Implications of India’s 2023 Budget for the Gaming Industry

The Indian Budget 2023 announcements and the proposed Finance Bill 2023 appear to be a mixed bag for the online gaming and gambling industry, with particular implications for offshore operators who have a sizable Indian market. The Indian prime minister has previously emphasized the significance of the gaming industry as one of India’s fastest growing sunrise industries. According to statistics, the industry is estimated to exceed $5 billion in net revenue by 2025. However, good regulatory and fair tax policies are critical to its growth.

On the regulatory front, positive developments include the designation of the Ministry of Electronics and Information Technology as the nodal ministry for online gaming and the proposed amendments to the IT Intermediary Rules 2021, which were released in early January and were broadly welcomed by the gaming industry for their self-regulatory nature and for balancing the interests of gamers with responsible industry growth.

However, on the indirect tax front, there exists much uncertainty arising from deliberations within the Goods and Services Tax Council relating to the distinction between games of chance and skill. A group of ministers constituted by the council is reportedly in the process of determining whether GST should be levied at 28% on both games of chance and skill, as opposed to the current 18% rate levied on online skill-based games, and whether the tax base for the GST levy should be the entire deposit amount as opposed to the commission or service fee.

Key Income Tax Proposals and Some Questions

Against this backdrop, the Finance Bill 2023 contains two key income tax proposals relating to the tightening of tax deduction at source—TDS—on winnings from gambling, and TDS on net winnings from online games. With respect to TDS on gambling, the bill proposes for TDS to be deducted on the aggregate amount of winnings exceeding 10,000 Indian rupees ($120) during a given financial year. While the proposal is aimed at curbing the practice of splitting a winning into multiple transactions each falling below the threshold, the resulting clarity is welcomed by many genuine gaming operators. Applying the provision in a conservative manner placed such operators at a competitive disadvantage against those who took the approach of splitting up winnings.

Accordingly, the proposed amendments are expected to standardize industry practice while ensuring that winnings don’t escape the tax net. However, while the policy intent seems to be to cover gambling and betting of all sorts within the purview of this amendment, it remains uncertain as to whether “online” gambling would be covered under within the purview of “gambling or betting of any form or nature whatsoever” considering that the proposed amended provision seems to read as though it covers only “offline” gambling and betting, and that the bill specifically proposes to insert a new section—194BA— in relation to TDS on winnings from online games.

As regards the proposed new Section 194BA, with effect from July 1, TDS should be deducted on net winnings in the user account at the end of a given financial year. Further, the proposed amendment clarifies that in situations where net winnings are wholly or partly paid in kind and where the cash component is not sufficient to discharge TDS liability, the person responsible for paying shall, before releasing the winnings, ensure that the tax has been paid.

While these clarifications are broadly welcomed by the industry, it remains unclear why no monetary threshold has been prescribed for TDS on winnings from online games, which is at variance with the above proposed amendment relating to winnings from betting and gambling, for which there is now a yearly aggregate 10,000-rupee threshold. Further, it remains unclear as to why online games have been carved out and dealt with separately under a special section in this manner.

Accordingly, it remains to be seen whether online forms of betting and gambling would be covered within the purview of “online game” under Section 194BA as opposed to under Section 194B, which now seems to relate to offline gambling and betting. Depending on where online forms of betting and gambling would be covered, TDS implications could vary.

Expansion of Online Service Taxation

The finance bill proposes to expand the scope of online information and database access or retrieval—OIDAR—services under GST laws. Presently, to qualify as an OIDAR service, delivery of such service should be automated and involve minimal human intervention. The proposed expansion seeks to remove this condition, potentially resulting in several services that are delivered online without automation or significant human intervention, and which were previously excluded, to fall within the purview of OIDAR services.

The revised definition doesn’t seem to be in line with accepted international standards. The expanded definition now could include a wider range of online services relating to live performance, entertainment, and streaming.

This also raises questions as to whether it is only services that are in nature information technology services that are covered, or whether any service that is enabled or rendered over the internet also would be covered. For instance, while live classes or live poker, where a human person operated the table while being live-streamed online, previously wouldn’t have been covered, now they would be. However, at a fundamental level, going by the amended definition there is nothing to distinguish a live poker game from a consultant sharing advice over email, which is likely to cause issues.

Further, the ability of the GST authorities to enforce this expanded law in a cross-border context is also questionable, considering the volume of such services and the current inability of the tax department to track such transactions.

In conclusion, while several of the proposals are broadly welcomed by the industry, they raise several questions relating to their application in unintended situations.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Meyyappan Nagappan is a partner and Shweta Mallya is an associate at Trilegal.

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