All about GST on Lottery

[Kashish Gupta]

Introduction

The history of lottery taxation under indirect tax law has always been seen wandering in the court of law where various aspects have been analyzed till date. There are several judgments that are essentially associated with the nitty-gritty of this taxation field, such as the cogent judgment of Supreme Court in case of Sunrise Associates Versus Govt. of NCT of Delhi and Others reported as 2006 (4) TMI 118 - SUPREME COURT . In this case, Supreme Court concluded that there is no sale of goods within the meaning of sales tax laws of the different States but at the highest, a transfer of actionable claim.

In case of H.Anraj Versus Govt. of Tamil Nadu & Shri Dipak Dhar and Others Versus State of West Bengal and Anr reported as 1985 (10) TMI 258 - SUPREME COURT, it was observed that a lottery is composed of three essential elements, namely:

1. Chance
2. Consideration; and
3. Prize.

A sale of a lottery ticket confers two rights on the purchaser viz.

1. The right to participate in the draw and
2. The right to claim a prize contingent upon the purchaser being successful in the draw. 

Both were held to be beneficial interests in moveable property, the former "in praesenti", the latter “in futuro” depending on the contingency. To use the words of the court:-

“......the two entitlements which arise on the  purchase of a lottery ticket are of a different character, inasmuch as the right to participate arises in praesenti, that is to say it is a choate on perfected right in the purchaser on the strength of which he can enforce the holding of the draw, while the other is inchoate right which is to materialize in future as and when the draw takes place depending upon his being successful in such draw.  Moreover, on the date of the purchase of the ticket, the entitlement to participate in the draw can be said to have been delivered into the possession of the purchaser who would be enjoying it from the time he has purchased the ticket and as such it would be a chose in possession while the other would be an actionable claim or a chose in action as has been held in Jones v. Carter  and King v. Connare  on which counsel for the dealers relied. It is thus clear that a transfer of the right to participate in the draw which takes place on the sale of a lottery ticket would be a transfer of beneficial interest in movable  property to the purchaser and therefore, amounts to transfer of goods and to that extent it is no transfer of an actionable claim; to the extent that it involves a transfer of the right to claim a prize depending on a chance it will be an assignment of an actionable claim."

Accordingly, the Assessing Authority was required to determine how much of the consideration was preferable to the right to participate in the draw and how much to the chance of winning and thereafter, assess the dealer on the first part alone.

However, on re-consideration of judgment passed in case of H.Anraj (supra) by Hon’ble Supreme Court and in case of Sunrise Associates Versus Govt. of NCT of Delhi and Others reported as 2006 (4) TMI 118 - SUPREME COURT , the Court sought to draw a distinction between the chance to win and the right to participate by describing the former as a right 'in futuro' and the latter as "in praesenti" and held that both the rights are in fact 'in futuro'. To use the words of the Court:

A lottery ticket has no value in itself.  It is a mere piece of paper. Its value lies in the fact that it represents a chance or a right to a conditional benefit of winning a prize of a greater value than the consideration paid for the transfer of that chance.  It is nothing more than a token or evidence of this right.  The Court in H.Anraj, as we have seen, held that a lottery ticket is a slip of paper or memoranda evidencing the transfer of certain rights.  We agree.

………….

There can be no doubt that 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 an actionable claim and would therefore be excluded from the definition of 'goods' under the Sale of Goods Act and the Sales Tax statutes. This was also accepted in H.Anraj when the Court said that to the extent that the sale of a lottery ticket involved a transfer of the right to claim a prize depending on chance, it was an assignment of an actionable claim. 

……………….

The further distinction sought to be drawn in H.Anraj between the chance to win and the right to participate in the draw was in our opinion unwarranted. A lottery having been held to be in essence a chance for a prize, the sale of a lottery ticket can only be a sale of that chance.  There is no other element. Every right can be sub-divided into lesser rights.   When these lesser rights culminate in a legally recognizable right, it is the latter which defines the right. The right to participate in the draw is a part of the composite right of the chance to win and it does not feature separately in the definition of the word "lottery".  It is an implicit part of the chance to win. It is not a different right.  The separation is specious since neither of the rights can stand without the other.  A draw without a chance to win is meaningless and one cannot claim a prize without participating in the draw.  In fact the transfer of the chance to win assumes participation in the draw.

 

Taxation details in pre-GST regime

• Lotteries (Regulation) Act, 1998 [17 of 1998] was enacted by the Central Government under Entry 40, List –I of the Constitution. Lottery Regulation Rules 2010 have been made by the Central Government in exercise of the powers conferred under Section 11 (1) of the Lotteries Regulation Act, 1998. As per information provided, lottery is currently organized and conducted in 10 States. Under the said Rules, the Organizing State Government/Autonomous Region charges a minimum amount of ₹ 5 lakh per draw for bumper draw of lottery and a minimum amount of ₹ 10,000/- per draw for all other forms of lottery.
• Lottery Tax – Three conducting states, Maharashtra, Punjab and Kerala, have enacted their own State Lottery Tax Acts (under erstwhile Entry 62 of the State List) which empowers them to levy Lottery tax. This entry has been amended by the 101st Constitutional Amendment Act, and tax levied by the States under this entry has been subsumed in GST.
• Service Tax – Lottery is in the Negative List of Services. However, the activities of lottery distributor or selling agent on behalf of the State Government, in relation to promotion, marketing, organising, selling of lottery or facilitating in organising lottery of any kind, in any other manner, in accordance with the provisions of the Lotteries (Regulation) Act, 1998 is included in the definition of service under the Finance Act 1994.

Consideration for a service has been defined in the Finance Act 1994 to include any amount retained by the lottery distributor or selling agent from gross sale amount of lottery ticket in addition to the fee or commission, if any, or, as the case may be, the discount received, that is to say, the difference in the face value of lottery ticket and the price at which the distributor or selling agent gets such ticket. Thus, the total amount retained by the lottery distributor (including discount/ Commission) is part of taxable value.

Further, there is an alternate option available with the lottery distributors under Service Tax Rules [Rule 7C] which allows them to pay service tax at the rate of ₹ 8200/- on every ₹ 10 Lakh (or part of ₹ 10 Lakh) of aggregate face value of lottery tickets printed by the organising State for a draw if the lottery or lottery scheme is one where the guaranteed prize payout is more than 80% and ₹ 12800/- where the guaranteed prize payout is less than 80%.

Provisions under GST law

GST applies on supply of goods or services as against the present concept on the manufacture of goods, or on the sale of goods, or on the provision of services. The definition of Goods and Services Tax (GST) has been given in clause (12A) of Article 366 to the Constitution of India, where it has been defined as “goods and services tax” means any tax on supply of goods, or services or both except taxes on the supply of the alcoholic liquor for human consumption. The expression “supply” has been defined under section 7 of Central/State Goods and Services Tax Act, 2017 (CGST Act, in short) which defines supply in an inclusive manner to be a supply of goods or of services or both.

Actionable claims have been included in the definition of “goods” in section 2(52) of the CGST Act. Further, Clause 6 of Schedule III of the CGST Act specifies, inter alia, actionable claims other than lottery, betting and gambling neither as a supply of goods nor a supply of services. Therefore, supply of lottery tickets is to be taxed as supply of goods in GST.

Levy of GST on Lottery Ticket

GST Council in its 17^th meeting held on June 18, 2017 has decided that the supply of lottery shall attract GST rate as under

1. Lottery run by State Governments – 12% of face value of lottery ticket
2. Lottery authorized by State Governments – 28% of face value of lottery ticket

Accordingly the rate of tax notified on this supply is as under:

S. No.	Chapter/ Heading/ Sub-heading/ Tariff Item	Description of Goods
242. [12%]	-	Lottery run by State Governments Explanation 1.-For the purposes of this entry, value of supply of lottery under sub-section (5) of section 15 of the Central Goods and Services Tax Act, 2017 shall be deemed to be 100/112 of the face value of ticket or of the price as notified in the Official Gazette by the organizing State, whichever is higher. Explanation 2.-(1) “Lottery run by State Governments” means a lottery not allowed to be sold in any state other than the organizing state. (2) Organizing state has the same meaning as assigned to it in clause (f) of sub-rule (1) of rule 2 of the Lotteries (Regulation) Rules, 2010.
228. [28%]	Any Chapter*	Lottery authorized by State Governments Explanation 1.-For the purposes of this entry, value of supply of lottery under sub-section (5) of section 15 of the Central Goods and Services Tax Act, 2017 shall be deemed to be 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. Explanation 2.-(1) “Lottery authorized by State Governments” means a lottery which is authorized to be sold in State(s) other than the organizing state also. (2) Organizing state has the same meaning as assigned to it in clause (f) of sub-rule (1) of rule 2 of the Lotteries (Regulation) Rules, 2010

* Substituted by NN 41/2017 CGST (Rate) dated 14.11.2017 w.e.f. 15.11.2017, before it was read as, “-“. Similar changes made in relevant IGST, UTGST and SGST laws.

This differential levy of taxes on lottery were made subject of challenge before Hon’ble Calcutta High Court in case of Teesta Distributors & Ors. Versus Union of India & Ors.  Reported as 2018 (10) TMI 941 - CALCUTTA HIGH COURT wherein it was argued that with the Lotteries (Regulation) Act, 1998 coming into effect, the States were conferred with the power to authorize private parties to organize lotteries. Consequently, there is only one kind of lottery, that is, lotteries organized/run by the State. Therefore, in such context, the rates of GST are unequal and discriminatory. However, Hon’ble Court after detailed analysis of the issue held as under:

“Differential rate of tax was introduced in the 17th Goods and Services Tax Council Meeting held on June 18, 2017. The States before the Court were present in such meeting. 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.”

However, owing to the demand of single rate of tax on lottery, GST Council, led by Finance Minister Smt. Nirmala Sitharaman, had in December 2019 decided to increase the rate as well as implement a single rate for lotteries. The eight-member group of ministers headed by Maharashtra Finance Minister Sudhir Mungantiwar had recommended that the Council should decide either on 18 per cent or 28 per cent GST for lotteries. Accordingly, the GST rate on supply of lotteries has been amended to 14 per cent each under CGST and SGST. As a result, single rate of GST on lotteries has been increased to 28 per cent vide NN 01/2020- CT (Rate) dated 21.02.2020 with effect from March 01, 2020.

It is further clarified by Circular No.06/06/2017-CGST dated 27th August, 2017 that the classification for lottery in respective CGST, IGST, UTGST and SGST notifications shall be ‘Any Chapter’ of the First Schedule to the Customs Tariff Act, 1975 (51 of 1975).

Value of supply in case of lottery

The GST on lottery sales has caught the attention of GST Council since the 31^st GST Council Meeting dated 22^nd December, 2018. Tax revenue from the sale of lottery tickets has been a major source of Exchequer for the Government. Hence, it becomes pertinent to analyze the GST implication on the sale of lottery tickets.

From a mere reading of rate notification, as effective till 29.02.2020, though the valuation mechanism was provided therein by virtue of taking powers from section 15(5) of the Act, the same was also prescribed by way of rules. Accordingly, rule 31A was inserted in the Central Goods and Services Tax Rules, 2017 vide NN 03/2018 – CT dated 23.01.2018 which reads as under:

1. Notwithstanding anything contained in the provisions of this Chapter, the value in respect of supplies specified below shall be determined in the manner provided hereinafter.
2. (a) The value of supply of lottery run by State Governments shall be deemed to be 100/112 of the face value of ticket or of the price as notified in the Official Gazette by the organizing State, whichever is higher.

The value of supply of lottery authorized by State Governments shall be deemed to be 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.

Explanation: - For the purposes of this sub-rule, the expressions-

(a)	“lottery run by State Governments” means a lottery not allowed to be sold in any State other than the organizing State;
(b)	“lottery authorized by State Governments” means a lottery which is authorized to be sold in State(s) other than the organizing State also; and
(c)	“Organizing State” has the same meaning as assigned to it in clause (f) of sub-rule (1) of rule 2 of the Lotteries (Regulation) Rules, 2010.

It is to be noted that w.e.f. 01.03.2020, the valuation formula is not available in the rate notification. The same was prescribed by way of an amendment carried out in rule 31A supra. Central Government vide NN 08/2020- CT dated 02.03.2020 w.r.e.f. 01.03.2020 substituted sub-rule (2) of rule 31A and it now reads as under:

“(2) The value of supply of lottery shall be deemed to be 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.

Explanation: – For the purposes of this sub-rule, the expression “Organizing State” has the same meaning as assigned to it in clause (f) of sub-rule (1) of rule 2 of the Lotteries (Regulation) Rules, 2010.”

A brief synopsis of Teesta Distributors & Ors. Versus Union of India & Ors.  Reported as 2018 (10) TMI 941 - CALCUTTA HIGH COURT

• Prayer

Petitioners have sought a declaration that, lotteries are exempt from tax under Sl. No. 6 of Schedule III read with Section 172 of the Central Goods and Service Tax Act, 2017 and Sl. No. 6 of Schedule III read with Section 172 of the State Goods and Service Tax Act, 2017.

• Petitioner contention

1. The initial view of the Supreme Court was that, lottery tickets to the extent they comprise the entitlement to participate in the draw, are goods. Such view was reversed in 2005 (5) SCC 603 (Sunrise Associates v. Government of NCT of Delhi).
2. ‘Goods’ as defined in article 366(12) of Constitution of India has to have the characteristics of material, commodities and articles. ‘Goods’ as defined in the Constitution has to be something which can be transferred for cash, deferred payment or other valuable consideration. It should be possible to transfer at least the beneficial interest in the movable property for it to be ‘goods’.
3. Referring to Article 366 (29A) of the Constitution, he has submitted that, the definition of ‘tax’ on the sale or purchase of ‘goods’ is an inclusive definition. However, there has to be a transfer of property.
4. The sale of lottery ticket is, therefore, a sale of chance. Consideration is paid for the chance to win. The sale of lottery ticket therefore does not entail transfer of any ‘goods’ or even beneficial interest in a movable property. Therefore, the person who sells the lottery ticket is not selling any ‘goods’ nor is the purchaser buying any ‘goods’.
5. Since lottery is neither ‘goods’ nor ‘service’, no levy under the Goods and Services Tax Act, 2017 can be made.
6. Lotteries Act, 1988 came into being in exercise of powers under List I Entry 40 of the Seventh Schedule of the Constitution. According to him, treating lottery to be a ‘goods’ would do violence to the provisions of the Act of 1998.
7. With the Lotteries (Regulation) Act, 1998 coming into effect, the States were conferred with the power to authorize private parties to organize lotteries. Consequently, there is only one kind of lottery, that is, lotteries organized/run by the State. Therefore, in such context, the rates of GST are unequal and discriminatory.
8. He has pointed out that, out of 29 States and 7 Union Territories in India, only 10 States organize lotteries. Out of the States organizing lotteries, only Hill States of North-East are affected. Therefore, the Hill States were outnumbered and outvoted in the GST Council. The Hill States were therefore obliged to apply the rates as decided by the GST Council.

• Respondents Contention

1. Sunrise Associates (supra) should be construed to mean that, lotteries are ‘actionable claim’ and are included in the definition of ‘goods’. However, since the Sales Tax laws excluded ‘actionable claim’ from its purview, lotteries were also held to be excluded.
2. 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. The definition of ‘goods’ under Article 366(12) of the Constitution of India is an inclusive one.
3. The inclusion of ‘actionable claim’ in the definition of ‘goods’ is legislative recognition of judicial pronouncement. Therefore, it cannot be argued that, the Union Parliament or the State Legislature did not have competence to include ‘actionable claim’ in the definition of ‘goods’.
4. 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.

• Decision

“lottery means a scheme, in whatever form and by whatever name called, for distribution of prizes by lot or chance to those persons participating in the chance of a prize by purchasing tickets;

‘Goods’ includes all materials, commodities and articles;

1. On the strength of Sunrise Associates (supra) therefore, the first issue has to be answered by holding that, a lottery is an ‘actionable claim’ and goods or moveable property. The first issue is answered accordingly.

1. H. Anraj (supra) has held that, lottery tickets are ‘goods’ for the purpose of Article 366(29-A)(a) of the Constitution of India and the Tamilnadu General Sales Tax Act 1959 and Bengal Finance (Sales Tax) Act, 1941. It has held that, only the transfer of right to participate in the lottery draw, which took place on the sale of a lottery ticket amounted to a transfer of goods to the extent that the sale involved the transfer of the right to claim the prize, depending on chance, it was an assignment of an ‘actionable claim’.
2. H. Anraj (supra) was rendered on October 4, 1985. The Lotteries (Regulation) Act, 1998 came into effect much later.
3. Sunrise Associates (supra) has held that, the distinction drawn in H. Anraj (supra) between the chance to win and the right to participate in the draw was unwarranted. It has held that, a lottery is in essential a chance for a prize, the sale of a lottery ticket can only be a sale of that chance. The right to participate being an inseparable part of the chance to win, is therefore part of an ‘actionable claim’. It goes on to hold that, the sale of a lottery ticket does not necessarily involve the sale of goods. It is nothing other than a contract of carriage. It has held that, lotteries being actionable claims are generally speaking “goods” or moveable property.

2. In the facts of the present case, it has not been substantiated that, the State Legislature promulgating the West Bengal Goods and Services Tax 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.  Therefore, lottery can be taxed under the Central Goods and Services Tax Act as well as the West Bengal Goods and Services Tax Act, 2017.
3. Article 279A contemplates establishment of a mechanism to adjudicate any dispute between one or more States or between the Government of India and any State or States on one side and one or more States on the other side or between two or more States. However it should not be construed that, the decisions or the resolutions of the Goods and Services Tax Council is immune from judicial review or that they are not justiciable. In a given case, where, a resolution adopted in the Goods and Services Tax Council Meeting is substantiated to be breaching any fundamental right or any provision of the Constitution of India, the same can be adjudicated upon by a Writ Court.

Differential rate of tax was introduced in the 17th Goods and Services Tax Council Meeting held on June 18, 2017. The States before the Court were present in such meeting. 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.

Pending challenges before other High Courts

• Sikkim High Court has admitted the similar matter in case of M/s Future Gaming and Hotel Services Private Limited and Another Versus Union of India and Others reported as 2018 (12) TMI 1603 - SIKKIM HIGH COURT wherein prayers were made to hold and declare that the provisions of serial No.6 of Schedule III read with Section 7 (2) of the State Goods and Services Tax Act, 2017 (SGST Act) of the State of West Bengal exempting “actionable claims” as activities or transactions which shall be treated neither as supply of goods nor a supply or service but not excluding “lottery” from such exemption is unconstitutional, illegal and non-est as “lotteries” cannot at all be subjected to tax under the SGST Act, 2017.

• Sikkim High Court in the case of Summit online Trade Solutions Pvt Ltd reported as 2018 (7) TMI 1635 - SIKKIM HIGH COURT, has admitted the matter wherein it was challenged that distinction between 'Lotteries run by State Government' and 'Lotteries organized by State Government' cannot be made because doing so every State Government will take pleas to classify these under highest tax rate category.

Concluding remarks

The taxation of lotteries under GST without a specific chapter allocated to it leaves an iota of doubt in the mind of author whether any goods can find its reference in tariff in such manner. Nevertheless, a uniform rate on lottery will bring a parity between state-run and authorized lotteries; thereby align an equal footing for businesses in the same line. However, if differential rate of taxes as challenged before other High Courts would be held as discriminatory and unreasonable, then it will open a new chapter for litigation wherein taxpayers would already have faced the axe of payment of taxes at higher rate.

(Article assisted by: Ms Sanskriti Naruka, a student of Institute of Chartered Accountants of India)