With the immense popularity of the IPL in India, along with low-cost data plans and high penetration of mobile phones, the growth of the Indian fantasy sports betting industry has sky-rocketed in the last five years. Fantasy sports operators organize online games based on real-life sporting events such as cricket, football, basketball, hockey and kabaddi.

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According to the Federation of Indian Fantasy Sports (FIFS), the revenue of fantasy sports operators increased 3x year-on-year in FY20, to Rs2,400 Crores. The number of fantasy sports operators has increased from 10 in 2016 to 150 in 2020. The number of fantasy sports users has increased 50x from 2 million in 2016 to over 100 million in 2020.

Betting and gambling are regulated by The Public Gambling Act, 1867 (PGA), which prohibits all forms of gambling activities and betting on games of chance. The PGA has no provision for online gambling, so no specific law bars online gambling in India. Online gambling in India can be in the form of crossword, quizzes, card games or fantasy sports.

In regulating platforms offering such games, Indian laws differentiate between betting on games of chance and staking on games of skill. There is a strict prohibition on participation and offer of games of chance, while jurisprudence has taken a more favourable position with games of skill. Certain versions of fantasy sports games can be argued to be predominantly skill-based games.

The High Court of Punjab and Haryana held Dream 11’s format of fantasy sport to be a game of skill in the Varun Gumber Case. Thereafter, the Bombay High Court also recognised that the same format of fantasy sport was a game of skill.

Various courts have reasoned that a user’s exercise of skill-based superior knowledge, judgment and attention plays a critical role in analysing the element of skill involved in fantasy games. It is also reasoned that the result thereof is not dependent on winning or losing of a particular team in the real world game.

Fantasy games are organised in the form of a contest. In each contest, a user builds a virtual team (constituted by players of a real-time match) and competes against virtual team/s of other users. Based on the performance of players in the real event, the virtual team created by the user is allotted points. The users with the highest points are declared winners and are paid the winnings or prize money.

Fantasy sports and online betting winnings are taxable under section 115BB of the Income Tax Act (“ITA”) under the head ‘Income from Other Sources’. It is a standalone special provision that encompasses winnings from lottery, crossword puzzle, horse race, card games, betting, gambling or any other games. Further, Section 58(4) of the ITA provides that no deduction or expenditure is allowed to be claimed against such income.

Winnings are taxed at a flat rate of 30 percent, excluding cess. The net rate after cess amounts to 31.2 percent, without the benefit of the basic exemption limit. The platform paying out the winnings will need to deduct tax at source under section 194B of the ITA if the winnings exceed INR 10,000 per contest. The TDS deducted by the platform at the time of payment will be displayed in Form-26AS of the user.  The user can take credit of the TDS while filing his/her income tax return.

The crucial aspect is that income tax is to be paid on the entire winnings and no deduction in respect of any expenditure or allowance shall be allowed in computing the income by way of any winnings from fantasy sport games. Although the term ‘winnings’ defined by the CBDT vide its circular no. 240 of 1978 meant gross winnings net of the amount invested in the form of bet, the meaning has been modified with the introduction of Section 58(4) of the ITA in 1995. It is now established that no such expenditure of bet paid/entry fees shall be allowed as a deduction.

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