Online gaming tax

Online gaming tax

Subject :Economy

Context: 

Enforcement Directorate (ED) has attached proceeds of crime of more than ₹1,000 crore in several cases related to cyber and crypto assets frauds wherein online gaming etc have been used for siphoning the proceeds.

Details:

• Proceeds of crime have been attached/seized/freezed under the Prevention of Money Laundering Act, 2002  and Section 37A of the Foreign Exchange Management Act, 1999.
• The disclosure of information about specific taxpayers is prohibited except as provided under section 138 of the Income Tax Act, 1961.

Concept:

What is a game of skill versus one of chance?

• Games of skill –where “success depends principally  upon the superior knowledge, training, attention, experience and adroitness of the player”.
  •  For instance, the ability to strategize the selection of athletes in a virtual football team, to earn points (and eventually money) from picking the best possible team.
• Games of chance-where winning would depend solely on luck. Example-gambling
• Staking money or property on the outcome of a ‘game of chance’ is prohibited and subjects the guilty parties to criminal sanctions. However, placing any stakes on the outcome of a ‘game of skill’ is not illegal per se and may be permissible.
• The state legislators are given exclusive power to make laws relating to betting and gambling. Gambling is a non-cognisable and bailable offence in India.

Online gaming?

• Online gaming so far has been a state subject.
• Real money games (RMGs)  refers to any game that accepts payments in real money from users to payments in real money from users to play.
• Both Daily Fantasy Sport and rummy qualify as RMG and games of skill are legal while other RMGs fall in an undefined space.

Taxing online gaming?

• Any gambling venture is taxed at 28% of the gross value charged from participants, while skill-based gaming ventures are taxed at 18% of their revenue.
• Income of professional streamers –Professional streamers are players who stream their games online through YouTube and earn from the streaming platform based on the number of views.
  • It is taxable under the head ‘business & profession’ on income after considering business expenses (on net income).
  • This income is taxable at applicable slab rates  and no tax is payable if income is below ₹2.5 lakh.
• Income from winnings of real money from online games
  • It is taxable under “Income from other sources”.
  • Unlike income of professional streamers, no deductions are allowed, and tax is chargeable on the gross winning amount credited to the player’s account.
  • It is taxable at a flat rate of 31.2% irrespective of the quantum of winnings even if the total income is below ₹2.5 lakh.
• Joining bonuses and referral bonuses:
  • A joining bonus to players on login and referral bonuses for referring friends is taxable on a net basis at applicable slab rates.
  • For professionals  under the “Income from business and profession” and for others, it will be taxable as “Income from other sources”.
• Distribution during gaming tournaments:
  • Merchandise received by a professional is taxable under “Income from business & profession” irrespective of the market value of the merchandise.
  • For others, income is taxable only if the total market value of the merchandise exceeds ₹50,000.
• Income of minors:
  • Income of a minor child is clubbed with the income of the parent except when the income is on account of application of any skill, talent or specialized knowledge and experience.
  • Given that online gaming has been held to be a game of skill by various courts, income of minors from online gaming will be taxable in their own hands depending on the nature of the income.