Summary of webinar on taxation and fema related aspects of gaming winnings

iPleaders in association with Pokerguru.in and GLaws.in has published a summary of the webinar with Sunil Agarwal, Senior Tax Partner at AZB & Partners and former Additional Commissioner of Income Tax held  on 13th September, 2015.  The following are some key points that emerged from the discussion in the webinar:

FEMA implications

Schedule I of FEMA Current Account Transaction Rules prohibits drawing foreign exchange for remittance for purchase of lottery tickets, banned/prescribed magazines, football pools, sweepstakes, etc. abroad. Further, any amount in India that is earned through lottery winnings, income from racing/riding, etc., or any other hobby cannot be remitted abroad as per the schedule.

There is a possibility that the authorities may give a broad interpretation to the words hobby, sweepstakes, lottery etc. and therefore there is distinct possibility that poker winnings (irrespective of whether poker is judicially held to be a game of skill or not) will be part of the list of prohibited activities under the Current Account Transaction Rules. FEMA requires “residents‟ to bring back foreign currency earned abroad – so winnings need to be brought back.

Even if you are an exporter and hold a special account (called Exchange Earner’s Foreign Currency Account), funds need to be brought back before the end of the calendar year. In this regard, if you are not a person resident in India as per FEMA (this is different from the test of residence under Section 6 of Income Tax Act), there are workarounds. Second, if foreign exchange is not obtained from India but is independently invested from offshore earnings (e.g. of a business abroad), there may be scope to argue that the regulations do not apply. However, this is untested.

Compliances under the new Black Money law with regard to gambling/betting winnings remitted through e-wallets/directly from such websites

The amount and all accounts abroad need to be disclosed and filed as per Form 6. Valuation of assets must be done as per the rules  There is an exemption from penalty if the amount of undisclosed foreign assets under the Black Money law is less than Rs. 5 lakhs

To that extent, you can continue to hold money in offshore poker accounts. The option to disclose any income earned till 31st March 2015 but which was not disclosed elsewhere (e.g. under income tax law) is till 30th September 2015. This disclosure needs to be made under Black Money law. On this, you need to pay a total of 60 percent tax. Any income earned after 31st March 2015 can be disclosed under income tax law during the normal course of filing returns in 2016.

Disclosure under the Black Money Law brings about immunity from penalty under multiple laws including FEMA. It is however clarified that both the Black Money law and FEMA Current Act Transaction Rules will only apply if a person deposits or withdraws money on an international poker website located out of India. The Black Money law or FEMA Rules will have no application in a scenario where a player is depositing and withdrawing money in Indian Rupees on a poker website setup as per Indian laws.

Income Tax on winnings from poker or other games in India

As per Section 115BB of the Income Tax Act, tax on winnings from gambling, lotteries, card games, prize competitions etc. is 30%. No set-off , carry forward or deduction for loss or expenses is permitted since this is a special type of income. Consequently a flat rate of 30% plus applicable cess is payable by assesses irrespective of whether there is any other source of income or not. Even if there are no other sources of income and the income from gaming winnings is below the taxable slab, Income Tax would still be payable on the same.

Gaming websites also have to deduct 30% as Tax Deducted at Source (TDS) on winnings exceeding Rs. 10,000/- as per Section 194B of the Income Tax Act. While the website which does not deduct TDS on winnings above Rs. 10,000/- is liable to pay penalty and may face criminal prosecution, such non-compliance does not absolve the assessee from tax liability. An assessee is required to disclose winnings from gaming activities and pay taxes at the time of filing the annual return/advance tax return even if TDS is not deducted on such winnings.

Withholding tax on winnings outside India

Whether or not India has a Double Taxation Avoidance Agreement (DTAA) with a foreign country offshore country, the Indian income tax law allows claiming credit of the amount deducted as withholding tax in the foreign country.

Note: Full summary of the webinar is available here and format for disclosure of black money winnings is available here.