With the festive season on course, various forms of entertainment, including esports games, are gaining traction. Some of these games also entail prizes and winnings in cash and kind.
Online games, such as Dota 2, Counter-Strike, Valorant, Call of Duty, and others are very popular within the young gaming population in India.
According to a report published by consultancy firm EY in 2021, “it is estimated that India has 150,000 players and around 60,000 teams”.
“Over 90 per cent of esports players participate in online mobile esports tournaments,” the report adds.
EY further shared that in FY 2021, IPL offered Rs 250 million in prize pool for the tournament. Esports tournaments offered Rs 150 million as prize pool.
But with this many players participating in esports event and winning prizes, the question that arises is how much money do the winners actually get to take home after paying taxes?
Indirect Taxation – GST
Goods and Services Tax (GST) is charged on games, but a different rate is charged depending on the type of the game.
Betting And Gambling Games: Archit Gupta, founder and CEO of Clear (formerly Cleartax), a tax filing assistance company, explained that GST is computed on gross gaming value or stake instead of the gross gaming revenue (total stake minus winnings distributed) or service fee.
“Hence, a 28 per cent GST is charged and collected on betting and gambling under the HSN code 999692 on the total stake or bet value,” adds Gupta.
HSN code is the harmonized system of nomenclature that classifies goods and services worldwide.
Game Of Skills: Esports is a game of skill, and so are some of the card-based games. Gupta highlighted that betting and gambling are games of chance in that they differ from the game of skills, such as e-sports and some card-based games.
“Game of skills, such as puzzles, e-sports, and gaming attracts 18 per cent GST under HSN 998439 on a commission fee,” Gupta adds.
Direct Taxation – Income Tax
The income tax rules are also different, based on the type of games one is playing, i.e., whether they are a game of chance or a game of skill.
Hence, before you calculate how much tax you have to pay for your esports or other games winnings, determine the type of game you are playing, whether it’s a skill or luck-based game.
In August 2021, the Supreme Court had ruled that Dream 11, a fantasy sports game is a game of skill and not a gambling, wagering, and/or betting game.
Saurrav Sood, a chartered accountant (CA) and practice leader (International tax and transfer pricing) at SW India, an advisory, assurance, tax, accounting and outsourcing services company, said, that the Income-tax Act, 1961 does not directly mention the terms ‘game of skills or ‘game of luck’. It mentions the type of games which will be taxed at a flat rate of 30 per cent on a gross basis.
“Applying the principles of Ejusdem Generis, one can say that where there are winning from such games or events which are akin to a game of chance, there is a higher rate of tax (30 per cent), and games which are skill driven, and hence, excluded from the provision, will be taxable as income from other sources (IFOS) on net basis i.e., deduction of expenditure shall be allowed from the receipts,” adds Sood.
“The amount of income tax calculated on the income by way of winnings from such lottery or crossword puzzle or race, including horse race or card game and other game of any sort or from gambling or betting of any form or nature whatsoever, shall be at the rate of 30 per cent,” says Section 115BB of the Income-tax Act, 1961.
Abhishek Soni, CEO and co-founder, Tax2win, a tax filing assistance company, said, "if any income is earned by way of a game of luck like the lottery, gambling, or others it will be considered as special income and will be taxable at a flat 30 per cent plus applicable cess without any basic exemption limit benefit."
Gupta further added that “any loss cannot be adjusted against such wins, and accordingly TDS at 30 per cent will also get deducted on such winnings”.
Winnings In Kind: Esports winnings are mostly in cash, but some other online games do give out players’ winnings in kind.
Gupta explains this aspect with an example. “The fair market value of kinds received as winnings will be considered for computing capital gains and assessable value for TDS under income tax,” he says.
“For instance, if the fair market value of the winning is Rs. 60,000, then 31.2 per cent (30 per cent tax rate plus cess) of 60,000, i.e., Rs.18,000 plus surcharge, if any, will be the income tax liability to be deposited with the government,” he adds.