LEVY OF GST ON LOTTERY

[Mr. M. GOVINDARAJAN]

Goods

Section 2(52) of the Central Goods and Services Tax Act, 2017 (‘Act’ for short) defines the term ‘goods’ as every kind of movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply. 

Actionable claim

Section 2(1) of the Act defines the expression ‘actionable claim’ as that shall have the same meaning as assigned to it in section 3 of the Transfer of Property Act, 1882

Section 3 of the Transfer of Property Act, 1882, defines the expression ‘actionable claim’ as  a claim to any debt, other than a debt secured by mortgage of immovable property or by hypothecation or pledge of moveable property, or to any beneficial interest in moveable property not in possession either actual or constructive, of the claimant, which the civil courts recognize as affording grounds of relief whether such debt or beneficial interest be existent, accruing or conditional or contingent.

Lottery – a supply?

Schedule III gives the list of activities or transactions which shall be treated neither as supply of goods nor supply of services.  Entry 6 of schedule III provides that actionable claims, other than lottery, betting and gambling.  Therefore the lottery, betting and gambling come under the purview of the term ‘supply’.

The Supreme Court in ‘Sunrise Associates Ys. Government of NCT of Delhi’ – 2006 (4) TMI 118 – Supreme Court,  held that the sale of lottery tickets had been held to be actionable claim and that actionable claim had been included in the definition of "goods" as per Section 2(52) of the CGST Act. Clause 6 of Schedule III of CGST Act specified that actionable claim other than lottery, betting and gambling was neither a supply of goods nor a supply of services, and therefore, supply of lottery tickets would need to be taxed as supply of goods.

GST rate on lottery

In respect of the Agenda Item on Lottery (17^th GST Council Meeting) , the Council approved the following –

• The supply of lottery shall attract GST rates as under -

• Lottery run by State Governments - 12% of face value of lottery ticket (Face value to be inclusive of GST)
• Lottery authorized by State Governments - 28% of face value of lottery ticket (Face Value to be inclusive of GST )

• Tax can be levied by the State Governments on the first point of sale by the State Government to the lottery distributor or the sole selling agent appointed by the State Government on reverse charge basis and to exempt agents/stockists below the distributor.

Challenge before High Court on levy of GST on lotteries

In ‘Teesta Distributors and others v. Union of India and others’ – 2018 (10) TMI 941 – Calcutta High Court, the petitioners have sought a declaration that, lotteries are exempt from tax under Sl. No. 6 of Schedule III read with Section 72 of the Central Goods and Service Tax Act, 2017 and Sl. No. 6 of Schedule III read with Section 72 of the State Goods and Service Tax Act, 2017.

The petitioners submitted the following submissions before the High Court-

• A lottery cannot come within the definition of ‘goods’;
• ‘Goods’ as defined in the Constitution has to be something which can be transferred for cash, deferred payment or other valuable consideration.
• Lottery has been defined to mean a scheme, in whatever form and by whatever name called for distribution of prizes by lot or chance to those persons participating in the chances of a prize, by purchasing tickets.
• The sale of lottery ticket does not entail transfer of any ‘goods’ or even beneficial interest in a movable property. 
•  The person who sells the lottery ticket is not selling any ‘goods’ nor is the purchaser buying any ‘goods’.
•  Lottery cannot come within the definition of ‘goods’ under the CGST Act, 2017 or any of the SGST Acts.
• Since lottery is neither ‘goods’ nor ‘service’, no levy under the Integrated Goods and Services Tax Act, 2017 can be made.
•  When CGST, 2017 and IGST, 2017 propose to tax a lottery, it goes beyond the constitutional definition of ‘goods’. 
• Since lottery is not ‘goods’ within the meaning of the Constitution, neither Central nor the State Governments can enact any law for the purpose of levying sales tax on the lottery.
• Treating lottery to be a ‘goods’ would do violence to the provisions of the Lotteries (Regulation) Act, 1998. 
• Sale of lottery ticket is a trade under Article 301 to 304 of the Constitution.
• Differential rates of tax cannot be fixed for lottery tickets imported from other States and lottery tickets produced in the States.
• The discrimination in rates varies between 12 and 28 per cent. It is per se unsustainable and is required to be stuck down. All lottery tickets organized by the States have to be treated at par. The same percentage of tax is required to be levied. Otherwise it would violate the constitutional mandate. 
• GST Council does not have any power or authority to bifurcate lotteries, based on entries in the seventh schedule, when the legislature has fixed the type of lottery to be one. Discrimination in the rates of levy between State organized lotteries merely because they are crossing the borders has no rational nexus and is highly discriminatory and violative of Article 14 of the Constitution of India as also Article 301 to 304 of the Constitution.

The States like Nagaland, Mizorm etc., alleged the discrimination of tax rates between the States in respect of lotteries and supported the views of the petitioner.

The West Bengal Government submitted the following before the High Court-

• Goods and Service Tax Act, 2017 was enacted in order to simplify the regime of indirect taxation by bringing it under one umbrella which has come into being by virtue of Constitutional Amendments, Central and State Legislations.
• Article 366(12) of the Constitution defines ‘goods’ to include all material commodities and articles. Accordingly the lotteries are ‘goods’.
•  The term ‘goods’ used in Article 366(12) of the Constitution of India is very wide and includes all types of movable properties whether those properties are tangible or intangible and is an inclusive one.
• Lotteries are ‘actionable claim’ and are included in the definition of ‘goods’.
• Lottery is not a commodity in the market which can be bought against consideration and on payment of consideration the property passes to the purchaser
• The Union Parliament and the State Legislature have the competence to levy tax on any item including lottery.
• The State is allowed to pick and choose districts, objects, persons, methods and rates of taxation, if the State, does so reasonably.
• The Legislature enjoys very wide latitude in classification for taxation. 
• A statute cannot be declared unconstitutional solely on the ground that, it is unreasonable or arbitrary. 
• The business of lottery partakes the character of betting and gambling. There exists no constitutional right to carry on the business of lottery. Therefore, there is no question of violation of fundamental rights. Since the business of lottery is not constitutionally protected activity, the reasonableness of physical restrictions cannot be subject matter of judicial review under Article 226 of the Constitution of India.
• CGST Act and SGST Act have not discriminated between lotteries run by the State Government and the lotteries authorized by the State.
• The Central and State Governments have issued relevant notifications imposing different rates of taxes for lottery run by the State Government and lottery authorized by the State Government in another State. In case of lottery run by the State Government it is in aggregate 12 per cent, with 6 per cent each been levied under the CGST and SGST. The lottery authorized by the State Government in another State attracts in aggregate 28 per cent, with 14 per cent each under the CGST and SGST. 
• The notifications have been issued pursuant to the recommendations made by the GST Council in its 17th meeting. The rates are not discriminatory and are intended to preserve economic uniformity and the interest of the constituent States. According to him, the tax component is included in the price of the ticket. The end customer who purchased the ticket is not saddled with any additional tax burden.

Union of India submitted the following before the High Court-

• Imposition of GST on lottery was discussed at length during the 17th GST Council meeting held on June 18, 2017. The States who are parties to the present writ petition were present in such Council meeting. The GST Council approved and resolved that, sale of lottery ticket will attract GST. The rates were also agreed upon. Therefore, the States should not be permitted to contend contrary to the resolution adopted by the GST Council in its meeting held on June 18, 2017.
• Since lottery tickets are sold at the price printed on them as inclusive price, that is, inclusive of all taxes, the value or supply of lottery under Section 15(5) of the GST Act has been deemed to be 100/112 and 100/128 of the face value of ticket or of the price as notified in the Official Gazette by the organizing State, whichever is higher, for lottery run by State Governments and lottery authorized by State Governments respectively. 
• The Union adopted the contentions of the State of West Bengal with regard to the contentions relating to Article 301 to 304 of the Constitution of India.

The High Court heard the submissions put forth by the parties to the writ petition.   The High Court took the following issues for consideration in this petition-

• Is lottery a ‘goods’ or an ‘actionable claim’?
• Can lottery be taxed under Central Goods and Services Tax Act, 2017 and West Bengal Goods and Services Tax Act, 2017?
•  If so, is differential levy of tax permissible?
• To what reliefs, if any, are the parties entitled to?

First issue - Lottery – an actionable claim?

             The High Court analyzed the various provisions of the Act for the term ‘goods’.  It also analyzed the various judgments of Supreme Court.  In ‘H Anraj v. State of Tamil Nadu’ – 1985 (10) TMI 258 – Supreme Court,  it was held that lottery tickets to the extent that they comprise the entitlement to participate in the draw are ‘goods’ falling within the definition of ‘goods’ as given in Tamilnadu General Sales Tax Act, 1954 and Bengal Finance (Sales Tax) Act, 1941. Independent of the two state Acts under consideration therein, it has held that, a trade of a lottery ticket confers on the purchaser two rights. 

The High Court observed that a sale of a lottery ticket confers on the purchaser thereof two rights-

• a right to participate in the draw; and
• a right to claim a prize contingent upon his being successful in the draw. Both would be beneficial interests in movable property,

the former ‘in praesenti’, the latter ‘in futuro’ depending on a contingency. Lottery tickets, not as physical articles, but as slips of paper or memoranda evidence not one but both these beneficial interests in movable property which are obviously capable of being transferred, assigned or sold and on their transfer, assignment or sale both these beneficial interests are made over to the purchaser for a price.  Therefore, a lottery ticket can be held to be ‘goods’ if at all only because it evidences the transfer of a right.

On purchasing a lottery ticket, the purchaser would have a claim to a conditional interest in the prize money which is not in the purchaser’s possession. The right would fall squarely within the definition of ‘actionable claim’.

In view of the above the High Court held that the first issue has to be answered by holding that, a lottery is an ‘actionable claim’ and goods or moveable property.

Second issue – levy of GST on lotteries

 In tune with the constitutional amendments incorporated, Central Goods and Services Tax Act, 2017, Integrated Goods and Services Tax Act, 2017 and the respective State Goods and Services Tax Act, 2017 were enacted.  The High Court analyzed the provisions of CGST Act regarding ‘goods’ , ‘actionable claims’, ‘reverse charge’, ‘scope of supply’, ‘levy and collection’  which have also been found the State Goods and Services Tax Act.  It regulates the levy and collection of tax on intra-State supply of goods or services or both in the State of West Bengal.  Legislature enjoys very wide latitude in classification for taxation.

                         Legislation or a provision contained in a statute can be invalidated on two grounds, namely,

• it is not within the competence of the legislature which passed the law; and/or
• it is in contravention of any of the fundamental rights stipulated in Part III of the Constitution or any other right/provision of the Constitution of India.

 A statute cannot be declared unconstitutional on the ground that, it is arbitrary or unreasonable.   In the facts of the present case, it has not been substantiated that, the State Legislature promulgating the WB GST Act, 2017 did not have the competence to pass the law or that it violates any fundamental rights of the petitioner or any other right of the petitioner or any provision of the Constitution.   The definition of ‘goods’ in Article 366(12) of the Constitution allows the Legislatures to classify lottery as ‘goods’ and charge tax thereon.  

Schedule III under Section 7 of the CGST Act, 2017 deals with activities or transactions which shall be treated neither as a supply of goods nor as a supply of services. Entry 6 of Schedule III of CGST Act, 2017 takes out ‘actionable claims’ other than lottery, betting and gambling from the scope of such Act. Consequently, since lotteries are generally speaking ‘goods’ and come within the definition of ‘actionable claims’, and since, lotteries are kept out of the purview of ‘actionable claims’ which do not attract the CGST Act, 2017, lottery can therefore be charged to tax under the CGST Act, 2017. On the parity of the same reasoning, lottery is chargeable to tax under WB GST Act, 2017 also.  

The High Court therefore held that lottery can be taxed under the CGST Act, 2017 and WB GST Act, 2017.

Third issue – levy of different taxes on lottery

The rationale for imposing differential rates appears from the minutes of the 17th meeting of the GST Council. The rationale for the differential rate or the rates by themselves has not been substantiated to be breach of any provision of the Constitution.  The State Government cannot challenge its own notification as unconstitutional as, it has the wherewithal to set the wrong, right.    In the present case, the States of Sikkim, Mizoram, Nagaland and Arunachal Pradesh have supported the writ petitioner on the score that the rates of taxes are discriminatory. Such States were present in the GST Council Meetings. The resolution was carried by requisite majority. 

It was after extensive deliberations that, the GST Council had approved the rates as presently obtaining in respect of lottery. It is within the domain of such Council to decide the rate of tax. In such circumstances, the third issue is answered by holding that differential levy of tax is permissible.

Fourth issue – relief to the petitioners

The High Court held that no relief can be granted to the petitioners, in the facts of the present case.

The High Court dismissed the writ petition filed by the writ petitioners.