SC upholds States power to tax lotteries organised by other States

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In a significant ruling, the Supreme Court bench comprising Justices MR Shah and BV Nagarathna upheld the State legislatures competence to levy tax on the lotteries organized by other states and allowed the appeals filed by the States of Karnataka and Kerala challenging the judgments of Karnataka and Kerala High Courts. The respective High Courts held that the states lacked the legislative competence to levy tax on the lotteries organized by other states like Nagaland, Meghalaya and Sikkim.

The Karnataka High Court in 2010 had struck down the Karnataka Tax on Lotteries Act, 2004 and held that the State lacked the legislative competence to enact the law. Similarly, in 2020, the Kerala High Court quashed the Kerala Tax on Paper Lotteries, Act, 2005. Both the states were directed to refund the tax collected under these legislations. Aggrieved by these decisions, the states have appealed to the Supreme Court.

“The power to tax is on all activities which are in the nature of ‘betting and gambling,’ including lotteries. Since, there is no dispute that lotteries, irrespective of whether it is conducted or organised by the Government of India or the Government of State or is authorised by the State or conducted by an agency or instrumentality of State government or Central government or any private player, is ‘betting and gambling’, State legislatures have the power to tax lotteries under Entry 62 of the State List,” Justice Nagarathna, who authored the 122-page judgment, held. It may be noted the case relates to pre-GST era.

The case pertains to pre-GST era where Entry-62 of the State List permitted states to impose tax on betting and gambling (which includes lottery). As part of GST reforms, the Entry 62 has been amended in 2016 to limit the taxing power to taxes on entertainments and amusements to the extent levied and collected by a Panchayat or a Municipality or a Regional Council or a District Council.

The Court held that entries in the different Lists should be read together without giving a narrow meaning to any of them. “Even where an Entry is worded in wide terms, it cannot be so interpreted as to negate or override another Entry or make another Entry meaningless.” The Court held that where one entry is made ‘subject to’ another Entry, all that it means is that out of the scope of the former entry, a field of legislation covered by the latter entry has been reserved to be specially dealt with by the appropriate Legislature.

“We find that Division Benches of the High Courts of Kerala and Karnataka were not right in holding that the respective State legislatures had no legislative competence to impose tax on the lotteries conducted by other States in their State,” Justice Nagarathna noted.

“We also hold that lottery schemes by the Government of other States are organised/conducted in the State of Karnataka or Kerala and there are express provisions under the impugned Acts for registration of the agents or promoters of the Governments of respective States for conducting the lottery schemes in the State of Karnataka and the State of Kerala. This itself indicates sufficient territorial nexus between the respondents–States who are organising the lottery and the States of Karnataka and Kerala.” the judgment said.