Special Tax Regimes for Gaming and Gambling Incomes : Clause 194 (Table: S. No. 1) of Income Tax Bill, 2025 Vs. Section 115BB of Income Tax Act, 1961

Clause 194 Tax on certain incomes.

Income Tax Bill, 2025

Introduction

Clause 194 of the Income Tax Bill, 2025, represents a significant evolution in the Indian taxation regime concerning "tax on certain incomes," particularly those arising from winnings such as lotteries, crossword puzzles, races, card games, and other games or gambling activities. Table S. No. 1 under Clause 194 specifically addresses the taxation of such winnings, setting forth the applicable rate, scope, and conditions. This provision is to be read in light of the existing section 115BB of the Income Tax Act, 1961, which has long governed the taxation of similar winnings. Section 115BB, introduced by the Finance Act, 1986 and subsequently amended, has been the statutory anchor for taxing winnings from lotteries, crossword puzzles, races (excluding income from the activity of owning and maintaining race horses), card games, and other games or gambling or betting of any form or nature. The provision ensures that such windfall gains are taxed at a flat rate, irrespective of the overall tax profile of the assessee, thus isolating these incomes from the progressive tax structure. The 2025 Bill's Clause 194, while retaining the core structure of Section 115BB, introduces certain refinements and distinctions, both in scope and in the treatment of online games, reflecting the dynamic nature of gaming and gambling in the digital era. This commentary provides a detailed examination of Clause 194 (Table S. No. 1), its legislative context, operative mechanics, and implications, followed by a comparative analysis with Section 115BB of the Income Tax Act, 1961.

Objective and Purpose

The legislative intent behind Clause 194 (Table S. No. 1) is to provide a clear, uniform, and efficient mechanism for taxing incomes that are generally characterized as windfalls or gains of a fortuitous nature, such as winnings from lotteries, gambling, and certain games. The rationale for a flat, high tax rate on such incomes is grounded in policy considerations:

• Equity and Progressivity: Winnings from gambling and similar sources are not considered regular or recurring income. Taxing such incomes at a flat rate ensures that beneficiaries of windfall gains contribute a fair share to the exchequer, irrespective of their regular income bracket.
• Administrative Simplicity: A uniform rate and denial of deductions or allowances minimize administrative complexity and scope for tax avoidance.
• Discouragement of Gambling: A high tax rate on such winnings also serves as a policy tool to discourage excessive gambling and speculative activities.
• Alignment with International Practice: Many jurisdictions similarly tax such incomes at flat rates, often higher than rates on regular income.

The 2025 Bill's Clause 194 extends this rationale to new forms of gaming and gambling, especially in the context of the digital economy, and seeks to address ambiguities and compliance challenges that have arisen under the previous regime.

Detailed Analysis of Clause 194 (Table S. No. 1) of the Income Tax Bill, 2025

1. Scope and Coverage: - Who is Taxed? Clause 194 (Table S. No. 1) applies to "Any person." This is an inclusive and broad formulation, ensuring that the provision applies to all assessees-individuals, companies, firms, HUFs, trusts, and any other juridical person-who derive income of the specified nature. This mirrors the approach in Section 115BB, which also applies to "any assessee."

2. Nature of Income Covered - The income subject to tax under Table S. No. 1 is defined as "Winnings (other than from any online game) from- (a) lottery; or (b) crossword puzzle; or (c) race including horse race (not being income from the activity of owning and maintaining race horses); or (d) card game and other game of any sort; or (e) gambling or betting of any form or nature." Each of these components warrants examination:

• (a) Lottery: Typically includes state lotteries, private lotteries, and any scheme by chance.
• (b) Crossword Puzzle: Any prize money received from solving crossword puzzles.
• (c) Race (including horse race): Winnings from betting on races, but specifically excludes income from the activity of owning and maintaining race horses, which is treated differently under the Act.
• (d) Card game and other game of any sort: Broadly covers all card games and other games where winnings are by chance.
• (e) Gambling or betting of any form or nature: This is a residuary category, ensuring all forms of gambling or betting are covered.

Notably, the provision expressly excludes "winnings from any online game," which is now separately dealt with under Table S. No. 5 of Clause 194.

3. Rate of Tax - The rate of tax prescribed is 30%. This is a flat rate, applied to the gross amount of winnings, with no slab or progressive structure. The flat rate is identical to that in Section 115BB, maintaining continuity in tax policy.

4. Conditions and Deductions - The "Conditions" column for S. No. 1 states "Nil." This means there are no special conditions for this category. However, by implication and consistent with the scheme of Section 115BB, this means:

• No deduction in respect of any expenditure or allowance is permitted against such income.
• No set-off of losses is allowed against such winnings.
• The gross amount is taxable at 30%.

This is reinforced by the language of Clause 194(1), which says the income-tax payable "shall be the aggregate of- (a) income-tax calculated on income mentioned in column C, at the rate mentioned in column D..." and (b) the tax on the balance of the total income as if the winnings were not included.

5. Computation Mechanism - The computation is bifurcated:

• First, the tax on the winnings (as defined) is computed at 30%.
• Second, the rest of the income (i.e., total income less winnings) is taxed as per the normal applicable rates to the assessee.
• The sum of the two is the total tax liability.

This ensures that the winnings do not push the assessee into a higher slab for the rest of their income, preserving the integrity of the progressive rate structure for normal income.

6. Exclusion of Online Games - A key change from the previous regime is the explicit exclusion of "winnings from any online game" from the scope of S. No. 1. This reflects the growing prominence of online gaming and the need for a separate, tailored tax regime for such winnings, which is provided for in S. No. 5 of the same Table.

7. Definitions and Clarifications - Clause 194(2) provides detailed definitions for terms such as "horse race," "online game," and others, to avoid ambiguity. For instance:

• "Horse race" is defined with reference to section 115.
• "Online game" is defined as "a game that is offered on the internet and is accessible by a user through a computer resource including any telecommunication device."

These definitions are crucial for ensuring clarity in the application of the provision, especially given the rapid evolution of gaming formats.

Practical Implications

1. For Taxpayers

• Uniformity: All taxpayers, regardless of their regular tax bracket, are subject to a 30% rate on such winnings.
• No Deductions: Taxpayers cannot claim any deductions for expenses incurred in earning such income (e.g., cost of lottery ticket, travel expenses to the race, etc.).
• Withholding Tax: Payers of such winnings are generally required to deduct tax at source at the applicable rate, ensuring upfront collection.

2. For Businesses and Payers

• Compliance: Entities paying such winnings (e.g., lottery organizers, casinos, race clubs) must ensure proper deduction of tax at source and reporting.
• Record-Keeping: Accurate records must be maintained to distinguish between types of winnings, especially in light of the separate treatment for online games.

3. For Regulators

• Enforcement: The flat rate and denial of deductions simplify enforcement and reduce disputes over the quantum of taxable income.
• Policy Monitoring: The exclusion of online games from S. No. 1 requires careful monitoring to prevent misclassification and ensure correct application of the relevant provision.

Comparative Analysis: Clause 194 (Table S. No. 1) vs. Section 115BB

1. Structural Similarity - Both Clause 194 (S. No. 1) and Section 115BB are special provisions for taxing winnings from lotteries, crossword puzzles, races, card games, and gambling/betting. Both prescribe a flat 30% rate and require the computation of tax in two steps: (a) tax on winnings at 30%, and (b) tax on the rest of the income as if the winnings were not included.

2. Exclusion of Online Games - A major point of divergence is the treatment of online games:

• Section 115BB (Post-2023 Amendment): The Finance Act, 2023, inserted a proviso stating that "nothing contained in this section shall apply to income by way of winnings from any online game for the assessment year beginning on or after the 1st day of April, 2024." Thus, online game winnings are excluded from Section 115BB from AY 2024-25 onwards.
• Clause 194 (2025 Bill): The exclusion of online game winnings is embedded in the very text of Table S. No. 1, and such winnings are addressed separately in Table S. No. 5 (taxed at 30%).

This shows a shift towards greater clarity and compartmentalization of different types of gaming income.

3. Definitions and Clarity - Clause 194 provides more elaborate definitions and cross-references to other enactments (e.g., Patents Act, Information Technology Act). Section 115BB, while providing an explanation for "horse race" and "online game," is less detailed in its definitional apparatus.

4. Scope of Application - Both provisions apply to "any person" and cover a wide range of winnings. However, Clause 194, as part of a new legislative framework, is more explicit in its coverage and exclusions. The 2025 Bill also integrates the treatment of other special incomes (e.g., royalty, carbon credits, virtual digital assets) within the same clause, suggesting a more consolidated approach.

5. Rate of Tax - Both prescribe a flat 30% rate for the specified winnings, maintaining continuity in tax policy.

6. Deductions and Set-Offs - Both provisions deny deductions for expenses or allowances against such income, and do not permit set-off of losses. This is implicit in Section 115BB and explicit in the general scheme of Clause 194.

7. Computation Mechanism -  The two-step computation (tax on winnings + tax on balance income) is identical in both provisions.

8. Legislative Evolution and Policy Rationale - The amendments to Section 115BB and the structure of Clause 194 reflect the evolving landscape of gaming and gambling in India. The exclusion of online games from Section 115BB, followed by their separate treatment in Clause 194, is a response to the digital transformation of gaming and the need for specialized tax treatment.

Interpretational Issues and Ambiguities

1. Distinction between Types of Games - The distinction between "online games" and other games may give rise to interpretational disputes, particularly in cases where games can be played both online and offline, or where the classification is ambiguous.

2. Definition of "Other Game of Any Sort" - The phrase "other game of any sort" is broad and could encompass a wide range of activities, potentially leading to litigation over the scope of the provision.

3. Treatment of Composite Incomes - Where an assessee earns income from multiple sources (e.g., part winnings from a physical card game and part from an online card game), careful segregation and classification will be required for correct tax computation.

4. Cross-Referencing with Other Provisions - The interaction between Clause 194 and other provisions (such as those relating to TDS, reporting, and penalties) will need to be harmonized to avoid overlaps or gaps.

Comparative Perspective: International Practice

Many jurisdictions tax gambling and lottery winnings at flat rates, often higher than regular income tax rates, and frequently deny deductions for expenses. The Indian approach, as reflected in both Section 115BB and Clause 194, is thus consistent with global best practices. The separate treatment of online games is a relatively recent development, reflecting the unique characteristics and policy concerns associated with digital gaming.

Potential Areas for Reform or Clarification

• Clarification on Mixed-Mode Games: Guidance may be needed on the treatment of games that can be played both online and offline, or where the platform is hybrid.
• Thresholds for Taxation: Consideration could be given to introducing minimum thresholds for taxation, to avoid taxing small, casual winnings.
• Coordination with TDS Provisions: Harmonization with withholding tax provisions is essential for smooth compliance.
• Public Awareness: Given the complexity, taxpayer education is crucial to ensure correct self-assessment and compliance.

Conclusion

Clause 194 (Table S. No. 1) of the Income Tax Bill, 2025, continues the policy of taxing windfall gains from lotteries, races, card games, and gambling at a flat, non-deductible rate of 30%, in line with the long-standing regime u/s 115BB of the Income Tax Act, 1961. The principal innovation is the exclusion of online gaming winnings from its scope, reflecting the legislative response to the digitalization of gaming. The provision is clear, comprehensive, and administratively efficient, but will require careful implementation and ongoing clarification to address emerging issues in the evolving gaming and gambling landscape.

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Full Text:

Clause 194 Tax on certain incomes.

 

Dated: 2-5-2025