1.Overview
The Indian gaming industry is thriving due to robust growth drivers conducive to the business environment. The growth trajectory of the industry, the advent of technology, huge geographical reach, and complexities involved in the business model require a specific examination of the applicability of direct tax laws for Indian Online Gaming Companies (OGCs). This chapter only deals with the applicability of direct tax laws with respect to OGCs and various persons who participate as gamers.
2.Taxation
2.1 Provisions of Section 4(1) of the Income-tax Act, 1961 (Act) deals with the charge of income which reads as ‘Where any Central Act enacts that income-tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with, and [subject to the provisions (including provisions for the levy of additional income-tax) of, this Act] in respect of the total income of the previous year of every person’. On plain reading of this section, one can understand that the total income of the person in respect to the previous year will be charged at the prescribed rate of income tax in the relevant assessment year.
2.2 The provisions of Section 5 of the Act deal with the scope of the total income of the resident and non-resident persons and Section 6 of the Act deals with provisions relating to the residential status of the persons. Thus, the scope of the total income of the persons depends on their residential status. Subject to certain exceptions the global income of a resident person is taxed in India and in respect of non-resident income which is received, accrued, deemed to accrue,
Online Gaming Industry A practical Guide to Business and Taxation in India
or deemed to be received in India is generally taxed in India. Section 10 of the Act exempts certain income from taxation even though they are in the nature of income.
2.3 Therefore it is clear that what is taxed under the Act is only income and section 2(24) of the Act gives an inclusive definition of income and as per clause (ix) of the said section income also includes income from winning from lotteries which read as under:
‘any winnings from lotteries, crossword puzzles, races including horse races, card games and other games of any sort or from gambling or betting of any form or nature whatsoever.
Explanation.—for the purposes of this sub-clause
(i) “lottery” includes winnings from prizes awarded to any person by draw of lots or by chance or in any other manner whatsoever, under any scheme or arrangement by whatever name called”;
(ii) “card game and other game of any sort” includes any game show, an entertainment programme on television or electronic mode, in which people compete to win prizes or any other similar game.”
Thus, winning from games that are played through electronic modes is taxable as income as per the provisions of the Act.
2.4 Section 14 of the Act classifies the income which is taxable under five heads of income which are as under:
(i) Salaries
(ii) Income from House Property
(iii) Profits and gains of business or profession
(iv) Capital Gains
(v) Income from other sources
In light of this background, we need to understand the profits and gains of the OGCs and also how the winning by the participants in online gaming contests are taxed in India.
3. Income Tax provisions applicable to Online Gaming Companies (OGCs)
3.1 The OGCs derive income from various operational, financial, and investment activities conducted by them. After preparing the financial
statement it is necessary to segregate the income into respective heads of income as per provisions of Chapter IV B to E of the Act.
3.2 While computing the income under the head business or profession, the OGC is eligible to claim various deductions in respect of eligible expenses. There may be issues with respect to revenue expenses whose benefit is spread across a few years. There will be issues as to eligibility for depreciation on intangibles, payment of expenses without TDS compliances, deductions for research and development and also matching concept as stipulated by section 37 of the Act. The Government by Finance Act, 2022 has introduced new provisions of TDS u/s 194R requiring deduction of TDS at 10% in respect of benefits and perquisite as referred to in section 28(iv) of the Act. Non-compliance will lead to disallowances u/s 40(a)(ia) of the Act along with the levy of interest and penalty as per the provisions of sections 201(1A) and 271C of the Act. Further, it may also lead to persecution U/s 276B of the Act. Therefore, utmost care and due diligence are required in compliance with the laws. As seen from the business model of the OGCs, they derive various sources of income that are mainly from business activities. A few examples of business revenue streams of the OGCs and their taxability are narrated hereunder.
Freemium Revenue
Subscription Revenue
Joining Fees, Game Fees and GGR
Income from data monetization
Income from cross-selling of products and services
Advertisement RevenueTaxed under the head income from business and profession as per provisions of Chapter IVD. While computing the income eligible expenses shall be allowed as a deduction from profit and net income taxable under this head will be computed which will become part of taxable income subject to other provisions of the Act.
Income from undischarged liability and deposits
Write backs
If OGCs receive revenue in advance, what will be their tax treatment? Whether the same will be taxable partly in the previous year of receipt and partly in subsequent years?
If part of the income is offered in one previous year then what will happen to the TDS deducted on such income, whether the same will also have to be split in two years?
Whether matching expenses also have to be accumulated and deducted over a period of time?
The OGCs impose exit conditions, because of which withdrawal of the money from the user’s account becomes difficult. The players are required to play, win, and it is only after a certain threshold are allowed to withdraw money. In such scenarios what will be the tax impact on money remaining unutilized in the user’s account?
3.3 The OCGs may also have income from the transfer of capital/investment assets. Such income is charged as long-term or short-term capital gains. The capital gain tax is an incidence of tax on the gains made by way of the transfer of capital assets.
3.3.1 Section 2(47) of the Act defines transfer as “Transfer in relation to capital assets includes,
i. the sale, exchange or relinquishment of the asset; or
ii. the extinguishment of any rights therein; or
iii. the compulsory acquisition thereof under any law; or
iv. in a case where the asset is converted by the owner thereof into, or is treated by him, as stock-in-trade of a business carried on by him, such conversion or treatment; or
v. the maturity or redemption of zero coupon bonds; or
vi. any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882; or
Taxation in Online Gaming
vii. any transaction (whether by way of becoming a member of, or acquiring shares in a cooperative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of any immovable property”.
3.3.2 The definition of transfer is not exhaustive, it can include any other kinds of transfer also as per the ratio decided in the case of Sunil Siddharthbhai v. CIT (1985) 156 ITR 509/23 Taxman 14 (SC). A few important judicial landmark judgments in connection with transfer are tabulated hereunder.
Transfer within the meaning of section 2(47) to Include
Sale of assets
Exchange of capital assets
Relinquishment of preference share
Extinguish of any rights in assets
CIT v. Gillanders Arbuthnot & Co (1973) 87 ITR 407 (SC)
CIT v. Tata Iron & Steel Co. Ltd. [1994] 206 ITR 196/[1993] 71 Taxman 188 (Bom)
Anarkali Sarabhai v. CIT (1997) 90 Taxman 509 (SC).
CIT v. Grace Collis (2001) 115 Taxman 326 (SC)
3.3.3 It is important to note that a transaction may be within the ambit of the definition of transfer as per section 2(47) of the Act, but it will not be as per transfer for the purpose of section 45 because specific exclusions given in the provisions of sections 46, 46A and 47 of the Act.
3.3.4 Section 2(14) of the Act defines Capital Asset, which means “a) property of any kind held by an assessee whether or connected with his business or profession, b) to c)…”As per the provisions of this section certain assets even though capital assets are not considered Capital Assets for the purpose of section 45 of the Act. Goodwill of the business is considered capital as per the ratio decided in the case of Haji Abdul Kader Sahib v. CIT (1961) 42 ITR 296 (Ker.). Rights under the contract are capital assets as per the ratio in the case of Rustom Spinners Ltd. v. ITO (1990) 32 ITD 30 (Ahd.-Trib.). Whether the controlling interest in a subsidiary or holding company by way of corporate structure is capital assets is an issue discussed and
Online Gaming Industry A practical Guide to Business and Taxation in India
deliberated in the case of Vodafone International Holdings BV v. Union of India (2012) 341 ITR 1/17 taxmann.com 202/204 Taxman 408 (SC)
3.3.5 The question of the year of transfer and the nature of capital assets are subject to litigation. There will be no capital gain unless all the conditions precedent to the transfer of capital assets as per the contract are fulfilled.
3.3.6 As the sector is fast expanding there will be a situation of mergers and acquisitions which may result in a slump sale as defined in section 2(42C) of the Act. Consideration under slump sale is determined and guided by rule 11UAE of the Income-tax Rules, 1962. If it is longterm capital gain no indexation benefit is available. No deduction for amortized expenses U/s 35D relating to preliminary and preoperative expenses amortized and self-generated goodwill is available. There will be tax incidence on the sale of acquired goodwill and intangibles which is dealt with by provisions of section 55(2) of the Act.
3.4 The OGCs raise money at huge valuations by charging hefty security premiums. The security premium is a capital receipt within the ambit of section 2(24) of the Act. However one has to keep in mind provisions of section 56(2)(viib) which stipulates that ‘Where company not being a company in which are public are not substantially interested, receives in any previous years from any persons being resident any consideration for issue of shares that exceeds the face value of such shares the aggregate consideration received for such shares as exceeds the fair market value of the shares’. This provision is subject to certain exceptions as provided in the proviso to the said section and also subject to Rule 11UA(2) of the Income-tax Rules, 1962. Which prescribes the NAV Method, Discounted Cash flow Method,
3.5 Since the OGC deals with a large number of the public and also raises funds through investors, it is necessary to ensure above-theboard documentation so that the provisions of deemed income u/ss 69 to 69D read with section 115BBE of the Act are not attracted. The burden of proof is vested in the taxpayer as per the ratio decided in the case of Kale Khan Mohammad Hanif v. CIT (1963) 50 ITR 1 (SC). The tabulation of deemed income is as under:
Section 68
Unexplained Cash Credit
Section 69Unexplained Investment
Applicable provisions of the ActNature of Deemed Income
Section 69AUnexplained Money
Section 69BAmount investments etc. not fully disclosed in the books of account.
Section 69CUnexplained Expenditure
Section 69DThe amount borrowed or repaid on hundies.
The income referred to in above referred sections is taxed at a special rate referred to in section 115BBE of the Act at 60%, along with a surcharge of 25% and health and education cess of 4%. Thus, overall rate of tax on deemed income is 78%. Further, there will be a levy of penalty U/s 271AACC of 10% of the tax payable.
3.6 If the net result of the computation is profit then the tax is payable and if it is loss then subject to the provision of section 115JB of the Act there may not be any tax incidence. In case of losses, be it depreciation loss or be it business loss these are either adjusted in the current year or carried forward subject to provisions of sections 70 to 72A of the Act. Applicable Income Tax rates for various corporate entities for A.Y. 2024-25 under different scenarios are tabulated here under:
CriteriaTax Rate Surcharge, Health and Education Cess,
Where total turnover or gross receipts during the previous year 2021-22 do not exceed Rs. 400 Crores
25%Income up to Rs. 1 Crore to Rs. 10 Crores at 7%.
Income above Rs. 10 Crores at 12%.
Health and Education Cess is 4% of the Income tax and surcharge. Any other domestic company 30%
Special Rate of Income Tax applicable to domestic companies
Where companies opt for section 115BA
25%Income up to Rs. 1 Crore to Rs. 10 Crores at 7%.
Income above Rs. 10 Crores at 12%.
Health and Education Cess is 4% of the Income tax and surcharge.
Where companies opt for section 115BAA
22%Surcharge at flat 10% irrespective of the amount of total income.
Where companies opt for section 115BAB 16%
Health and Education Cess is 4% of the Income tax and surcharge.
Online Gaming Industry A practical Guide to Business and Taxation in India
Further companies opting for sections 115BAA and 115BAB are exempt from MAT provisions u/s 115JB, whereas companies that have opted for 115BA are liable for MAT u/s 115JB at the rate of 15% and Health and Education Cess at 4% on the Income tax and surcharge. Further foreign companies are taxed at 50% or 40% for different incomes along with applicable surcharge at 2% or 5% and 4% of Health and Education Cess.
3.7 The Government of India has recognized the importance of the young startup sector in terms of innovation, job creation, FDI inflow, and also the amount of revenue generated by the exchequer. Therefore, vide Finance Bill, 2016 certain provisions are introduced to give 100% deductions of profit as per provisions of section 80-IAC. The Finance Act of 2023 has amended the provision to extend benefits of 80-IAC to all eligible startups that have incorporated between the period 1-4-2016 to 1-4-2024. These deductions are available for a period of 3 consecutive assessment years out of 5 years only to startups subject to compliance with conditions stipulated under the Act. This provision is subject to MAT provision u/s 115JB of the Act.
3.8 The Non-Resident OGCs may be subject to DTA, Equalization Levy, PE issues, and issues of taxation of royalty, taxation of SASS etc. This chapter does not deal with cross-border taxation aspects.
3.8.1 Equalization Levy was first introduced by the Finance Act of 2016. It is charged on the amount paid to a Non-Resident not having PE in India in respect of specified services provided by them to a resident or to a non-resident having PE in India. The levy is charged at 6% of the consideration paid to a non-resident U/s 165(1) of the Act. A threshold limit up to Rs. 1,00,000 payment to non-residents during the previous year is provided on which no levy shall be charged. Services covered under this section are:
a. Online advertisements.
b. Any provisions for digital advertising space.
c. Any other facility or services for online advertisement.
d. Any other services as may be notified by the Government.
e. Levy at 2% on digital services provided through e-commerce (This aspect is not covered in this chapter).
3.8.2 Some of the OGCs who either pay or derive income from services covered under provisions of section are required to comply with law
in Online Gaming
relating to equalization levy. Payment of levy has to be made on or before 7th day of month immediately following the month in which transaction take place as per provisions of section 166(2) of the Act.
Section 167(1) provides for filing of the return in Form No. 1 before 30/06 immediately following the financial year.
3.8.3 In case the levy is not paid the expenses related to such levy shall be disallowed u/s 40(a)(ib) and shall be allowed only in the year of payment of such levy.
3.8.4 Non-payment of levy or delayed payment of levy will also lead to a charge of interest and penalty as per sections 170 and 171 of the Act.
3.9 The OGCs are required to maintain books of account and get the books of account audited under the provisions of the Company’s Act 2013. The provisions related to maintaining of books of account and audit are provided in section 44AA and section 44AB of the Act. The OGCs (if individual, Partnership Firm, and LLP) are eligible to declare profit and pay tax as per the provisions of section 44AD of the Act subject condition that their turnover during the previous year does not exceed Rs. 2.00 Crores.
3.10 OGCs are required to file return of income as per the provisions of Chapter XIV more specifically provisions of section 139(1) of the Act. The returns of income filed may be selected for regular scrutiny assessment by the issue of notice U/s 142(1) r. w. s. 143(1) of the Act or by the issue of reassessment/income escaping assessment U/s 148 of the Act.
3.11 Regulatory authorities like GST Department, Income Tax Authorities, and Enforcement Directors are empowered to conducts search and seizure operations as per the provisions of the relevant law. Any non-compliance in one Law will lead to a huge impact on the assessment proceedings in other Law. The search and seizure operations under the Act will have far-reaching implications for the business as a whole.
3.12 As reported in The Indian Express e-Paper dated 24-2-2022 income tax authorities have conducted search and seizure operations on one OGC based in Mumbai. Post conclusion of the search operation Central Board of Direct Taxes has released a press statement “The search revealed that the group has been introducing its unaccounted cash into books of account as unsecured loans, security premium, partner’s capital, agricultural income,
Online Gaming Industry A practical Guide to Business and Taxation in India
share transactions, commission and trading income, etc., in the form of accommodation entries. This cash has been routed through several layers of dummy/shell companies controlled by the entry provider groups or through hawala channels. The amounts introduced in the books of account have been invested in real estate and securities market,” said a statement issued by the Central Board of Direct Taxes (CBDT) The income tax department has unearthed several millions of worth of tax fraud by the OGCs. The following table gives a few examples of the issues uncovered during the search operations by the direct tax department on OGCs.
Nature of allegation
No deduction and/or Lower deduction of TDS
Suppressing of revenue
Cash/Hawala Transactions
Description of issues involved
Whether TDS is to be deducted on gross winning or net winning, per game or per day, before credit or before payment. The law on this account was not very clear. The OGCs were doing TDS on net winning, for which the department contended otherwise, which led to dispute and litigation. The introduction of section 194BA, section 115BBJ coupled with the CBDT circular has clarified this matter to a great extent. OGCs should fight these cases judiciously and resolve the matter using all options, including payment of taxes, appeal, and alternate dispute resolution process.
The full amount of revenue is not accounted for in the book of account.
In some cases, the department was able to unearth systematic hawala/cash operation networks using the online gaming flat form. The OGCs had local area agents who collected cash from players and upon collecting cash equal amount of dummy points were credited to the account of the players. Using these dummy points players play online games, the winner is credited with additional winning points to his account. Once the player decides to withdraw cash, payments are made by OGCs in cash to players and at the same time, players’ user accounts are debited for the consumption of points on one or other pretext. The department has unearthed this complete Hawala network and brought a huge amount to the tax fold. (Source The Economic Times (Enews) 24/2/2022.
Additions proposed based on the search operations of the GST department
Unexplained Credits, Investments
U/ss 68 and 69 etc. read with section 115BBE
As per the protocol, there is a well-oiled mechanism through which financial and suspicious transactions unfold when intelligence gathered is shared with several departments of the Government. In case GST department based on various provisions of law confirms certain additional GST liability, then the direct tax department may also reopen such cases and assess additional income and tax it as per law. Then the question is if GST liability is confirmed whether the same can be claimed as expenses during the course of direct tax assessment?
These are common additions during search operations, the onus is on taxpayers to prove the correctness and creditworthiness of the transaction with unflinching documentation.
Any additions to income resulting from income tax search operation u/s 132 of the Act will have to be based on incriminating documents. This is upheld by the ratio decided by the Apex Court in the case of Principal CIT v. Abhisar Buildwell (P.) Ltd. [2023] 150 taxmann.com 257/294 Taxman 70 (SC) in Civil Appeal Number 6580 of 2021. This judgment was delivered in connection with the erstwhile scheme of assessments U/s 153A read with section 132 of the Act. In respect of any fresh search conducted on or after 1-4-2021 all assessments will be conducted as per the framework of the provisions of section 147 read with section 148 of the Act. It is necessary to evaluate how the ratio decided in the above-cited decision will come into play in the new scheme of search-related assessment proceedings.
If during the course of the search, any incriminating documents are found and statements are recorded, it is necessary that OGCs should make every endeavour to make correct representation before the investing wing of the department by presenting relevant documents and clarifying the intent/ meaning of the statements recorded. Otherwise such documents and statements will be held against the OGCs.
Post completion of the search all assessments of the group are centralized and assessments are processed U/s 147 read with section 148 of the Act.
3.13 There may be several complex and unresolved aspects that may lead to adverse burdens on the OGCs, therefore it is advisable to follow the most conservative, learned, opinion and compliance-driven strategy to mitigate the risk of litigation.
AUTHORS : SUJATHA G, VISHAL G. PODDAR, RAJEEV K. SHARMA, PRAVEEN SHARMA, NEHA TAYAL, RAHUL R. GANDHI, SATISH SUKUMAR CHIPPALAKATTI, DEEPAK KOTHARI
PUBLISHER : TAXMANN
DATE OF PUBLICATION : MAY 2024
EDITION : 2024 EDITION
ISBN NO : 9789357788939
NO. OF PAGES : 304
BINDING TYPE : PAPERBACK
Rs. 725 | USD 10
This book provides an in-depth analysis of the online gaming industry in India, focusing on the following:
Evolution
Legal Framework
Taxation Issues
It discusses various business models, such as free-to-play, subscription services, and in-game advertising, highlighting their unique challenges and opportunities.
Each chapter invites readers—from legal and accounting professionals to business strategists and curious students—to gain a holistic understanding of the complexities of online gaming in India.
The Present Publication is the Latest Edition, authored by CA. Sujatha G, CA. Vishal Govindprasad Poddar, CA. Rajeev K. Sharma, CA. Praveen Sharma, CA. Neha Tayal, CA. Rahul R. Gandhi, CA. Deepak Kothari, CA. Satish Sukumar Chippalakatti. The noteworthy features of the book are as follows:
[Introduction to Online Gaming] The book begins with an in-depth analysis of the online gaming industry, emphasising its dynamic intersection of technology, entertainment, and business. It discusses the historical development, various business models, and the significant growth of the global gaming industry, facilitated by technological advancements and widespread internet access
[Business Models in Online Gaming] This book analyses business strategies within the online gaming sector, such as free-to-play models with microtransactions, subscription services, and in-game advertising. Each model’s unique challenges and opportunities for developers, publishers, and players are discussed
[Legal Aspects in India] The book examines the complex legal framework surrounding online gaming in India, focusing on debates and judicial interpretations concerning games of skill versus chance and the broader legal issues impacting the industry
[Taxation Framework] A thorough analysis of taxation related to online gaming under GST and Income Tax is provided. The book covers GST compliance, input tax credits, cross-border transactions, and income tax issues like revenue recognition and deductions
[Global Perspective and Strategic Recommendations] The book discusses global policies on online gaming, comparing international jurisdictions and proposing strategic recommendations for policymakers, industry stakeholders, and regulators