December 9, 2023

New Delhi: The online gaming industry has approached the Central Board of Direct Taxes (CBDT) and the Prime Minister’s Office (PMO) to oppose changes in tax deduction at source (TDS) and Goods and Service Tax (GST) on the sector.

On 23 February, three online gaming industry bodies—E-Gaming Federation (EGF), All India Gaming Federation (AIGF) and Federation of Indian Fantasy Sports (FIFS)— wrote to the CBDT to reconsider the changes in TDS regime which take effect on 1 April. This follows a 9 February letter to the PMO requesting not to club online gaming with gambling, horse racing and casinos. The latter sectors are imposed with the highest tier of GST at 28%, often referred to as ‘sin tax’.

At present, online gaming firms are required to charge a 30% TDS on any winnings withdrawn by users in excess of 10,000 in each transaction. While the 10,000 threshold will remain from 1 April, it will apply on a user’s annual earnings. In simpler words, any online gaming winnings between 1 April and 30 June will be levied a 30% TDS. From 1 July, this rule will change, and there will be no threshold for application of TDS, which means any transaction on an online gaming platform will incur TDS.

In the letter to the CBDT, which was seen by Mint, the industry bodies argued that implementing the new TDS regime would leave room for ambiguity in terms of how tax would be calculated for the two regimes after 31 March, and will also drastically increase the cost of compliance and hinder the ability of small companies to operate in the sector.

“Online gaming has the potential to emerge as the next big new age export economy for India, but imposing 28% GST will prematurely stifle the sector. There are many early stage companies in the sector. However, increasing tax rates for the sector will take away companies’ ability to survive. It also affects creators, whose earnings will be stifled,” Saumya Singh Rathore, co-founder of Delhi-based gaming firm Winzo Games said.

The 9 February letter refers to a long-standing debate on the appropriate rate of taxation on online gaming. While a group of ministers (GoM) chaired by Meghalaya chief minister Conrad Sangma has already submitted its report to the GST Council, the matter was not taken up for discussion in the Council’s 49th and latest meeting held on 20 February.

A lawyer, who requested anonymity, said that the Directorate General of GST Intelligence (DGGI)’s ongoing lawsuit against Bengaluru-headquartered Gameskraft is expected to result in a landmark judgment, affecting how GST is implemented.

Online gaming companies are presently liable to pay 18% GST on their gross revenue.

Meanwhile, the representation filed with CBDT on 23 February seeks to ease compliance issues. “The overall step to segregate online gaming from gambling, under section 194BA of Finance Bill, 2023, is a positive one for the industry. However, increasing the TDS liability for each and every transaction can be a major hurdle, since now, every single transaction will require a TDS mechanism. Additionally, companies will also be required to implement two different TDS mechanisms in a short span of time, and many companies are likely to fail in their efforts to comply with the rules,” said Roland Landers, CEO of industry body AIGF.

S. Vasudevan, executive partner at law firm Lakshmikumaran & Sridharan, added that the TDS move may also prove to be a deterrent for users. “The move is likely a way for the government to enforce a streamlined taxation process, since previously, there was no way to determine if a person was evading taxes by using the threshold as a way to hide withdrawals, unless they would voluntarily disclose these earnings. The TDS regime does not, theoretically, increase any tax burden for companies. However, it could act as a deterrent for many casual players, if they were to have a sizable tax being implemented on every small-ticket casual title they would play,” he said.

Industry experts added that both GST and TDS regimes are favoured towards large companies in the online gaming sector, and increase barriers for smaller companies to operate.

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