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IT dept’s idea of ​​gross winnings can kill online gaming

The platform in question is said to be an online rummy portal with around 8 million users. Other platforms like Dream11, which sponsored IPL and hosts wildly popular fantasy cricket games, and claims 130 million users, are also said to be under examination.

Online gaming has exploded in the past three years, due to a combination of favorable factors. India has a young population, with deep 4G penetration and lots of digital-savvy in 15-35 age cohort. The pandemic has also led to a focus on novel forms of digital entertainment.

There’s fierce competition among dozens of websites vying for gamer attention. Rummy is played on multiple online platforms and it has an industry lobby in The Online Rummy Federation, which says the industry size was roughly 2,200 crores in 2020.

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Dream11 is a market leader in fantasy sports. The Mobile Premium League (MPL) has unicorn status, and a presence in Indonesia and the US, with multiple different games (paid and free) hosted on the site. Plus, there are popular massively multiplayer online role-playing games (MMORGs) like World of Warcraft, Final Fantasy and PuBG (banned intermittently in India) which have global competitions with real money prizes. A large ecosystem has developed in India with platforms, coders, game developers and graphic designers gravitating to service demand for this form of entertainment.

The way the tax laws are structured doesn’t necessarily consider how such games or such platforms operate. So, let’s take a look.

The relevant Sections 155BB and 194B, (the latter for TDS) of The Income Tax Act apply to winnings from gaming, betting, lottery, etc. The tax on winnings from lotteries, crossword puzzles, races, card games, gambling or betting is a flat 30 per cent without any exemptions. The payer of the prize money (the online platform in these cases, or the turf club in horse races) will usually deduct tax at source (TDS) and pay the balance of winnings. Unlike in the stock market, or commodities trading, you cannot offset losses against winnings in these games.

All the platforms have free practice games as well as paid games. The latter can be played by putting money into an account (often called a wallet) on the platform. All platforms are digital, with KYC becoming applicable either on sign up or when somebody withdraws money from the wallet. All cash transfers are digital. Hence, the IT department can track all this data.

Fantasy cricket games are similar in payout style to horse-race totalizers or lotteries. Everyone who plays a game puts down money, creating a pool. The platform takes a cut to run the operation (this is where the profits come from). The winners divide up the rest of the pool. The government should take a cut, that flat 30 per cent, from the pool. That is what it does with state-run lotteries, and with horse-race totalizers.

There can be one complication–the money may remain on the platform, with players continuing to play with reinvested winnings. Generally, in such cases, only withdrawals are taxed. In analogy with the stock market, capital gains are considered notional and charged only when stocks are sold.

How can an industry with 2,200 crore in total revenues have 58,000 crores in winnings? The paradox resolves when we consider the fact that it’s “gross winnings”. It is entirely possible to have huge gross winnings, on very small pools of cash, while actually making nothing, or losing money.

For example, somebody plays rummy with a cut-off of 2,000. He is prepared to lose a maximum of that amount and so puts 2,000 in his gaming wallet. He plays 10,000 deals a year, which is roughly 30 deals a day (about two hours per day). He wins an average of 55 per deal half the time and loses 55 per deal rest of the time. At the end of the year, he has “gross winnings” of 2.75 lakh and net winnings of zero. He has rarely had a balance of much more than 2,000 sitting in the wallet.

Now if he withdraws that 2,000, I may have to pay 600 as tax on assumed winnings. But if the IT Dept looks only at the gross winnings and ignores the losses, does he face a tax demand for 30 per cent of gross winnings of 2.75 lakh?

Given digitisation, KYC, etc., the IT department has access to all data on all platforms. It is hard to believe that the platforms would have knowingly attempted to help players evade tax. Note that the platforms don’t gain from enabling tax evasion; they pay taxes anyway on the fees they charge.

How the IT department chooses to interpret the law and apply it, is therefore key. Other countries with laws regarding capital gains taxes on games, football pools, lotteries, fantasy cricket, etc., have found ways to keep these popular forms of entertainment going, without killing them with over-zealous tax demands.

The devil is in the details. If the IT department interprets “gross winnings” without considering the business model, it could potentially lead to a shutdown of this entire ecosystem, with huge loss of employment, venture capital going up in smoke, and ultimately, far less in the way of tax It’s up to the IT Department to avoid killing the digital geese laying these golden eggs.

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