEA.

While the online skill-based gaming industry is agreeable to the government’s move of raising GST on online gaming from 18 % to 28%, they suggest that it should only apply to gross gaming revenue (GGR).

Proceeds generated from online games played with actual currency

Various gaming platforms, including Dream11, Rummy, Ludo Empire, and The Money Drop, offer the opportunity for players to win real money. Players can contribute money into a game (known as a “wager amount” or “stake”), and any winnings are then deposited into the account of the player who wins the bet. From there, the player is free to use the money for further gameplays or transfer the funds to their bank account.

– As per Finance Budget 2023, Section 115BBJ is proposed to be inserted which provides the tax rate of 30% on any winning from online gaming.

– Regardless of any other provision of this Act, where an assessee’s total income includes any income from winnings from any online game, The total amount of income tax due is the sum of

  • The amount of income tax calculated on net winnings from such online games during the previous year, computed in the manner as may be prescribed at flat rate of 30%
  • The income tax you would have paid if your total income was reduced by your online game winnings. It may seem complicated, but understanding your tax obligations is essential for staying on the right side of the law.

It’s also noteworthy that this tax on online gaming is mandatory regardless of whether the winnings were used for further gameplay or whether the player’s total income is below ₹2.5 lakh.

Incentives for joining and referring:

Real money online games commonly offer joining bonuses to players upon sign up, as well as referral bonuses for those who successfully refer their friends. It is important to note that these bonuses do not fall under the same category as prize winnings and are therefore not subject to taxation as per the Income Tax Act.

However, any income obtained from joining or referral bonuses is referred to as tax on online gaming on a net basis according to the applicable slab rates for individuals. No tax shall be owed if the income earned is below the maximum limit that is chargeable to tax.

Distribution of prizes during gaming tournaments

It is important to note that winnings from gaming tournaments are subject to taxation similar to winnings from online gaming under section 115BBJ of the Act.

  • Any merchandise received by a professional player is taxable under the “Income from business & profession” category, regardless of the merchandise’s market value.
  • For non-professional players, income from the merchandise is taxable under section 56(2) of the Act only if the overall market value of the merchandise exceeds ₹50,000.

Two-Tier Taxation Structure for Online Gaming Industry

The special tax on gaming revenue is known as the “GST Compensation Cess” and is levied on the value of the services provided by the online gaming company. This tax is in addition to the regular Goods and Services Tax (GST) that is levied on all services provided in India

The GST Compensation Cess is calculated as a percentage of the value of the services provided by the online gaming company. The exact percentage varies depending on the type of game and the amount of revenue generated by the company.

In addition to the GST Compensation Cess, online gaming companies in India are also subject to corporate income tax. The corporate income tax rate in India is currently 25% for domestic companies and 40% for foreign companies.

Professional streamers are required to pay online gaming tax, which falls under the category of ‘business and profession’ on the net taxable income. This means that the income is calculated after taking into account all the business expenses.

Furthermore, individuals have the option to offer their income on a presumptive basis by availing of section 44ADA of the Act, ensuring that if their total income is below ₹50 lakh in the previous year (limit increased to Rs 75Lakhs from AY 2024-25), it is taxable at applicable slab rates.

In cases where income falls below the maximum amount chargeable to tax, which is ₹2.5 lakh, then no tax is payable. However, if gaming income exceeds Rs.1cr, a surcharge of 15% of the normal tax rate is levied, along with an additional  4% surcharge for Health and Education Cess.

The Assessment of Income Tax for Minors

As per section 64(1A) of the Act, the income of a minor child is combined with their parent’s income, unless it is derived from the implementation of a specific skill, talent, or specialized knowledge and experience. With the courts considering online gaming to be a game of skill, the minor’s income from online gaming is taxable as per the nature of the income.

Additional recent contemplations that have been made

The Group of Ministers (GoM) is presently evaluating a proposition that entails dividing the funds obtained through online gaming platforms into two accounts, namely Service and Escrow. As per the proposed plan, the Service account will be subject to a GST rate of 28 %, while the Escrow account might attract a tax deducted at source (TDS) of 30 % based on the prevailing direct tax regulations.

Your Company

    Subscribe to our Newsletter

      Proprietorship Registration