CONSTITUTIONALITY OF LEVYING GOODS AND SERVICES TAX ON LOTTERY & GAMBLING: DETAILED RECAPITULATION

This article has been authored by Savita Gangwar, a third year student at Army Institute of Law, Mohali.

Introduction

Lottery is a process of selling numbered tickets, consequentially giving prizes to those people whose numbers are chosen by chance. It is rather a game of luck affected by mere chance and not being controlled by a fair process. It is sometimes mixed with gambling which is wagering of money or something of value on an event with an uncertain outcome, with the primary intent of winning money or material goods.

Lottery is a part of gambling and is defined under S. 2(b) of The Lotteries (Regulation) Act, 1998. In India gambling is tightly regulated and is under a strict control except for few categories like lottery and horse- racing. The Public Gambling Act, 1867 declares all Gambling activities illegal except the games where skill is needed as held in RMD Chamarbaugwala v. Union of India .

The constitutionality of levying tax on lottery, betting and gambling was challenged in the Supreme Court (‘SC’) in Skill Lotto Solutions Pvt Ltd. v. Union of India,where the SC upheld the constitutional validity of tax imposition on lottery tickets and the prize money. The SC held that lottery and gambling under the Goods and Services Tax’s (‘GST’) ambit is legally valid and is not further questionable.

Background

Lottery, Betting and Gambling were regulated and taxed by various legislations even before the parliament made laws for control and management of these activities. Many State Governments had already enacted such legislations which included the imposition of tax on lottery. For example, Bengal Finance Sales Tax Act, 1941, Madras General Sales Tax Act, 1939 and Bombay Lotteries (Control and Tax) and Prize Competitions Tax Act, 1958.

In the year 1998, Lotteries (Regulation) Act was enacted to regulate lotteries and any matter connected with it. Under this act, S. 2(b) defines Lottery while S. 4 provides that a State Government can conduct or promote lottery subject in a manner which it deems fit. In addition to this, few legislations were formed which supported the concept of levying tax on lottery like Finance Act, 1994 imposed Service Tax on lottery ticket. In the year 2010, Central Government framed rules namely Lotteries (Regulation) Rules for the management of lotteries by state.

Article 246A was inserted in the Constitution through 101st Amendment Act, 2016 which contains special provisions with respect to GST. Another Act named Central Goods Services Tax (‘CGST’) was enforced in the year 2017 under which S. 2(52) defines ‘goods’ as any movable property except money and securities but also includes actionable claim which is defined under Section 3 of Transfer of Property Act, 1882 (‘TPA’). Chapter III of CGST contains provisions for Levy and Collection of Tax.

Challenged in the Supreme Court

CGST Act defines goods and includes actionable claim under it. Furthermore, it specifies that only lottery, betting and gambling under actionable claims shall be imposed with taxes. Petitioner in the case of Skill Lotto Solutions Pvt Ltd. v. Union of India filed a writ petition challenging the constitutionality of levying of tax on only lottery, gambling and betting under the CGST.

It was stated by the petitioner that GST is levied only on goods. Art. 366(12) of the Indian Constitution defines goods as all materials, commodities and articles and excludes actionable claims. TPA defines actionable claim as only claim and not goods. In addition to this, S. 2 of The Sales of Goods Act, 1930 excludes actionable claim from the definition of ‘goods’ which was also taken into consideration in State of Madras v. Gannon Dunkerley & Co. Ltd.In Sunrise Associates v. Government of NCT of Delhi, it was agreed that the sale of lottery ticket is not the sale of goods. S. 2(52) of CGST Act in defining ‘goods’ includes actionable claim in it, which is self- contradictory in nature and can be said as unconstitutional as according to the above-mentioned definitions, lottery is not a good. As goods and actionable claim are in no sense similar to each other thus, the Parliament does not enjoy absolute power for making such artificial definition of something and levy tax which otherwise is non- taxable.

Furthermore, the inclusion of only lottery, gambling and betting out of all actionable claims under the ambit of GST is a clear hostile discrimination. The petitioner pleaded that attempt of including actionable claim and that only these three within the meaning of goods seems to be a deliberate attempt to make the lottery fall within the scope of GST.

In Ayurveda Pharmacy v. State of Tamil Nadu and State of Uttar Pradesh v. Deepak Fertilizers & Petrochemical Corporation Ltd., it was held that when the commodities belong to the same class or category, then there must be some rational basis for discrimination between one and other for the purposes of imposing tax only on one particular commodity from the same class. The Petitioner claimed that there is no intelligible differentia for excluding all other actionable claim from the taxing net.

Detailed Overview

Article 366(12A) of the Constitution defines GST as any tax which is levied on supply of goods or services or both except on the supply of liquor for human consumption. The Parliament enjoys power of levying GST on lotteries under Article 246A of the Constitution.

The SC in Skill Lotto Solutions Case cleared the petitioner’s queries and held that the definition given under Sale of Goods Act is solely for the purpose of sale where exchange with some consideration has taken place. But here, a kind of contract is built which is entirely indivisible and in no way fulfills the condition for sale of goods. So, referring to the definition of goods under Sale of Goods Act, is completely non- acceptable. Also, the definition of goods given under Article 366(12) of Government of India Act, 1935 is inclusive in nature and can be interpreted by the judiciary in a wider sense. It thus, specifically includes actionable claim in it. As it was held in Reserve Bank of India v. Peerless General Finance and Investment Co. Ltd that the legislature has the power to enlarge the meaning of inclusive definition as to give it a natural and ordinary sense in words which statute wishes to give meaning to. When Parliament enjoys the power of making laws with respect to goods and services, it can be inferred that the legislative power of the Parliament is plenary.

Under Article 246A of the Constitution, the legislature of every state can make laws with respect to GST imposed by the Union or by such states. Further, the Parliament has exclusive powers to make laws related to goods and services tax where the supply of goods or services or both takes place in the course of inter- state trade or commerce. Furthermore, Article 279A of the Constitution approved GST Council to levy GST on lotteries, hence including lotteries under the definition of goods under S. 2(52) is in consonance with legislative, taxing policy and SC judgment of Sunrise Association Case, where it was held that the sale of lottery ticket amounts to actionable claim.

The court further stated that there is intelligible rational basis for including only these three which can be inferred from the case State of Bombay v. R.M.D. Chamarbaugwalawhere it was held that gambling activities are extra commercium. Although the external forms, formalities and instruments of trade may be employed but they are not protected either by Article 19(1)(g) or Article 301 of the Constitution. There is enough nexus to entitle state legislature to collect tax from people who carry such businesses like gambling or of such nature activities like lottery and betting which cannot be regarded as trade or commerce. It was further held that law recognizes lottery to be gambling which is res extra commercium.

Constitutionality

On December 3, 2020 the SC upheld the constitutionality of levying GST on Lottery, Betting and Gambling. It does not violate any constitutional provision nor does it conflict any definition of goods under Article 366 (12) of Indian Constitution. With the addition of Article 246A via 101st Amendment Act, 2016, Parliament is very much capable of making any laws related to GST.

In case of Navinchandra Mafatlal Bombay v. Commissioner of Income Tax, it was held that the Parliament enjoys power of interpreting the meaning of any term as such. Under this case, it was “income” which needed judicial interpretation while in Skill Lotto case, the term ‘goods’ under Constitution Act, must not be construed in a narrow sense and Parliament shall give the particular definition a meaning by expanding or expressing it in an appropriate sense.

H. Anraj v. Government of Tamil Nadu, challenged the levy of sales tax by the state legislature on the sale of lottery tickets. In another case of Sri Krishna Das v. Town Area Committee, it was held that it should be the legislature or the taxing authority to decide the question of need, the policy and to select the goods or services for taxation. Inclusion of only lottery, betting and gambling from actionable claim under the ambit of levying GST in no sense is discriminatory. Lastly, in case of Union of India v. Martin Lottery Agencies Ltd, the SC considered levy of service tax on lottery tickets as not ultra vires to the constitution.

Conclusion

It has already been explained as how the Parliament holds power of interpreting any inclusive definition in a wider sense but the interpretation of the definition must depend on the text and the context. ‘If the text is the texture, context is what gives the colour. A statute is best interpreted when we know why it was enacted’[i]

There lies sufficient rationale for including only these 3 categories under the ambit of levying tax under actionable claim. The framers of the Indian constitution who set up an ideal welfare state had never intended to elevate betting and gambling on the level of country’s trade or business or commerce. The SC Bench in RMD Chamarbaugwala case had the objective of taxing lottery, gambling as these were never accorded recognition of trade.

Hence, the constitutionality holds good position in the eyes of law.

[i] Skill Lotto Pvt Ltd. v. UOI, (2020 SCC Online SC 990), para.33