Lottery is species of gambling; States competent to tax lotteries under Entry 62 List II: Supreme Court

The Supreme Court on Wednesday held that lottery is a form of gambling and State legislatures are entitled to enact laws to levy tax under Entry 62 of List II of the Constitution (State List) on lotteries organised by Government of India or State governments [State of Karnataka and ors v. State of Meghalaya and ors]..A bench of Justices MR Shah and BV Nagarathna held that lotteries is a species of gambling activity and hence lotteries are within the ambit of 'betting and gambling' as appearing in Entry 34 List II. Hence, the fact that lotteries are placed in Entry 40 of List I (Union List) of the Constitution will not disentitle States from taxing the same as per Entry 62 of List II.This is because Centre under Entry 40 of Union List is entitled to regulate lotteries and the power of taxation is not included within the ambit of that Entry. "The scope and ambit of lotteries organised by 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 Court held. Elaborating on the power of States to tax lotteries, the Court said that Entry 62 of List II is a specific taxation entry on luxuries, including taxes on entertainments, amusements, betting and gambling·. The power to tax is on all entries which are in the nature of betting and gambling. "Since there is no dispute that lotteries, irrespective of whether it is conducted or it is organised by the Government of India or the Government of State or is authorized by the State or is conducted by an agency or instrumentality of State Government or a Central Government or any private player is 'betting or gambling' the State Legislatures have the power to tax lotteries under Entry 62 of List II," the Court ruled.This is because the taxation contemplated under the said Entry is on 'betting and gambling' activities which also includes lotteries, irrespective of the entity conducting the same, the Court said. “When a specific entry regarding taxation is provided in List II empowering the State Legislature to levy tax on a subject, namely, ‘betting and gambling’ amongst other similar activities, the same cannot be read by implication in an entry of List I namely Entry 40 of List I. This is because a taxation entry is separate and distinct from an entry dealing on a particular subject,” the Court added. Further, the legislative power to levy a tax on ‘betting and gambling’ cannot be split between the parliament and the State legislature because Entry 62 of the State list expressly makes the State competent to levy taxes of the said subject. This power to levy taxes on ‘betting and gambling’ is absent from the Entry 40 of Union list, which makes it clear that only the State, under Entry 62 of State list, has the power to levy such taxes, the top court held. .“The object and purpose of Entry 62 of List II is to tax the activity of ‘betting and gambling’, whether it is conducted by a private entity or a State authorised entity or an instrumentality or agency or for that matter by the Government of India or the Government of any State,” the judgment noted. In view of the above, the Court upheld the validity of two State laws - the Karnataka Tax on Lotteries Act, 2004 and the Kerala Tax on Paper Lotteries Act, 2005. .In this case, the State Legislatures of Karnataka and Kerala had enacted legislations to levy taxes on the lotteries conducted by the Government of India, State Governments or private parties in their respective states. These legislations were challenged by the Governments of Meghalaya, and Nagaland among others before the High Courts of Karnataka and Kerala. The High Courts of Karnataka and Kerala held that both these legislations are unconstitutional and the State Governments cannot tax a lottery conducted by another State government or the Central government as there is no territorial nexus. .This led to the present appeals by Karnataka and Kerala before the Supreme Court of India. The Supreme Court framed the following issues: (i) Whether lotteries can be classified under the subject matter of ‘betting an gambling’; (ii) Whether a State government can levy taxes on lotteries conducted by the Union or any other state government or a private party; (iii) Whether the legislations enacted by the governments of Karnataka and Kerala are constitutionally valid or not..Interpretation of Lottery in “Betting and Gambling”The Supreme Court held that ‘gambling’ is the genus in which ‘lottery’ in a species. Both gambling and lottery have an inherent element of ‘chance’ in the manner in which the result is determined, the bench observed. “That the species of ‘lottery’ may be placed in the genus of ‘betting and gambling’ and more specifically under the ambit of ‘gambling’ because of the ‘gambling spirit’ which is a necessary element of ‘lottery’. The expression ‘to take a chance’ is itself synonymous to a gamble. Therefore, it may be concluded that lottery is one such activity which requires a participant to take a chance or to gamble,” the Court held.The Court further observed that, “110. It is also settled that the sale of a lottery ticket involves two elements, namely, (i) the right to participate in a draw; and (ii) the right to win the prize, dependent on chance. Therefore, sale of a lottery ticket is in the nature of a transfer of an actionable claim or a chose in action.” Therefore, the apex court held that while reading the Entry 62 of the State list, the term ‘lottery’ can be interpreted within the meaning of ‘gambling’ as it is a species of the same. .Whether a State Government can levy taxes on lotteries conducted by Union or any other State Government?The top court answered the question in affirmative. The Court held that the activity of betting and gambling (including lotteries) can be conducted throughout the territory of India provided a particular State grants permission to organise and conduct the said activity in that State. "Thus, organisation and conducting of lottery can be a pan India activity of gambling and when a particular State permits a lottery scheme conducted by the Government of India or the Government of any State in that State, a tax is leviable on the same, which is a tax on gambling. Thus Entry 62 of List II empowers the State Legislatures to impose tax on ‘gambling’ irrespective of who or which entity is conducting it including the Government of India or Government of any State,” the Court said. When the tax is levied on the lotteries per se by the State government, it is not the tax on the lottery itself, but on the gambling activity which is completely covered under Entry 34 of the State list, the Court opined.The said lottery can be conducted by any private party, Government of India or any State government. To add on to it, the State Government can regulate a lottery activity by the private party and tax it as well. But it cannot regulate the said activity which is conducted by the Union or any other State and can only levy taxes on it, the Court clarified.Further, power to organise lotteries by Government of India or State government under Entry 40 of the Union list will not empower the Union to levy tax as it is only the power to “organise” the activity, not to levy tax. “Entry 40 of List I is meant only for the regulation of lotteries organised by the Government of India or the Government of a State. The said Entry cannot be expanded to cover the power to levy taxes on lotteries by the Parliament when as such a power is envisaged in Entry 62 of List II,” the judgment said.Further, Entry 97 (Residuary powers) of Union list can only be invoked by the parliament to levy taxes only when the subject matter is not mentioned in neither the State list or Concurrent list, the top court held. If the power to levy taxes will be read into Entry 97 of the Union list, then the Court said, it would be “violence to the manner of interpretation of Entries in the Lists.” Therefore, if the State Government permits the lotteries of Government of India or any other State government to be conducted in its particular State, only then it would have the legislative competence to levy taxes, the judgment noted. .Whether the statues enacted by the States of Karnataka and Kerala levying taxes on lotteries are valid and constitutional?The Supreme Court answered the question in affirmative and held that the power to levy taxes comes from the Entry 62 of the State list. The Entry makes the State legislature competent to impose taxes on the entire genus of ‘betting and gambling’, having concluded that lottery of every kind, whether conducted by the Government of India, State government or private parties.“Exclusion of a legislative field from a term appearing in a general Entry, does not necessarily mean that such field ought to be excluded from the taxation Entry. This means that the term ‘betting and gambling’ in Entry 62 of List II is being construed in the same way as in Entry 34 of List II. The expression is accorded the same meaning and interpretation in both the Entries, i.e., that gambling includes lotteries,” the judgment noted. Therefore, the Supreme Court held that, Karnataka and Kerala were competent to pass legislations and levy taxes on the activity of ‘betting and gambling’. .The judgments of the Kerala High Court and Karnataka High Court were, therefore, overruled the laws passed by them were held to be constitutionally valid..Additional Solicitor General of India N Venkataraman appeared for Karnataka. Senior Advocate Pallav Shishodia appeared for Kerala. Senior Advocate C Aryama Sundaram represented Nagaland.Senior Advocate Arvind P Datar along with Advocate General Amit Kumar appeared for Meghalaya while Senior Advocate SK Bagaria appeared for Sikkim. .[Read Judgment]