Centre can't levy service tax on lottery distributors, only state govts can, rules SC

In a big relief to lottery distributors like Future Gaming and Hotel Services, the Supreme Court on Tuesday ruled that the Centre cannot levy service tax on such distributors for promoting, marketing and organising lottery and its only the state government that has such power.

Dismissing a batch of appeals by the Centre, a bench led by Justice B.V. Nagarathna upheld a Sikkim High Court's 2012 ruling that struck down a 2010 law imposing service tax on activities like promoting or organising lotteries.

The HC had held that Parliament had the power to levy taxes on any subject matter, including service tax, under the Union List, however it does not have the same competence and jurisdiction under State and Concurrent List.


The top court said that activities comprising of promotions, organising, reselling or any other manner assisting in arranging of lottery tickets of the state lotteries do not establish the relationship of a principal or an agent but rather that of a buyer and a seller.

“Although a lottery ticket is nothing but an actionable claim, the conduct of a lottery scheme is nothing but a betting and gambling activity. Therefore, it is only Entry 62 – List II which enables the imposition of tax by the state government,” the apex court said.

The SC in its judgment noted that the HC had applied the test of the principle of pith and substance and observed that the power to levy tax on lotteries, which are considered games of chance and fall under "betting and gambling" in Entry 62 - List II of the Seventh Schedule of the Constitution, lies exclusively with the State Legislature. Consequently, Parliament's authority to impose such a tax under its residuary power in Entry 97 - List I, read with Article 248 of the Constitution, is excluded. The High Court held that while Parliament is competent to levy service tax under Entry 97 – List I, this does not imply that it can impose such a tax on lotteries, as the power to levy taxes on this subject has been conferred on the State Legislature in List II. That the residuary powers of Parliament can only be exercised when no Entry in any of the Lists provide a legislative field. Hence, it is the exclusive legislative domain of the State Legislature to levy tax of any nature on lotteries by virtue of Entry 62 - List II, the top court affirmed the HC view.

The appeals were filed by the Union government against the HC judgment that declared clause (zzzzn) of the Section 65(105) of the Finance Act, 1994 as inserted by the Finance Act, 2010 as unconstitutional. The amendment had introduced the activity of “promotion, marketing, organising or in any other manner assisting in organising game of chance, including lottery” as a taxable service.