State Legislature Has Power To Levy Tax On Lotteries Conducted By Other States – Supreme Court [Read Judgment]

While allowing the appeal of the State of Karnataka and Kerala, the Supreme Court set aside the judgments of the Division Bench of Karnataka and Kerala High Courts which had observed that the States did not have the power to levy tax on the lotteries conducted by other states such as Nagaland, Arunachal Pradesh, Meghalaya, Sikkim, and others, who were the organizers – Respondents of the lotteries in the State of Karnataka and Kerala.

Senior Counsel and ASG Mr. N. Venkataraman appeared for the Appellant – State of Karnataka, Senior Counsel Mr. Pallav Shishodia appeared for the Appellant – State of Kerala, Senior Counsel Mr. C. Aryama Sundaram appeared for Respondent – State of Nagaland, Senior Counsel Mr. S.K. Bagaria appeared for Respondent – State of Sikkim, Senior Counsel Mr. Arvind P. Datar, and Advocate General Mr. Amit Kumar appeared for Respondent – State of Meghalaya.

Kartik Seth, Advocate along with Shriya Gilhotra and Garima Saxena, Advocates for M/s Chambers of Kartik Seth, AoR filed and appeared for Interveners in the said matter.

Earlier, the Karnataka and Kerala High Courts had held that the State Legislature did not have the competence to levy tax on lotteries conducted by other states.

The Karnataka High Court in 2010 had held that the Karnataka Legislature did not have the competence to enact Karnataka Tax on Lotteries Act, 2004 while the Kerala High Court in 2020 & 2021 had held that Kerala Legislature had no legislative competence to pass the Kerala Tax on Paper Lotteries, Act, 2005 and declared it invalid and unconstitutional. Further, both the States were directed to refund amounts deposited to the Respondents – States.

i) Issues Involved

• Interpretation of the expression 'betting and gambling' in Entries 34 and 64 of List II of the Seventh Schedule to the Constitution.

• Whether the lotteries organized by the Government of India or Government of a State, which is a subject in Entry 40 of List I also encompasses the power to levy tax on the said lotteries.

• Whether Entry No. 40 of List I restricts the State Legislature to levy taxes on lotteries organized by other states.

• Whether the Karnataka Act 2004 and Kerala Act 2005 are unconstitutional as being extra-territorial in operation.

ii) Court's Analysis

In its 122 pages judgment, the Apex Court noted that legislation in the field of tax and economic activities needs special consideration and has to viewed with larger flexibility rather than measuring the propositions by an abstract symmetry.

The Court also observed that where the power is with the Union to regulate and control, such power of the Union cannot result in depriving the States of their power to levy tax or fee within its legislative competence.

The Bench noted that lottery is one of the many gambling schemes. Also, gambling is a genus of which lottery is the species.

"The Court after placing reliance on various precedents held, "What emerges from the discussion of the decisions of this Court referred to above is that 'lotteries' are a species within the genus of 'gambling.' That one of the essential features of a lottery is its inherent gambling nature, which persists irrespective of whether the lottery scheme is conducted by the Government of India, Government of a State or by a private entity. 'Gambling' activities include a whole gamut of activities, including, but not limited to 'lotteries'," the Bench added.

The Court held that lotteries organized by private parties or entities in a State or lotteries authorized by Government of a State continue to remain within the scope and ambit of Entry 34 of List II dealing with 'betting and gambling.'

The Court also observed, "We have already stated that only lotteries organised by the Government of India or the Government of a State is carved out of the subject, 'betting and gambling' in Entry 34 of List II and is placed in Entry 40 of List I and Entry 62 of List II, inter alia, speaks of tax on 'betting and gambling'. By that, we do not think by that the State Legislatures have been denuded of their power to levy tax under Entry 62 of List II on lotteries organised by Government of India."

The Bench also held that the tax sought to be imposed by the State Legislatures of Karnataka and Kerala by way of impugned Acts is traceable to the power vested in the State Legislature under Entry 62 of List II.

In the judgment authored by Justice BV Nagathnna, the Court opined that the tax imposed on gambling, nature of lotteries which field is covered in its entirety under Entry 62 of List II, and the power to levy tax under this Entry extends in relation to the lottery of every kind, with no distinction as to the entity organizing the same.

In this context, the Bench further observed –

"Thus, in the context of lotteries, the organisation and conduct of a lottery scheme being a pan India activity, when any State Government permits the Government of India or any other State Government to organise the lottery scheme in that State, Entry 62 of List II would enable the Legislature of that State to levy taxes on the same."

The Court held that in its view, the State of Karnataka and Kerala were fully competent to enact the impugned Acts and levy taxes on the activity of 'betting and gambling' being conducted and organized in the States including lotteries conducted by the Government of India or the Government of any State.

iii) Summary of Court's Analysis

• Betting and Gambling in Entry 34 of List II is a state subject.

• Lottery is a species of gambling and thus comes under the purview of betting and gambling as appearing in Entry 34 List II.

• Expression 'Betting' and 'Gambling' is relatable to activity under the nature of betting and gambling which falls within the subject of Entry 34 List II.

• If Lotteries are organized by private parties or by instrumentalities or agencies authorized by the Government of India or State, it would come within the scope of and ambit of Entry 34 of List II.

• State legislatures are denuded of their powers under Entry 34 of List II only to the extent of lotteries organized by the Government of India or the Government of a State, in terms of Entry 40 of List I.

• State Legislatures have the power to levy tax on lotteries under Entry 62 List II.

• The scope and ambit of lotteries organized by the Government of India or Government of State under Entry 40 of List I is only in the realm of regulation of such lotteries. The said Entry does not take within its contours the power to impose taxation on lotteries conducted by the Government of India or the Government of State.

• The Bench finally held that Division Benches of the High Courts of Kerala and Karnataka 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 (in the State of Karnataka and Kerala respectively).

In the light of these observations, the Court allowed the appeals filed by the State of Karnataka and Kerala and set aside the judgments passed by the Division Benches of Karnataka and Kerala High Courts.