Only states can tax lotteries, not Centre: SC rules

The judgment struck down the Centre’s attempt to levy service tax on lottery distributors.

The Supreme Court on Tuesday ruled that only state governments - not the Centre - have the authority to impose taxes on the sale of lotteries, reinforcing the constitutional framework that places lotteries under the exclusive domain of states.

The court ruled that only state legislatures have the authority to regulate and tax them. (Representative file photo)

A bench of Justices BV Nagarathna and Satish Chandra Sharma dismissed a batch of appeals filed by the central government, which had argued that it was entitled to impose service tax on the lottery distributors under the provisions of the Finance Act. However, the bench categorically ruled that lotteries fall under the definition of “betting and gambling” as per Entry 62 of the State List in the Seventh Schedule of the Constitution, making it clear that only state legislatures have the power to tax them.

“Although a lottery ticket is nothing but an actionable claim, the conduct of a lottery scheme is nothing but a betting and gambling activity. Therefore, it is only Entry 62 – List II which enables the imposition of tax by the state government. The activity of betting and gambling which includes conducting of a lottery is regulated under Entry 34 – List II, with Entry 62 – List II being the taxation entry.

Asish Philip, Partner, Lakshmikumaran and Sridharan Attorneys, said: "Multiple legislative attempts to levy service tax on distribution of lottery has come to a naught with this landmark judgment. The interpretation canvassed on taxing powers in relation to ‘actionable claim’ will have a positive impact on pending GST litigation for online skill gaming companies too." Emphasising that the factors and clauses of the agreements considered for determining P2P (principal to principal) and P2A (principal to agent) arrangements will have a far-reaching impact on tax liability under GST and Income Tax, Philip added that the observations on P2P arrangement are in line with the earlier observations of the apex court in the Bharti Cellular case (2024) on distribution of telecom vouchers.

The ruling not only clarifies the Centre’s inability to impose service tax on lotteries under the existing legal regime but also underscores the broader regulatory approach towards lotteries in India. The operation of lotteries is not uniform across the country - only some states allow and regulate lotteries, while others have outright banned them. This selective regulation stems from the discretion granted to states under Entry 34 of the State List, which covers “betting and gambling,” subject to certain stipulations relating to organising and selling lotteries, available under a central law - The Lotteries (Regulation) Act, 1998.

Many states, such as Maharashtra, Sikkim, Kerala, Nagaland and West Bengal, permit lotteries as a means of generating revenue, while others, including Uttar Pradesh, Gujarat and Bihar, have prohibited them due to concerns over addiction, financial exploitation and social consequences. The differential approach is rooted in the principle of federalism, allowing states to decide whether or not to permit lotteries based on economic, social and moral considerations.

The Centre had sought to impose service tax on companies involved in the distribution, promotion, marketing, and sale of lotteries, arguing that such activities amounted to a taxable “service”. Over the years, the Centre came out a slew of amendments to the Finance Act to bring these activities under the tax net. However, the Supreme Court ruled that these amendments, carried out between 2010 and 2016, did not alter the fundamental nature of the relationship between the state governments and lottery distributors.

The bench held that there was no “service” element involved between the state and lottery distributors since the relationship was that of “principal to principal” rather than “principal to agent”. The court clarified that for an activity to be classified as a “service” under taxation laws, two conditions must be met – first, it must be carried out by one party for another; and second, it must be done in exchange for consideration. Since these elements were missing in the lottery business and the State was not engaging in an activity of service while dealing with the business of lottery, the court held, service tax could not be levied.

This ruling follows multiple attempts by the central government to bring lotteries under the service tax net. Amendments to the Finance Act in 2010, 2012, 2015 and 2016 sought to levy service tax on lottery-related activities by categorising them as “business auxiliary services”. But these attempts were struck down by the Sikkim high court in a series of cases between 2012 and 2017, a mandate now affirmed by the Supreme Court.

The case involved appeals filed by the Centre against companies such as Future Gaming & Hotel Services (Private) Limited and Summit Online Trade Solutions Private Limited, which had secured relief from the Sikkim high court. The Supreme Court upheld the high court’s view that lotteries are actionable claims – not goods -- and therefore, do not attract service tax.

The court emphasised that the taxation of lotteries falls solely within the competence of state legislatures under Entry 62 of the State List. It ruled that amendments to the Finance Act by way of inserting entries or adding explanation to an existing provision cannot override either the constitutional mandate that grants states exclusive jurisdiction over “betting and gambling” or a previous ruling by the Supreme Court in Sunrise Associates Vs Govt of NCT Delhi (2006) that ruled lottery tickets are actionable claims. The court noted that the legal position continues even after the amendments in the Finance Act, and therefore, distributors cannot be burdened with service tax for the sale of lotteries.