Can State legislatures impose tax on lotteries?

Recently, the State of Karnataka along with State of Kerala preferred an appeal before the Hon’ble Supreme Court of India bearing Civil Appeal nos. 10466-10476 of 2011. The respective High Courts vide impugned judgments basically held that the State Legislatures had no legislative competence to pass the respective acts regarding taxation of lotteries (for instance, Karnataka Tax on Lotteries Act, 2004) and, consequently, directed the amounts deposited by the respondents-States who had organised the lottery schemes to be refunded to them within four months from the date of receipt of the copy of the impugned judgment. The respondent states in the said case were States of Nagaland, Arunachal Pradesh, Meghalaya, Sikkim, and others who were the organisers of the lotteries as well as promoters, inter alia, in the States of Karnataka and Kerala.

The following acts were under consideration in the subject case along with the Constitution of India:

• The Lotteries (Regulation) Act, 1998 
• The Karnataka Tax on Lotteries Act, 2004 
• Kerala Tax on Paper Lotteries Act, 2005 

In the above background, the following points for consideration were dealt with by the Apex Court:

1. Whether the subject ‘lotteries organised by the Central Government and the State Governments’ being carved out of ‘betting and gambling’ which is dealt with under Entry 34 of List II and being placed in Entry 40 of List I would also exclude the power of taxation on the same in Entry 62 of List II?
2. Whether the power of taxation on ‘betting and gambling’ is within the ambit of Entry 62 of List II?
3. Whether the impugned Acts passed by the Karnataka and Kerala State Legislatures are within the legislative competence of Entry 62 of List II, and are therefore valid pieces of legislation?

Entries 40 and 97 of List I of the seventh schedule of the Constitution of India read as follows:

“40. Lotteries organised by the Government of India or the Government of a State.”

“97. Any other matter not enumerated in List II or List III including any tax not mentioned in either of those Lists.”

Entries 34 and 62 of List II of the seventh schedule of the Constitution of India read as follows:

“34. Betting and gambling”

“62. Taxes on luxuries, including taxes on entertainments, amusements, betting and gambling.

After discussing the meaning of “betting and gambling” and “lotteries” and after consideration of various judgments, the Apex court observed that ‘lotteries’ are a species within the genus of ‘gambling’. 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 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.

The Apex Court on an extensive analysis of the above points and after discussion of a plethora of judgments held the following:

i) That the subject ‘betting and gambling’ in Entry 34 of List II is a State subject.

ii) 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.

iii) The expression ‘betting and gambling’ is relatable to an activity which is in the nature of ‘betting and gambling’. Thus, all kinds and types of ‘betting and gambling’ fall within the subject of Entry 34 of List II. The expression ‘betting and gambling’ is thus a genus it includes several types or species of activities such as horse racing, wheeling and other local variations/forms of ‘betting and gambling’ activity. The subject ‘lotteries organised by the Government of India or the Government of a State’ in Entry 40 of List I is a Union subject. It is only lotteries organised by the Government of India or the Government of State in terms of Entry 40 of List I which are excluded from Entry 34 of List II. In other words, if lotteries are conducted by private parties or by instrumentalities or agencies authorized, by Government of India or the Government of State, it would come within the scope and ambit of Entry 34 of List II.

iv) Thus, the State legislatures are denuded of their powers under Entry 34 of List II only to the extent of lotteries organised by the Government of India or the Government of a State, in terms of Entry 40 of List I. In other words, except what is excluded in terms of Entry 40 of List I, all other activities which are in the nature of ‘betting and gambling’ would come within the scope and ambit of Entry 34 of List II. Thus, ‘betting and gambling’ is a State subject except to the extent of it being denuded of its powers insofar as Entry 40 of List I is concerned.

v) 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 activities which are in the nature of ‘betting and gambling,’ including lotteries. 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 and gambling’, the State Legislatures have the power to tax lotteries under Entry 62 of List II. 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. Hence, the legislations impugned are valid as the Karnataka and Kerala State Legislatures possessed legislative competence to enact such Acts.

vi) Thus, 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.

vii) The Apex court also held that also hold that lottery schemes by the Government of other States are organised/conducted in the State of Karnataka or Kerala and there are express provisions under the impugned Acts for registration of the agents or promoters of the Governments of respective States for conducting the lottery schemes in the State of Karnataka and the State of Kerala. This itself indicates sufficient territorial nexus between the respondents–States who are organising the lottery and the States of Karnataka and Kerala.

viii) The Apex court 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).

The appeals filed by the State of Karnataka and State of Kerala and others were therefore allowed, by setting aside the impugned judgments passed by the Division Benches of the High Courts of Karnataka and Kerala.

The judgment can be accessed from the following link:

https://main.sci.gov.in/supremecourt/2011/19072/19072_2011_12_1502_34280_Judgement_23-Mar-2022.pdf