The platform in question is said to be an online rummy portal with around 8 million users. Other platforms like Dream11, which sponsors the IPL and hosts the wildly popular fantasy cricket games, and claims 130 million users, are also said to be under scrutiny.
Online gaming has exploded over the past three years, due to a combination of favorable factors. India has a young population, with deep penetration of 4G and a lot of digital-savvy in the 15-35 age group. The pandemic has also focused on new forms of digital entertainment.
There is fierce competition among dozens of websites to grab the attention of the gamer. Rummy is played on several online platforms and it has an industry lobby in the Online Rummy Federation, which states that the size of the industry was roughly 2,200 crore in 2020.
You might also like
No, Airbags Alone Are Not Enough
Do you benefit if the life insurance commission is reduced?
How Adil Shetty of Bank Bazaar juggled five credit cards
Why all the shares of CIL are operated
Dream11 is the market leader in fantasy sports. The Mobile Premium League (MPL) has unicorn status, and has a presence in Indonesia and the US, with many different games (paid and free) hosted on the site. In addition, there are popular massively multiplayer online role-playing games (MMORGs) such as World of Warcraft, Final Fantasy and PuBG (intermittently banned in India), which have global competitions with real money prizes. India has developed a large ecosystem with platforms, coders, game developers and graphic designers fueling the demand for the service of this form of entertainment.
The way tax laws are structured does not necessarily govern how such games or such platforms work. So, let’s take a look.
The relevant sections 155BB and 194B of the Income Tax Act, (the latter for TDS) apply to winnings from gaming, betting, lotteries etc. The tax on winnings from lotteries, crossword puzzles, races, card games, gambling or betting is a flat 30 percent without any rebate. The payer of the prize money (in these cases the online forum, or turf club in horse racing) will usually deduct tax at source (TDS) and pay the balance of the winnings. Unlike stock market or commodity trading, you cannot set off losses against winnings in these games.
All 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 the platforms are digital, KYC is applied on sign up or when someone withdraws money from the wallet. All cash transfers are digital. Therefore, 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 the game creates a pool and puts in money. The platform takes the cut to run the operation (this is where the profits come from). The winners split the remaining pool. The government should deduct 30 percent of that flat from the pool. That’s what it does with state-run lotteries and horse racing totalizers.
There may be a complication – money can remain on the platform, with players continuing to play with reinvested winnings. Usually in such cases only the withdrawal is taxed. Analogous to the stock market, capital gains are considered notional and are charged only when the stock is sold.
How can one be with the industry 2,200 crore in total revenue 58,000 cr in winnings? The paradox is resolved when we consider the fact that it is a “gross win”. On very small pools of cash, it’s entirely possible to win big gross, without actually making anything, or losing money.
For example, someone plays rummy with a cut-off 2,000. He is ready to take maximum loss of that amount and therefore puts 2,000 in his gaming wallet. He makes 10,000 deals a year, which is about 30 deals a day (about two hours per day). he averages wins 55 per deal half time and loses 55 per deal the rest of the time. At the end of the year, he has a “gross win”. 2.75 lakhs and net winnings of zero. he has rarely had a balance of more than 2,000 sitting in the wallet.
Now if he takes it back 2,000, he may have to pay 600 as tax on estimated winnings. But if the IT department only looks at the gross winnings and ignores the losses, does it face a tax demand for 30 per cent of the total winnings? 2.75 lakhs?
Looking at digitization, KYC etc., the IT department has access to all the data across all the platforms. It’s hard to believe that the platforms would have deliberately tried to help players avoid taxes. Note that enabling tax evasion does not benefit the platform; They pay the fee they charge anyway.
Therefore, how the IT department chooses to interpret the law and enforce it is critical. Other countries with laws regarding capital gains taxes on sports, football pool, lotteries, fantasy cricket, etc. have found ways to keep these popular forms of entertainment going, without hitting them with overly enthusiastic tax demands.
The devil is in the details. If the IT department interprets this as a “gross win” without considering the business model, it could potentially shut down this entire ecosystem, leading to huge job losses, venture capital rising up in smoke, and ultimately, taxes. There is little in the way of revenue. It’s up to the IT department to avoid killing these golden egg-laying digital geese.
Elsewhere in Minto
In opinion, Niranjan Rajadhyaksha writes on supply side return On the radar of policy. Vivek Kaul says: free popcorn Bollywood’s problems can be solved. how rahul manthan writes a century old law One industry has been badly affected. long story tells how Thatcher fan Liz Truss Will face the perfect storm that awaits him.
catch all business News, market news, today’s fresh news events and breaking news Updates on Live Mint. download mint news app To get daily market updates.