In a definitive judgment (UNION OF INDIA AND ORS. v. FUTURE GAMING SOLUTIONS P.LTD. AND ANR.ETC) on February 11, the Supreme Court has sided with the Sikkim High Court to strike down the imposition of service tax on lottery distributors.The High Court had held that lottery comes within the expression “betting and gambling” which is Entry 62 of state list and only state can impose tax.
Supreme Court ruled that it is only the state government which can impose taxes on lotteries and not the Centre. The court says that service tax cannot be imposed by Centre on sale of lotteries.
This decision emerged from challenging an amendment in the Finance Act of 1994, specifically clause (zzzzn) introduced by the Finance Act, 2010, which aimed to classify activities such as the promotion, marketing, and organizing of lotteries as taxable services.
Lottery distribution companies, which manage the sale of paper-based and online lottery tickets in Sikkim, argued that their operations did not align with the legal definition of a ‘taxable service.’ They claimed that lottery operations constitute “betting and gambling,” which are exclusively regulated by state legislation under Entry 62, List II of the Seventh Schedule to the Constitution, thereby rendering the federal imposition of service tax inappropriate.
Supporting the petitioners’ stance, the High Court previously ruled the contested clause unconstitutional, asserting that lottery-related activities do not qualify as services and are thus outside the realm of taxable activities. The court emphasized that such activities are part of “betting and gambling,” over which only state governments have the authority to tax.
The Supreme Court’s ruling, delivered by Justices B.V. Nagarathna and NK Singh, reaffirmed that there is no agency relationship between lottery distributors and the State of Sikkim, which means that the distributors are not providing a service to the state government. As such, the transactions involving lottery tickets and the government do not attract service tax.
This ruling reinforces the principle set by the 2024 Supreme Court verdict in K Arumugham v Union of India, which determined that the sale of lottery tickets by state governments does not constitute a service but a means to augment state revenue. Thus, lottery distributors are not liable for service tax under the category of “business auxiliary service.”
While this ruling relieves lottery distributors from service tax liabilities, they remain subject to state level gambling taxes as stipulated by local laws.
Case Details: C.A. No. 4289-4290/2013
