Online Gaming Tax: Section 194T Taxes Shadows, Not Substance
Representative image of online gaming in India! (Image X.com)
Double Taxation, No Loss Offsets, and Zero Thresholds — India’s New TDS Rule on Online Winnings Needs Urgent Reform
By P. SESH KUMAR
NEW DELHI, July 21, 2025 — The Indian Income Tax system, while evolving to meet the demands of a digital economy, must uphold fairness and equity as its guiding principles. Section 194T of the Income Tax Act, introduced through the Finance Act, 2023, fails that test.
On paper, Section 194T may appear to be a logical extension of earlier TDS provisions like Section 194B, meant to capture taxes on gambling and lottery winnings. However, its real-world application in the context of online gaming — a fast-growing and legitimate industry — has led to unintended consequences: double taxation, economic overreach, and a disproportionately high compliance burden, especially for casual or low-income players.
Double Taxation: When the State Taxes Non-Income
Perhaps the most glaring flaw in Section 194T is the inability to offset losses across platforms. Imagine a gamer winning ₹1 lakh on Platform A and losing ₹80,000 on Platform B. According to Section 194T, a 30% TDS is still deducted from the ₹1 lakh, regardless of the ₹80,000 loss elsewhere. The state, in effect, ends up taxing non-existent income — a scenario that blatantly contradicts the fundamental principle of taxing only “real” income.
This anomaly is exacerbated when combined with Section 115BBJ, which also levies a flat 30% tax on net winnings from online games. The term “net winnings” is left undefined in operational terms. Without standardized, cross-platform reconciliation mechanisms, players are liable to be taxed twice — once at the source and again when filing returns.
The Regressive Trap of One-Size-Fits-All Taxation
What makes Section 194T even more inequitable is its failure to distinguish between professional gamers and casual players. A college student winning ₹20,000 in a one-off game faces the same 30% TDS as a full-time gaming streamer earning lakhs. There is no exemption threshold, no scope for deductions under Chapter VI-A, and no consideration for expenses incurred in generating this income.
This flat-rate taxation not only violates the constitutional principle of equity — where taxation should match ability to pay — but also makes the system regressive. For many small players, especially those outside the taxable income bracket, filing returns to claim refunds becomes an uphill task. Often, they do not file returns at all, letting the deducted TDS become their final liability. In effect, this amounts to an indirect tax on the economically weaker segments — all in the name of income tax.
Liquidity Crunch: When Winnings Aren’t Even in Cash
Further compounding the issue is the liquidity challenge. Winnings in online games often come in the form of redeemable points, coins, or virtual assets — not always cash. But Section 194T mandates TDS deduction at the time of withdrawal or financial year-end, regardless of whether the income is actually realized. This forces gamers to pay tax on income they haven’t practically received.
The Constitutional Test: Article 265 and Article 14
Taxation, as per Article 265 of the Constitution, must be backed by authority of law. But it also must pass the test of fairness and reasonableness. Section 194T, by taxing players without regard to their actual net gains or ability to pay, opens itself up to constitutional scrutiny. Legal challenges on grounds of arbitrariness (Article 14) and violation of economic freedoms (Article 19) cannot be ruled out.
Rationalization Is Not Optional — It’s Urgent
The policy intent behind Section 194T — to widen the tax base and prevent evasion — is understandable. But in its current form, the law ends up penalizing honest players more than defaulters. The government must act swiftly to restore balance and equity. Here’s how:
- Allow Netting Across Platforms: A centralized, platform-neutral reconciliation system should be instituted to allow players to offset winnings and losses across different platforms before calculating tax liability.
- Introduce a Threshold for TDS: A basic exemption limit — say ₹50,000 or ₹1 lakh annually — should be applied to exempt low-stakes players from the burden of immediate tax deduction.
- Permit Expense Deductions: Entry fees, platform charges, and other legitimate expenses should be deductible from gross winnings, especially for professional gamers.
- Lower TDS for Casual Players: A differentiated TDS rate (say, 10% or nil) for first-time or low-frequency players can ensure proportionality and compliance.
- Clarify Definitions and Processes: The CBDT must issue detailed guidelines on what constitutes “net winnings,” how to handle non-cash earnings, and refund procedures to prevent harassment and ambiguity.
The Missed Opportunity of the DTC
Unfortunately, the Direct Taxes Code (DTC 2025) — India’s latest attempt to overhaul the income tax framework — fails to address this issue adequately. It reproduces the same inequitable structures without offering clarity or relief. The government must rectify this through rules, circulars, or amendments.
Don’t Let TDS Kill the Digital Economy
India’s digital economy is thriving, and online gaming is a legitimate part of it. Tax policy should adapt to its realities, not punish its participants. Section 194T currently taxes shadows — imaginary profits and not actual incomes — while stifling innovation and participation.
A progressive taxation system must balance efficiency with empathy. It must protect the exchequer without punishing the small player. Section 194T, in its current form, fails that test. The time to reform is now.
(This is an opinion piece, and views expressed are those of the author)
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