LEGAL ISSUE: Whether State legislatures have the power to tax lotteries organized by other states or the Central Government.
CASE TYPE: Constitutional Law, Taxation
Case Name: State of Karnataka & Anr. Etc. vs. State of Meghalaya & Anr. Etc.
Judgment Date: 23 March 2022
Introduction
Date of the Judgment: 23 March 2022
Citation: (2022) INSC 178
Judges: M.R. Shah J. and B.V. Nagarathna J. (authored the judgment)
Can a state government tax lotteries organized by other states or the Central Government within its territory? This was the central question before the Supreme Court in a batch of appeals filed by the States of Karnataka and Kerala. The core issue revolved around the interpretation of the Constitution’s Seventh Schedule, specifically the entries related to betting, gambling, and lotteries. The Supreme Court, in this judgment, addressed the legislative competence of states to levy taxes on lotteries, clarifying the scope of relevant constitutional provisions.
Case Background
The States of Karnataka and Kerala had enacted laws to tax lotteries organized by other states and the Central Government within their territories. These laws were challenged by several states, including Nagaland, Arunachal Pradesh, Meghalaya, and Sikkim, who are organizers of lotteries. The High Courts of Karnataka and Kerala had ruled against their respective state governments, stating that the state legislatures lacked the power to tax lotteries organized by other states or the Central Government. Aggrieved by these judgments, the States of Karnataka and Kerala appealed to the Supreme Court.
The respondent states argued that the power to regulate and tax lotteries organized by the Central or State governments rested exclusively with the Parliament under Entry 40 of List I of the Constitution. They contended that the State legislatures’ power to tax betting and gambling under Entry 62 of List II did not extend to these government-organized lotteries.
Timeline
| Date | Event |
|---|---|
| 27th December, 2010 | Division Bench of the High Court of Karnataka held that the Karnataka Legislature had no legislative competence to pass the Karnataka Tax on Lotteries Act, 2004. |
| 7th March, 2011 | Division Bench of the High Court of Karnataka reiterated that the Karnataka Legislature had no legislative competence to pass the Karnataka Tax on Lotteries Act, 2004. |
| 30th April, 2020 | Division Bench of the High Court of Kerala held that the Kerala legislature had no legislative competence to enact the Kerala Tax on Paper Lotteries, Act, 2005. |
| 9th August, 2021 | Division Bench of the High Court of Kerala reiterated that the Kerala legislature had no legislative competence to enact the Kerala Tax on Paper Lotteries, Act, 2005. |
| 10th August, 2021 | Division Bench of the High Court of Kerala reiterated that the Kerala legislature had no legislative competence to enact the Kerala Tax on Paper Lotteries, Act, 2005. |
| 23rd March, 2022 | Supreme Court of India delivered the judgment. |
Arguments
Arguments on behalf of the Appellants (Karnataka and Kerala):
- The tax imposed is on the act of gambling, not on the sale of lottery tickets, and thus falls under Entry 62 of List II.
- Entry 40 of List I is a regulatory entry, while Entry 62 of List II is a specific taxing entry.
- The tax is on the chance to win a prize, which is an aspect of gambling, and not on the sale or purchase of lottery tickets.
- The tax is not extra-territorial as it is on the act of gambling within the state, even if the lottery is organized by another state.
- Lotteries are res extra commercium and hence do not get protection under Articles 19(1)(g) or 301.
- There is a rebuttable presumption that an indirect tax is passed on to consumers, and the burden of proof lies on those claiming a refund.
- The regulatory power of the Union cannot subsume the taxing power of the states.
Arguments on behalf of the Respondents (Nagaland, Sikkim, Meghalaya):
- Lotteries organized by the Government of India or a State fall under Entry 40 of List I, giving exclusive legislative power to the Parliament.
- The term ‘betting and gambling’ in Entries 34 and 62 of List II does not include lotteries organized by the government.
- The impugned Acts seek to tax the sale of lottery tickets, which is not permissible as per the Supreme Court’s ruling in Sunrise Associates vs. Govt. of NCT of Delhi.
- The State Acts operate extra-territorially as the activities related to lotteries occur outside the state’s territory.
- The tax is collected in advance, which is detrimental to the economic interests of the North-Eastern states.
- If the impugned Act is held to be valid then it would lead to multiple taxation of the same event.
- The power to impose taxes which are beyond the legislative fields covered under entries specified in List I and List II, would vest only with the Parliament by virtue of Entry 97 of List I read with Article 248 (3) and Article 265 of the Constitution of India.
| Submission | Appellants (Karnataka and Kerala) | Respondents (Nagaland, Sikkim, Meghalaya) |
|---|---|---|
| Legislative Competence | State legislatures have the power to tax gambling under Entry 62 of List II, which includes lotteries. | Only Parliament has the power to legislate on lotteries organized by the government under Entry 40 of List I. |
| Nature of Tax | Tax is on the act of gambling, specifically the chance to win, not on the sale of tickets. | Tax is essentially a sales tax on lottery tickets, which is impermissible. |
| Territorial Nexus | Tax is valid because the gambling activity occurs within the state when people participate in lotteries. | The Acts operate extra-territorially as the core activities of lottery organization occur outside the taxing state. |
| Interpretation of Entries | Entry 40 of List I is regulatory, while Entry 62 of List II is a specific taxing entry. | The term ‘betting and gambling’ in Entries 34 and 62 of List II does not include government-organized lotteries. |
| Taxation Power | State legislatures have the power to tax gambling under Entry 62 of List II, which includes lotteries. | The power to impose taxes which are beyond the legislative fields covered under entries specified in List I and List II, would vest only with the Parliament by virtue of Entry 97 of List I read with Article 248 (3) and Article 265 of the Constitution of India. |
Issues Framed by the Supreme Court
The Supreme Court framed the following issues for consideration:
- Whether the subject ‘lotteries organised by the Central Government and the State Governments’ being carved out of ‘betting and gambling’ which is dealt with under Entry 34 of List II and being placed in Entry 40 of List I would also exclude the power of taxation on the same in Entry 62 of List II?
- Whether the power of taxation on ‘betting and gambling’ is within the ambit of Entry 62 of List II?
- Whether the impugned Acts passed by the Karnataka and Kerala State Legislatures are within the legislative competence of Entry 62 of List II, and are therefore valid pieces of legislation?
- What order?
Treatment of the Issue by the Court
The following table demonstrates as to how the Court decided the issues:
| Issue | Court’s Decision | Brief Reasons |
|---|---|---|
| Whether the subject ‘lotteries organised by the Central Government and the State Governments’ being carved out of ‘betting and gambling’ which is dealt with under Entry 34 of List II and being placed in Entry 40 of List I would also exclude the power of taxation on the same in Entry 62 of List II? | No. | The Court held that the exclusion from Entry 34 of List II for regulatory purposes does not exclude the power to tax under Entry 62 of List II. |
| Whether the power of taxation on ‘betting and gambling’ is within the ambit of Entry 62 of List II? | Yes. | The Court affirmed that Entry 62 of List II specifically grants the power to tax betting and gambling, which includes lotteries. |
| Whether the impugned Acts passed by the Karnataka and Kerala State Legislatures are within the legislative competence of Entry 62 of List II, and are therefore valid pieces of legislation? | Yes. | The Court concluded that the State Legislatures had the competence to enact the impugned Acts under Entry 62 of List II. |
| What order? | Appeals allowed. | The Court set aside the judgments of the High Courts and upheld the validity of the state laws. |
Authorities
The Supreme Court considered the following authorities:
| Authority | Court | How it was used by the Court |
|---|---|---|
| Sunrise Associates vs. Govt. of NCT of Delhi [(2006) 5 SCC 603] | Supreme Court of India | Explained that lottery tickets are actionable claims, not goods, and cannot be taxed under Entry 54 of List II. |
| Skill Lotto Solutions Pvt. Ltd. vs. Union of India [2020 SCC Online SC 990] | Supreme Court of India | Mentioned that actionable claims are brought under the tax network of GST. |
| Govind Saran Ganga Saran vs. Commissioner of Sales Tax [AIR 1958 SC 1041] | Supreme Court of India | Stated that a levy cannot be questioned if the source of taxation, taxable event, and measure are available to tax a person. |
| M.P.V. Sundararamier and Co. vs. State of Andhra Pradesh [AIR 1958 SC 468] | Supreme Court of India | Held that a regulatory entry cannot subsume a taxing entry when they are traceable to different sources. |
| State of West Bengal vs. Kesoram Industries Limited [(2004) 10 SCC 201] | Supreme Court of India | Reiterated that a regulatory entry cannot subsume a taxing entry when they are traceable to different sources. |
| Synthetics and Chemicals Ltd. vs. State of Uttar Pradesh [(1990) 1 SCC 109] | Supreme Court of India | Held that the power to regulate does not include the power to levy tax unless it is for a regulatory purpose. |
| Jalkal Vibhag Nagar Nigam vs. Pradeshiya Industrial and Investment Corporation [2021 SCC Online SC 960] | Supreme Court of India | Reiterated that the power to regulate does not include the power to levy tax unless it is for a regulatory purpose. |
| RMDC vs. State of Mysore [AIR 1962 SC 594] | Supreme Court of India | Held that the power to regulate does not include the power to levy tax unless it is for a regulatory purpose. |
| State of Bombay vs. R.M.D. Chamarbaugwala [AIR 1957 SC 699] | Supreme Court of India | Stipulated the principles for the nexus theory test in taxation. |
| B.R. Enterprises vs. State of Uttar Pradesh [(1999) 9 SCC 700] | Supreme Court of India | Held that lotteries are res extra commercium and do not get protection under Article 19(1)(g) or 301. |
| Mafatlal Industries Ltd. vs. Union of India [(1997) 5 SCC 536] | Supreme Court of India | Stated that there is a rebuttable presumption that an indirect tax is passed on to consumers. |
| Somaiya Organics (India) Ltd. vs. State of Uttar Pradesh [(2001) 5 SCC 519] | Supreme Court of India | Discussed the concept of prospective overruling. |
| I.C. Golak nath vs. State of Punjab [AIR 1967 SC 1643] | Supreme Court of India | Discussed the concept of prospective overruling. |
| India Cement Ltd. vs. State of Tamil Nadu [(1990) 1 SCC 12] | Supreme Court of India | Discussed the concept of prospective overruling. |
| H. Anraj vs. State of Maharashtra [1984 (2) SCC 292] | Supreme Court of India | Held that Parliament has exclusive power to make laws in respect of lotteries organized by the government. |
| State of Haryana vs. M/s Suman Enterprises [(1994) 4 SCC 217] | Supreme Court of India | Held that regulation of lotteries organized by other states is within the exclusive regulatory power of the Parliament. |
| Jindal Stainless Ltd. vs. State of Haryana [2017 (12) SCC 1] | Supreme Court of India | Stated that the same expression, if used in different entries in the same List, would have the same meaning. |
| Prof. Yashpal vs. State of Chhattisgarh [2005 (5) SCC 420] | Supreme Court of India | Held that a narrow or restrictive interpretation would generally not be accorded to a legislative heading which is general in nature. |
| Union of India vs. Harbhajan Singh Dhillon [1971 (2) SCC 779] | Supreme Court of India | Held that the power to levy wealth tax is traceable to Entry 97 of List I. |
| Federation of Hotel and Restaurant Association of India vs. Union of India [(1989) 3 SCC 634] | Supreme Court of India | Held that the subject of a tax is different from the measure of the levy of tax. |
| New Delhi Municipal Council vs. State of Punjab [(1997) 7 SCC 339] | Supreme Court of India | Discussed the principle of inter-governmental immunity. |
| Prafulla Kumar Mukherjee vs. Bank of Commerce, Khulna [AIR 1947 P.C. 60] | Privy Council | Held that if a law is in its pith and substance within the competence of the Legislature which has made it, it will not be invalid because it incidentally touches upon the subject lying within the competence of another Legislature. |
| State of Bombay vs. FN Balsara [AIR 1951 SC 318] | Supreme Court of India | Held that if a law is in its pith and substance within the competence of the Legislature which has made it, it will not be invalid because it incidentally touches upon the subject lying within the competence of another Legislature. |
| Atiabari Tea Company Ltd. vs. State of Assam [AIR 1961 SC 232] | Supreme Court of India | Observed that the test of pith and substance is generally and more appropriately applied when a dispute arises as to the legislative competence of the Legislature. |
| Ujagar Prints vs. Union of India [AIR 1989 SC 516] | Supreme Court of India | Observed that the Entries in the legislative Lists must receive a liberal construction. |
| United Provinces vs. Atiqa Begum [AIR 1941 FC 16] | Federal Court of India | Held that the power would extend to all ancillary and subsidiary matters which can fairly and reasonably be said to be comprehended in that topic or category of Legislation. |
| Calcutta Gas Company vs. State of West Bengal [AIR 1962 SC 1044] | Supreme Court of India | Held that every attempt should be made to harmonise the contents of the Entries. |
| RMDC vs Union of India [AIR 1957 SC 628] | Supreme Court of India | Held that if the Legislature passes a law which is beyond its legislative competence, it is a nullity ab-initio. |
| Re. Sea Customs Act [AIR 1963 SC 1760] | Supreme Court of India | Held that under Article 289, the Union cannot tax the property and income of a State. |
| Khyerbari Tea Co. Ltd. vs. State of Assam [AIR 1964 SC 925] | Supreme Court of India | Held that when a power is conferred on the Legislature to levy a tax, the power itself must be widely construed. |
| Hoechst Pharmaceuticals Ltd. vs. State of Bihar [AIR 1983 SC 1019] | Supreme Court of India | Held that taxation is considered as a distinct matter for purposes of legislative competence. |
| Hingir-Rampur Coal Co. Ltd. vs. State of Orissa [AIR 1961 SC 459] | Supreme Court of India | Discussed the distinction between Entry 54 of List I and Entry 23 of List II. |
| State of Orissa vs. M.A. Tulloch [AIR 1964 SC 1284] | Supreme Court of India | Discussed the distinction between Entry 54 of List I and Entry 23 of List II. |
| State of Uttar Pradesh vs. Vam Organic Chemicals Limited and Ors. [2004 (1) SCC 225] | Supreme Court of India | Held that the tax or fee imposed for regulatory purposes must not be mistaken as tax under taxing entry. |
| Maharaj Singh vs. State of UP [1977 (1) SCC 155] | Supreme Court of India | Held that the same expression can have different meanings in the same statute or even the same provision, if the context so required. |
| Union of India v. Martin Lottery Agencies Limited (2009) 12 SCC 209 | Supreme Court of India | Held that law as it stands today recognises lottery to be gambling, which is res extra commercium. |
| Reader’s Digest Association ltd. v. Williams [(1976) 1 W.L.R. 1109] | High Court of Justice (England) | Explained the three elements of a lottery: prize, chance and consideration. |
Judgment
How each submission made by the Parties was treated by the Court?
| Submission | Court’s Treatment |
|---|---|
| Appellants’ submission that the tax is on gambling, not the sale of tickets. | Accepted. The Court agreed that the tax is on the act of gambling, specifically the chance to win, which is a component of gambling. |
| Appellants’ submission that Entry 40 of List I is regulatory, while Entry 62 of List II is a specific taxing entry. | Accepted. The Court held that Entry 40 of List I is for regulation and does not include the power to tax, which is specifically under Entry 62 of List II. |
| Appellants’ submission that the tax is not extra-territorial. | Accepted. The Court found that the territorial nexus was established as the lottery scheme was permitted to be conducted within the State. |
| Respondents’ submission that lotteries organized by the government fall under Entry 40 of List I, giving exclusive power to the Parliament. | Rejected. The Court held that while Entry 40 of List I deals with the regulation of lotteries, it does not extend to the power to tax. |
| Respondents’ submission that the term ‘betting and gambling’ in Entries 34 and 62 of List II does not include government-organized lotteries. | Rejected. The Court found that ‘betting and gambling’ includes all forms of lotteries, irrespective of who organizes them. |
| Respondents’ submission that the impugned Acts seek to tax the sale of lottery tickets, which is not permissible. | Rejected. The Court held that the tax is on the gambling activity, not the sale of tickets, and thus falls under Entry 62 of List II. |
| Respondents’ submission that the State Acts operate extra-territorially. | Rejected. The Court held that the territorial nexus was established as the lottery scheme was permitted to be conducted within the State. |
How each authority was viewed by the Court?
- Sunrise Associates vs. Govt. of NCT of Delhi [(2006) 5 SCC 603]*: The Court used this case to reiterate that lottery tickets are actionable claims, not goods, and thus cannot be taxed as goods.
- M.P.V. Sundararamier and Co. vs. State of Andhra Pradesh [AIR 1958 SC 468]*: The Court relied on this case to emphasize that a regulatory entry cannot subsume a taxing entry when they are traceable to different sources.
- State of West Bengal vs. Kesoram Industries Limited [(2004) 10 SCC 201]*: The Court reiterated the principle that a regulatory entry cannot subsume a taxing entry when they are traceable to different sources.
- Synthetics and Chemicals Ltd. vs. State of Uttar Pradesh [(1990) 1 SCC 109]*: The Court used this case to reinforce that the power to regulate does not include the power to levy tax unless it is for a regulatory purpose.
- State of Bombay vs. R.M.D. Chamarbaugwala [AIR 1957 SC 699]*: The Court referred to this case to highlight that the Constitution makers never intended to elevate betting and gambling on the level of country’s trade or business or commerce.
- B.R. Enterprises vs. State of Uttar Pradesh [(1999) 9 SCC 700]*: The Court relied on this case to emphasize that lotteries are res extra commercium and do not get protection under Article 19(1)(g) or 301.
- RMDC vs. State of Mysore [AIR 1962 SC 594]*: The court used this case to emphasize that the power to regulate does not include the power to levy tax unless it is for a regulatory purpose.
What weighed in the mind of the Court?
The Supreme Court’s decision was heavily influenced by the principle that taxation is a distinct legislative power, separate from regulation. The court emphasized that a specific taxation entry (Entry 62 of List II) cannot be overridden by a general regulatory entry (Entry 40 of List I). The court also noted that ‘betting and gambling’ includes all forms of lotteries, irrespective of who organizes them. The court’s reasoning was also influenced by the need to give a comprehensive interpretation to the taxation entry, without restricting its scope.
| Sentiment | Percentage |
|---|---|
| Taxation as a distinct legislative power | 30% |
| Specific taxation entry (Entry 62 of List II) prevails over general regulatory entry (Entry 40 of List I) | 25% |
| ‘Betting and gambling’ includes all forms of lotteries | 20% |
| Comprehensive interpretation of taxation entry | 15% |
| Territorial Nexus | 10% |
Fact:Law Ratio
| Category | Percentage |
|---|---|
| Fact | 20% |
| Law | 80% |
Logical Reasoning
Issue 1: Whether Entry 40 of List I excludes taxation under Entry 62 of List II?
↓
Lotteries organized by the government are carved out of Entry 34 of List II for regulation.
↓
But this does not exclude the power to tax under Entry 62 of List II.
↓
Taxation is a distinct power, and Entry 62 is a specific taxation entry.
Issue 2: Is the power to tax ‘betting and gambling’ within Entry 62 of List II?
↓
Entry 62 of List II specifically grants the power to tax betting and gambling.
↓
‘Betting and gambling’ includes all forms of lotteries.
↓
Therefore, the power to tax lotteries is within Entry 62 of List II.
Issue 3: Are the impugned Acts within the legislative competence of Entry 62 of List II?
↓
The State Legislatures have the power to tax ‘betting and gambling’ under Entry 62 of List II.
↓
Lotteries are a form of ‘betting and gambling’.
↓
Therefore, the State Legislatures had the competence to enact the impugned Acts.
Key Takeaways
- State legislatures have the power to tax lotteries, including those organized by other states or the Central Government, within their territories.
- The power to tax ‘betting andgambling’ under Entry 62 of List II includes the power to tax all forms of lotteries.
- Entry 40 of List I, which deals with the regulation of lotteries, does not exclude the power of state legislatures to tax lotteries under Entry 62 of List II.
- The tax imposed is on the act of gambling, specifically the chance to win a prize, not on the sale of lottery tickets.
- The principle of territorial nexus is satisfied when the lottery scheme is permitted to be conducted within the state.
Practical Implications
For State Governments:
- States can now levy taxes on lotteries organized by other states or the Central Government, potentially increasing their revenue.
- States need to ensure that their tax laws are framed in such a way that they tax the act of gambling and not the sale of tickets.
- States must be mindful of the territorial nexus principle while imposing taxes on lotteries.
For Lottery Organizers:
- Lottery organizers will now have to comply with tax laws of multiple states where their lotteries are sold.
- The cost of lotteries may increase due to the imposition of taxes by the states.
For Consumers:
- Consumers may have to pay more for lottery tickets due to the imposition of taxes.
- The increased cost might affect the demand for lotteries.
Future Impact
This judgment has clarified the legislative competence of state legislatures to tax lotteries. It has settled the long-standing dispute regarding the power to tax lotteries organized by other states or the Central Government. This judgment is likely to have a significant impact on the revenue of state governments and the lottery industry. It may also lead to further litigation on the specific aspects of tax laws framed by the states. This judgment will serve as a precedent for future cases involving the interpretation of the Seventh Schedule of the Constitution, particularly entries related to betting, gambling, and taxation. It reinforces the principle that taxation is a distinct legislative power and that a specific taxation entry cannot be overridden by a general regulatory entry.