Supreme Court Ruling: Only States Can Tax Lotteries, Not Centre

In a significant ruling, the Supreme Court of India has reaffirmed that only state governments—not the Centre—have the authority to impose taxes on lotteries. A bench comprising Justices BV Nagarathna and Satish Chandra Sharma dismissed appeals filed by the central government, which had sought to levy service tax on lottery distributors under the Finance Act. The court ruled that lotteries fall under “betting and gambling” as per Entry 62 of the State List in the Seventh Schedule of the Constitution, placing them under the exclusive domain of state legislatures.

Lotteries as Betting and Gambling

While lottery tickets are categorised as actionable claims, the Supreme Court held that operating a lottery scheme qualifies as betting and gambling. This classification has significant legal implications, as taxation on betting and gambling falls strictly within the legislative competence of states. The ruling effectively nullifies multiple attempts by the Centre to impose a service tax on lottery distribution, reinforcing the constitutional separation of powers.

State-Specific Regulation and the Lotteries Act, 1998

India has a fragmented approach to lottery regulation. While states such as Maharashtra, Sikkim, Kerala, Nagaland, and West Bengal allow lotteries as a revenue-generating mechanism, others, including Uttar Pradesh, Gujarat, and Bihar, have banned them due to concerns about addiction and social consequences. This selective governance is enabled by Entry 34 of the State List, which gives states the discretion to regulate or prohibit lotteries under the Lotteries (Regulation) Act, 1998.

Centre’s Attempts to Levy Service Tax on Lotteries

The central government has long sought to bring lottery-related activities under the service tax net. Through amendments to the Finance Act in 2010, 2012, 2015, and 2016, it aimed to categorise the distribution, promotion, and marketing of lotteries as “business auxiliary services.” However, the Supreme Court ruled that these amendments did not change the fundamental nature of the transaction between states and lottery distributors.

The court clarified that for an activity to be classified as a taxable service, it must meet two conditions:

1. It must be carried out by one party for another.
2. It must involve a consideration in exchange for the service.

Since the lottery business operates on a principal-to-principal basis rather than a principal-agent relationship, it does not constitute a service, making it ineligible for service tax.

SC Ruling Upholds Prior High Court Decisions

This ruling aligns with earlier decisions by the Sikkim High Court, which had struck down multiple service tax levies on lottery-related activities between 2012 and 2017. Companies such as Future Gaming & Hotel Services (Private) Limited and Summit Online Trade Solutions Private Limited had challenged the Centre’s imposition of service tax and secured relief from the high court. The Supreme Court has now upheld this stance, reinforcing that lotteries are actionable claims, not goods, and are beyond the scope of service tax.

Implications of the Judgment

This verdict serves as a landmark precedent in India’s taxation and regulatory framework. It not only clarifies that states alone have the power to tax lotteries but also restricts the Centre from categorising them as taxable services. Additionally, the ruling highlights the importance of maintaining federal balance in taxation policies, ensuring that constitutional boundaries are upheld.

With this decision, the ongoing debate over lottery taxation has reached a decisive legal conclusion, preventing further legislative attempts to impose central taxes on lottery-related activities.

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