States have legislative competence to tax lotteries run by other states: SC

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The Supreme Court on Wednesday held that state legislatures are competent to levy tax on the lotteries run by other state governments or the central government on their territory.

A bench of Justices M.R. Shah and B.V. Nagarathna said the subject ‘betting and gambling’ in Entry 34 of List II is a state subject. “It is now clear that ‘lotteries’ is a species of gambling activity and hence lotteries is within the ambit of ‘betting and gambling’ as appearing in Entry 34 List II,” it said.

“If lotteries are conducted by private parties or by instrumentalities or agencies authorised by Government of India or the government of a state, it would come within the scope and ambit of Entry 34 of List II.”

The top court upheld the validity of the laws passed by Karnataka and Kerala to impose tax on lotteries of other state governments.

Justice Nagarathna, who authored the judgment on behalf of the bench, said that the Karnataka and Kerala government can impose tax on lotteries conducted by other state governments as the court allowed an appeal filed by Karnataka and Kerala challenging the decisions of their respective high courts.

The high courts had held that state governments cannot tax lotteries run by other northeastern states like Nagaland, Arunachal Pradesh, Meghalaya, Sikkim, and ordered them to refund the money.

In its 122-page judgment, the top court said: “The division benches of the high courts were not right in holding that the state legislatures had no power to levy tax on lotteries conducted by the Government of India or the government of any state or Union territory in the state of Karnataka as such a power could be read in Entry 40 or Entry 97 of List I and only the Parliament could levy such a tax.”

Both Karnataka and Kerala government relied upon the Karnataka Tax on Lotteries Act, 2004, and the Kerala Tax on Paper Lotteries, Act, 2005 to impose taxes.

Karnataka government counsel argued that the tax under question is a tax on gambling traceable to Entry 62 of List II of the Constitution. Kerala adopted the same submission.

The top court said the state legislatures have the power to tax lotteries under Entry 62 of List II, as taxation contemplated under the said entry is on ‘betting and gambling’ activities which also includes lotteries, irrespective of the entity conducting the same.

“The legislatures of the states of Karnataka and Kerala were fully competent to enact the impugned Acts and levy taxes on the activity of ‘betting and gambling’ being organised and conducted in the said respective states, including lotteries conducted by the Government of India or the government of any state.”

The bench noted that there are express provisions under the acts of Karnataka and Kerala for registration of the agents or promoters of the governments of respective states for conducting the lottery schemes over there. “This itself indicates sufficient territorial nexus between the respondents-states who are organising the lottery and the states of Karnataka and Kerala,” it added.

Setting aside the high court judgments, the bench ruled that high courts 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 (Karnataka and Kerala).

Northeastern states had argued that both Karnataka and Kerala sought to impose tax on the sale of lottery tickets which is not permissible and their laws were extra-territorial in operation.

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