ONLINE GAMING IN INDIA AND THE TAX CONUNDRUM
Sports and gaming have long been popular for enjoyment, leisure, and social interaction, both for those participating and those watching. Online gaming expands these possibilities by offering on-demand, real-time play that overcomes the limitations of physical locations and different time zones. The COVID-19 pandemic and resulting social distancing measures further pushed many people to seek alternative forms of recreation and social connection, consequently boosting the growth of online gaming.
The online gaming market has seen consistent growth in recent years. Global projections estimate a significant revenue increase from approximately US$38 billion in 2019 to around US$122 billion by 2025. India’s online gaming market is also on a strong upward trajectory, expected to rise from US$906 million in 2019 to over US$5 billion by 2025, representing an annual growth rate of about 22%. These figures indicate the increasing popularity and economic significance of online gaming worldwide and within India. This expanding market for interactive digital entertainment, including online gaming, has demonstrated a steady pattern of financial growth, underscoring its growing prevalence and economic importance on both global and domestic levels.
Thus, it becomes quite apodictic that the Indian online gaming sector possesses the capacity for rapid expansion and the potential to evolve into a substantial economic contributor. The digitization of this industry has facilitated the formalization of a previously less structured market, fostering enhanced transparency and accountability.
The significant proportion of young individuals in India, who are generally more adept with technology compared to older demographics, strongly suggests a favourable environment for the expansion of the online gaming industry in the country. This tech-savvy youth population is more likely to embrace and actively participate in online gaming, which bodes well for the industry’s future growth. The current market size and the anticipated growth trends effectively underscore this positive outlook.
In a collaborative effort with far-reaching implications for the Indian gaming landscape, the All India Gaming Federation, the Federation of Indian Fantasy Sports, and the E-Gaming Federation recently formalized a “Code of Ethics” (CoE). This comprehensive framework aims to enforce consistent standards of user safety and practices across the industry by mandating the implementation of responsible gaming and advertising policies, annual third-party audits, and robust reporting mechanisms that will ensure accountability and transparency.
This is a welcome move in view of the fact that humongous Indian population has embraced online gaming with open hands and the mandates proposed recently will bring the spur in online gaming within the regulatory framework.
The Income Tax Act of 1961, specifically Section 115BB under ‘Income from Other Sources,’ imposes a distinct flat tax rate of 30% on winnings from lotteries, crossword puzzles, races (including horse races), gambling, and online gaming. This means these winnings are taxed separately, without any deductions, exemptions, or the application of regular income tax slabs. Furthermore, the Act explicitly prohibits setting off any losses from these activities against other types of income.
Sports and gaming have long been popular for enjoyment, leisure, and social interaction, both for those participating and those watching. Online gaming expands these possibilities by offering on-demand, real-time play that overcomes the limitations of physical locations and different time zones. The COVID-19 pandemic and resulting social distancing measures further pushed many people to seek alternative forms of recreation and social connection, consequently boosting the growth of online gaming.
The online gaming market has seen consistent growth in recent years. Global projections estimate a significant revenue increase from approximately US$38 billion in 2019 to around US$122 billion by 2025. India’s online gaming market is also on a strong upward trajectory, expected to rise from US$906 million in 2019 to over US$5 billion by 2025, representing an annual growth rate of about 22%. These figures indicate the increasing popularity and economic significance of online gaming worldwide and within India. This expanding market for interactive digital entertainment, including online gaming, has demonstrated a steady pattern of financial growth, underscoring its growing prevalence and economic importance on both global and domestic levels.
INCOME TAX PURVIEW: New Tax Rules for Online Gaming Platforms:
India’s rapidly growing online gaming industry, alongside recent Goods and Services Tax (GST) developments, is also navigating a changing regulatory environment concerning income tax. New rules under the Income Tax Act, 1961, are being implemented to define how winnings and other earnings from online gaming platforms are taxed, affecting both the companies and the players. Comprehending these regulations is vital for adhering to the law and managing the finances within this dynamic digital entertainment market.
GST Implications
With the growth of online gaming in India, the Income Tax Act, 1961 now provides a structured framework for taxing such income through Sections 115BBJ and 194BA, introduced by the Finance Act, 2023. W.e.f. April 1, 2023, Section 115BBJ mandates a flat 30% tax (excluding surcharge and cess) on any winnings from online games, overriding regular tax slabs and applying to both residents and non-residents.
To ensure proper compliance, Section 194BA, requires the online gaming platform (intermediary) to deduct TDS at 30% on net winnings, either at the time of withdrawal or at the end of the financial year—with no minimum threshold.
Net winnings are calculated by adjusting withdrawals and closing balances against deposits and opening balances during the financial year ensuring comprehensive taxation and withholding of online gaming income across users and platforms.
The net winnings is to be calculated in the following manner:
Net winnings = (A + D) – (B + C) Where:
A = Total amount withdrawn by the user during the year
B = Total non-taxable deposits made by the user during the year
C = Opening account balance at the start of the year (excluding non-withdrawable bonuses)
D = Closing account balance at the end of the year (excluding non-withdrawable bonuses)
As per Rule 133 of the Income Tax Rules, net winnings from online gaming are calculated using the above given formula, and if the result is negative, then it is ignored for tax purposes and further no loss is allowed to be carried forward or set off.
However, TDS under Section 194BA must still be deducted at 30% on any actual withdrawal made during the year.
It is observed in recent times, that during assessment proceedings, the National Faceless Assessment Centre of Income Tax Department has made additions of the “WINNINGS” disregarding “NET WINNINGS” which has led to creation of humongous unfounded Income Tax demands in respect of various taxpayers who had done online gaming in the relevant Assessment Years.
These issues need to be addressed by the Department and a circular clarifying the issues in this regard is of utmost importance.
Winnings and Net- Winnings
Keeping the concerns of the e-gaming and digital gaming craze and its source of income in India, the GST Council came up with the decision to impose a 28% tax on the full face value of player deposits in online gaming, regardless of whether the game is skill-based or chance-base. This step marks a major shift from the earlier 18% GST which was levied only on Gross Gaming Revenue (GGR), which is nothing but the platform’s commission or service fee for offering such services to the players.
Under the new regime, if a player deposits Rs. 1,000, Rs. 280 is deducted as GST, leaving just Rs. 720 for gameplay, significantly impacting user engagement and the platform viability. This move has raised serious concerns among industry stakeholders, particularly startups and smaller operators, as it compresses margins, shrinks the active user base, and threatens overall sustainability. According to the All-India Gaming Federation (AIGF), this change could slash industry revenues by 70–80%, potentially forcing many businesses to shut down, undermining a sector that was projected to reach $5 billion by 2025.
Skill VS Chance Debate
Keeping the concerns of the e-gaming and digital gaming craze and its source of income in India, the GST Council came up with the decision to impose a 28% tax on the full face value of player deposits in online gaming, regardless of whether the game is skill-based or chance-base. This step marks a major shift from the earlier 18% GST which was levied only on Gross Gaming Revenue (GGR), which is nothing but the platform’s commission or service fee for offering such services to the players.
Under the new regime, if a player deposits Rs. 1,000, Rs. 280 is deducted as GST, leaving just Rs. 720 for gameplay, significantly impacting user engagement and the platform viability. This move has raised serious concerns among industry stakeholders, particularly startups and smaller operators, as it compresses margins, shrinks the active user base, and threatens overall sustainability. According to the All-India Gaming Federation (AIGF), this change could slash industry revenues by 70–80%, potentially forcing many businesses to shut down, undermining a sector that was projected to reach $5 billion by 2025.
Games of skill
In these games, the outcome predominantly depends on the player’s ability, such as knowledge, experience, judgment, or strategy. Examples include fantasy sports platforms like Dream11, rummy, and poker. Courts in India, including the Hon’ble Supreme Court, have recognized games like rummy as skill-based, stating that “a competition where success depends on a substantial degree of skill is not gambling.” These games were earlier taxed at 18% GST on Gross Gaming Revenue (GGR).
Games of chance
these games mostly rely upon luck or random outcomes, and the player’s skill has little to no effect on the result. Examples include online casinos, slot machines, and roulette. These are often categorized under gambling and are subject to stricter regulations and higher taxation, especially after the GST Council’s decision to impose 28% GST on the full face value of bets, regardless of whether the game involves skill or chance.
Keeping the concerns of the e-gaming and digital gaming craze and its source of income in India, the GST Council came up with the decision to impose a 28% tax on the full face value of player deposits in online gaming, regardless of whether the game is skill-based or chance-base. This step marks a major shift from the earlier 18% GST which was levied only on Gross Gaming Revenue (GGR), which is nothing but the platform’s commission or service fee for offering such services to the players.
Under the new regime, if a player deposits Rs. 1,000, Rs. 280 is deducted as GST, leaving just Rs. 720 for gameplay, significantly impacting user engagement and the platform viability. This move has raised serious concerns among industry stakeholders, particularly startups and smaller operators, as it compresses margins, shrinks the active user base, and threatens overall sustainability. According to the All-India Gaming Federation (AIGF), this change could slash industry revenues by 70–80%, potentially forcing many businesses to shut down, undermining a sector that was projected to reach $5 billion by 2025.
In Manoranjithan Manamyil Mandram v. State of Tamil Nadu (2005), the Madras High Court held that determining whether a game is one of skill or chance is a question of fact, to be assessed individually in each case. The Court emphasized that even if some chance is involved, a game where skill predominates does not fall under gambling laws, reinforcing the legal protection for skill-based games under state legislation.
In the case R.M.D. Chamarbaugwala v. Union of India (1957), the Supreme Court upheld the predominance test, ruling that games where skill outweighs chance are games of “mere skill” and thus protected under Article 19(1)(g) of the Constitution, which guarantees the freedom to carry on trade or profession. Games primarily based on chance could be regulated or prohibited under gambling laws.
In Varun Gumber v. Union Territory of Chandigarh (2017), known as the Dream11 case, the Punjab and Haryana High Court ruled that fantasy sports involve substantial skill, judgment, and knowledge in team formation, and are not games of chance. The Court categorized them as games of skill, a view later upheld by the Supreme Court, affirming fantasy sports as a legitimate business activity under Article 19(1)(g) of the Constitution.
In the recent decision of the Karnataka High Court in the case of Gameskraft Technologies Private Limited has held that online rummy, being a game of skill, cannot be categorized as gambling or betting and therefore is not taxable under the Central Goods and Services Tax Act. While this decision reiterates the position that rummy is a game of skill, it may not have precedential value for other games, both online and offline.
For any industry to fully flourish and expand rapidly, a strong and clear regulatory and legal framework is essential. In the gaming sector, a crucial aspect with significant ramifications for businesses is the distinction between a game of skill and a game of chance which has been cited supra. This classification often dictates the legal permissibility and operational modalities of the business. The categorization of a game as one of chance or skill is contingent upon a thorough examination of the specific facts and circumstances surrounding each particular game.
As a sunrise sector, India’s skill-based online money gaming industry holds significant promise in contributing to India’s aspiration of becoming a US$5 trillion economy by 2025. However, the increased rate of GST to 28% on the total amount deposited on pay-to-play gaming platforms, may limit the contribution of the sector in the economy at large, though the GST collections will be increased substantially.
For the past year, the individuals who established online gaming platforms have voiced concerns about the potential impact on their sector’s ability to secure investment, expand operations, and generate employment. The government, however, has a different perspective. Their justification for the increased GST is rooted in the need to augment revenue and to align the treatment of online gaming with activities such as casinos and horse racing
Conclusion
In conclusion, the distinction between games of skill and games of chance continues to be a cornerstone of online gaming regulation in India. While judicial rulings have offered clarity regarding the legality of skill-based games, it remains crucial for gaming operators to thoroughly assess whether the games they offer, particularly those involving monetary stakes, can be classified as games of skill.
The regulatory landscape remains complex, with overlapping central and state-level rules, as well as additional compliance obligations under the IT Rules.
Conclusively, imposing a 28% GST rate on the gaming industry can offers significant benefits such as revenue generation, a level playing field, encouragement of domestic development, and support for local infrastructure.
However, policymakers must carefully consider the potential impact on consumers, the risk of tax evasion, international competitiveness, and regulatory challenges. Striking the right balance between taxation and industry growth is crucial to ensure a sustainable and thriving gaming sector that benefits all stakeholders.