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This decision of Income Tax Appellate Tribunal i.e. ITAT is no less than a big boon for the lovers of online gaming and playing real money games. In the last few years, legal and tax related complications have been increasing continuously on platforms like online rummy, poker and fantasy sports in India, due to which common players are very troubled. A recent high-profile case has proved that if a player has incurred an overall loss while gaming, he cannot be imposed with a heavy tax burden. In this historic case, a player had staked a total of Rs 2.61 crore on different platforms while playing online rummy and poker, but at the end of the year, instead of making a profit, he had to suffer a net loss of Rs 28 lakh. Despite this, the tax department had slapped a huge tax and penalty notice of Rs 2.33 crore on him on the basis of his total winnings or transaction turnover. But ITAT has given a judicious verdict and has completely canceled this unwanted tax demand, due to which lakhs of online gamers across the country have heaved a sigh of relief. This decision is going to be a major milestone in the ongoing legal debate between the tax authorities and gaming lovers, as it sends a clear message that the tax should be applicable only on the actual income or net profits and not on the total turnover or lost money.
The root of this entire controversy lies in the transactions done on online gaming platforms and the assessment process of the tax department. The victim player betted huge amounts at different times while playing online rummy and poker and invested a total of Rs 2.61 crore. The nature of gaming is such that the player sometimes wins small matches and sometimes loses big matches. When this player calculated his entire year’s transactions, he came to know that despite winning, he ended up with a net loss of Rs 28 lakh. Generally, when there is a loss in any business or investment, it is not taxable, but the automated system or assessment process of the Income Tax Department considered the total deposit and winning turnover of the player as his income. The tax authorities assumed that the amount of money the player invested in the game and the number of initial winnings he won was his taxable income, and on this basis imposed a huge tax of Rs 2.33 crore on him. The player was shocked to see the notice of such a huge amount, because he had lost the money from his pocket and on the contrary, tax worth crores was demanded from him. After this, the victim approached the Income Tax Appellate Tribunal i.e. ITAT against this unreasonable demand, where after a long legal hearing, justice was given and the decision of the tax department was reversed in which tax was being collected by ignoring the loss.
When the case reached the ITAT, the tribunal listened very closely to the arguments from both sides and studied the functioning of online gaming in depth. ITAT, in its order, laid special emphasis on the fact that any person should be taxed on his actual income and not on the total bets placed by him or the gross turnover. The court held that when the player ultimately suffered a net loss of Rs 28 lakh, he should not be considered an income earner but a loss-making investor. It is against the intention of the law for the tax authorities to assess the tax based only on the player’s winnings and deposit figures, ignoring his losses. ITAT clearly underlined that in games of skill like online rummy and poker, players play based on their own strategy and risk, and if their net result in a financial year is in loss, they cannot be forced to pay any additional tax on the same. This logical and justified decision has made it clear that the tax department should accurately tally the net profits and losses for the entire year while investigating gaming transactions instead of just looking at the initial figures. This decision has provided huge legal protection to all those taxpayers who are facing wrong tax demands despite incurring losses while gaming or trading.
The Government of India has recently made several stringent changes in the Income Tax Act to regulate the online gaming sector, in which section 115BBH has been specifically added. Under this new provision, a rule has been made to directly deduct TDS i.e. Tax Deducted at Source and Income Tax at the rate of 30 percent on any kind of winnings from online games. Apart from this, the rules for depositing and withdrawing money on gaming platforms have also been made quite strict. The problem arises when gaming companies or tax authorities deduct TDS on every small amount won by the player, but when the player loses the game and suffers a loss, there is no clear legal provision or clarity to set-off that loss with any other income. Due to this technical flaw, many times common players appear to be huge income holders on paper, whereas in reality their pockets are empty. This latest decision of ITAT shows a big direction in removing this technical confusion and complexity. This judgment advocates that unless there is real and net profit in online gaming, it is not justified to impose arbitrarily heavy taxes on it. Tax experts believe that after this decision, the government and the Finance Ministry may be forced to make online gaming tax rules more clear and practical in the future, so that players are not unnecessarily exploited.
The impact of this decision is not just on a single player, but its scope is huge and will affect the entire Indian online gaming industry. For the past few years, there was always a fear in the minds of millions of users playing on platforms like Dream11, MPL, PokerBaazi and various rummy apps that while celebrating their victory, they might get caught in the trap of notice from the tax department. Many casual gamers had even reduced playing on such platforms due to fear of tax, as the flat tax rate of 30 percent and the rule of not being able to deduct losses were proving to be a loss-making deal for them. Now after ITAT has made it clear that tax cannot be charged on net loss, the confidence of gamers will increase to a great extent. Along with this, this decision is also a relief news for all those gaming startups and companies who are continuously making new efforts to keep the players engaged on their platforms. However, along with this, gaming industry and tax experts are also advising that players should take full precautions from their side so that they can avoid any kind of legal complications in future. This judgment has proved that the Indian judiciary and tribunals are fully aware and prompt in resolving the new financial disputes of the technological and digital age, which is a positive sign for the digital economy of the country.
If you are also fond of playing online rummy, poker or other skill-based games, then you should take a huge lesson from this matter and act with utmost caution. The first and most important thing is that you keep the yearly transaction statements of all your gaming platforms, bank account transactions and TDS certificate i.e. Form 16A very safely. Many times players are not able to keep accurate track of their wins and losses, which leads to errors while filing income tax returns and the automated system issues notices. Always file ITR with the help of an experienced Chartered Accountant i.e. CA and show your gaming income or loss in the correct columns. If you have incurred a net loss on any gaming platform, indicate the same clearly in your return so that it becomes easier for the tax authorities to understand what your actual financial position is. Also, always avoid investing large amounts of money on any unknown or unregistered gaming app, as sometimes the risk of financial fraud increases due to fake apps. In the digital age, financial literacy and correct knowledge of the rules is your biggest security shield, so always be alert and enjoy online gaming only by following the guidelines set by the government.