Online Gaming in India: The Taxation Quandary

March 18, 2023

The online gaming sector in India has seen significant growth in recent years, and has the potential to contribute significantly to the country’s goal of becoming a USD 1 trillion digital economy, generating substantial employment, and fostering innovation. However, the industry is also facing a taxation quandary, according to a report titled ‘Online Gaming in India: The Taxation Quandary’ by Primus Partners.

Regulation of the Online Gaming Industry

The report highlights that the regulation of online gaming in India will not only open up economic opportunities but also address various social issues. With the growing popularity of online gaming, there has been a call for more regulation in the sector. Regulation will ensure that the industry operates in a safe and secure environment, with fair and transparent practices for players.

Positive Announcements in Union Budget 2023-24

The report notes that the announcements made in Union Budget 2023-24 are positive for the online gaming sector. One of the key announcements was the incorporation of the offset of losses in the calculation of gains from online games for income tax. This has been a persistent ask from the industry, and the inclusion of this in the budget is a positive development.

Tax Deducted at Source (TDS) Mechanism

However, the report also highlights a pertinent issue relating to the implementation mechanism proposed in the Union Budget for TDS (Tax Deducted at Source) on online games. The issue has arisen due to amendments to section 194B under which online gaming is currently covered from April 1, 2023, and the separate provision on online gaming, i.e., section 194BA, coming into force from July 1, 2023, leading to an anomaly.

Streamlining the Applicability of the Amendments

The report recommends that it would be ideal to streamline the applicability of the amendments for “online game” and establish a singular effective date of April 1, 2023. Alternatively, the current tax regime could be continued for the period between April 1, 2023, to June 30, 2023, to eliminate any discrepancies in interpretation. This would ensure that the taxation mechanism is simplified and more efficient, which would benefit the industry as a whole.

Impact on Smaller and Mid-Size Gaming Companies

The report also notes that the recurrent developments in the taxation regime will lead to higher costs for the industry, resulting in unnecessary expenses that will be difficult to bear for several smaller and mid-size gaming companies. This highlights the need for a streamlined and efficient taxation mechanism that takes into account the needs of all players in the industry.

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