In a relief to lottery firms such as Future Gaming and Hotel Services Pvt. Ltd, the Supreme Court has ruled that lottery distributors do not have to pay service tax for organizing lotteries.
The court on Tuesday upheld a Sikkim high court decision that struck down a 2010 law imposing service tax on activities like promoting or organizing lotteries.
A bench comprising Justices B.V. Nagarathna and N. Kotiswar Singh ruled that lotteries fall under “betting and gambling”, which, under the Indian Constitution, only state governments have the authority to tax.
By dismissing the Union government’s appeal, the court reinforced that the Centre cannot impose service tax on such activities.
“There being no agency, no service is rendered by the respondent-assessees as agents to the Government of Sikkim. Therefore, service tax is not leviable on the transactions between lottery ticket purchasers and the Government of Sikkim,” stated Justice Nagarathna while reading out the judgment.
However, the apex court clarified that lottery companies remain liable to pay the gambling tax imposed by a state under Entry 62 of the State List.
The ruling is based on constitutional provisions that divide taxation powers between the Centre and states. Entry 62 of the State List (List II) explicitly grants states the power to tax betting and gambling, including lotteries, while Entry 34 of the same list gives states the power to regulate such activities.
The Centre, however, attempted to impose service tax on lottery distributors by invoking Entry 97 of the Union List (List I), which allows Parliament to tax matters not already covered under the Constitution.
Since betting and gambling fall squarely under the State List, the Supreme Court ruled that only states have the power to impose taxes on lotteries, rejecting the Centre’s claims.
The dispute originated in 2010, when the Indian Parliament amended the Finance Act, 1994, adding Clause (zzzzn) to Section 65(105).
This amendment classified activities like promotion, marketing, and organizing lotteries as taxable services, thereby subjecting lottery distributors to service tax.
Lottery companies, including Future Gaming and Hotel Services Pvt. Ltd, which sells paper and online lottery tickets organized by the Government of Sikkim, challenged this amendment in the Sikkim high court.
They argued that their activities do not fall under “taxable service” and that conducting lotteries qualifies as “betting and gambling”, which is exclusively under state jurisdiction as per Entry 62, List II of the Indian Constitution. They further contended that Parliament lacks the authority to impose taxes on state subjects under Entry 97 of the Union List.
On 29 November 2012, the Sikkim high court ruled in favour of the lottery companies, striking down Clause (zzzzn) of the Finance Act, 2010. The high court held that lottery distributors do not provide a service and, therefore, cannot be subject to service tax.
It also reaffirmed that betting and gambling are state subjects, and only state governments can impose taxes on such activities.
The Centre later challenged this ruling before the Supreme Court, which dismissed the Centre’s appeal.
This decision aligns with another 2024 ruling, which held that the sale of lottery tickets by a state government is not a taxable service but an activity aimed at generating additional revenue.
The court noted that wholesale lottery purchasers are not promoting or marketing any service the state provides, thereby excluding them from service tax liability.
