Service Tax on Lottery Distributors and the Division of Powers: Analysing Union of India vs. Future Gaming Solutions

Posted On - 6 March, 2025 • By - Vatsal Gaur

Introduction

The Lotteries (Regulation) Act, 1998 has defined a lottery in Section 2(b) as a scheme in which prizes are allocated by chance to the purchasers of tickets. It covers all types of lotteries, irrespective of name or form. State lotteries are presently taxed at 12% GST, whereas those approved by states but sold outside are charged 28% GST[1].  Indian Constitution clearly delineates powers of taxation between the Union and State governments by Article 246 into the Union List, State List, and Concurrent List[2]. Exclusive power over taxes in the Union List is vested in the Union government, whereas state legislatures have control over taxes in the State List, including lotteries under Entry 62.

Prior to the introduction of the Central Goods and Services Tax (CGST), the sale of lottery tickets attracted state-wise sales tax[3]. Disputes arose regarding whether lottery distributors were subject to service tax under the Finance Act, 1994, and legal challenges ensued. The Supreme Court, in Union of India & Ors. vs. Future Gaming Solutions Pvt. Ltd. & Anr., held that lottery taxation is under the domain of the state in the nature of betting and gambling. The judgment reiterates constitutional federalism by establishing that although the Centre may regulate specific areas of taxation, states have primacy when it comes to lottery-related transactions and revenues.

Facts

The respondents, Future Gaming Solutions Pvt. Ltd. and others, are companies registered under the Companies Act, 1956, dealing in the business of selling paper and online lottery tickets conducted by the Government of Sikkim. They made contracts with the State of Sikkim for buying lottery tickets in bulk and reselling them to the general public through agents and stockists.

The controversy began with the Finance Act, 1994, introducing service tax. In 2003, the Act was amended to incorporate “Business Auxiliary Service” as a taxable category under Section 65(19) from July 1, 2003. The Service Tax Department thereafter issued notices to lottery distributors, including the respondents, to register and pay service tax on their operations.

Challenging this levy, the respondents moved writ petitions in the High Court of Sikkim contending that sale of lottery tickets did not amount to a ‘service’ and hence was outside the ambit of service tax. The High Court, by its judgment dated September 18, 2007, held in favor of the respondents and declared that service tax could not be levied on the sale of lottery tickets. The Union of India has appealed this ruling, which resulted in the current case in the Supreme Court.

In 2010, the Finance Act was again amended, adding clause (zzzzn) to Section 65(105), to come into force from July 1, 2010, aimed at charging service tax on services of organizing or promoting games of chance, inter alia, lotteries. The respondents opposed this amendment in the Sikkim High Court by Writ Petition (C) No.36 of 2011. The High Court, on November 29, 2012, gave its judgment in favor of the respondents, declaring clause (zzzzn) ultra vires, as taxation on lotteries came within the exclusive field of the state under Entry 62 of List II of the Seventh Schedule of the Constitution.

Thereafter, the services tax laws saw further amendments during 2012 and 2015, intended to redefine tax services and encompass lottery-related activities within the coverage of the services tax. These amendments were countered by the respondents, which gave rise to a chain of Sikkim High Court judgments favorable to the respondents, which at all times favored the respondents citing the exclusive authority of the state to tax activities of gambling and betting.

Issues Involved:

  1. Whether the Parliament possesses the authority to levy service tax on activities related to lotteries, considering that “betting and gambling” fall under the State List (Entry 62, List II) of the Constitution.
  2. Assessing whether the activities performed by lottery distributors, such as promotion and marketing, qualify as “services” under the Finance Act, 1994, and subsequent amendments.
  3. Evaluating the validity of the amendments made to the Finance Act in 2010, 2012, and 2015, which sought to bring lottery-related activities under the purview of service tax.

Court’s Analysis and reasoning:

The main constitutional issue in the present case is whether or not the Union government can impose service tax on lottery-related activities, given that “betting and gambling” are included under Entry 62 of List II (State List). The Indian Constitution has clearly demarcated the legislative powers and has exclusively granted the states the power of taxation on betting and gambling, including lotteries.

The Union, through the amendment of the Finance Act, attempted to levy service tax on the promotion, marketing, and distribution of lotteries on the ground that these were ancillary services apart from gambling itself. But the respondents claimed that all activities connected with lotteries naturally come under the ambit of “betting and gambling” and must be taxed by the states alone.

The Sikkim High Court upheld the respondents and held that any taxation of lottery activities was within the legislative domain of the state government. This view is consistent with the doctrine of “pith and substance,” which says that if the central subject of a law comes under a specific legislative list, incidental incursions into another list do not affect its constitutional validity. As the nature of the transaction was connected with gambling, the court ruled that service tax could not be levied by the Union.

One of the key issues in the case was whether the services carried out by lottery distributors, including marketing, promotion, and distribution, amounted to a “service” within the Finance Act, 1994.

The Union government had contended that such activities constituted a service as they helped boost lottery sales and hence conferred economic value to the state governments that conducted the lotteries. The respondents, however, asserted that their role was not that of service providers but independent business entities dealing with each other on a principal-to-principal basis. They bought tickets for the lottery from the state at a discount and resold them, earning a profit on the difference. This commercial transaction, they claimed, was not a service but the sale of an actionable claim, which cannot be taxed under the service tax.

Basing its ruling on past decisions, such as that of Sunrise Associates vs. Government of NCT of Delhi, the Court reiterated that lottery tickets are similar to actionable claims and are not ‘goods’ or ‘services’ in the usual sense. The Court noted that the exchange between the state and the distributor is more a sale of an actionable claim than it is a provision of service.

In addition, the Court went into the legislative intention in charging service tax, with the court highlighting that the tax is meant to finance services provided for consideration. In the distribution of lottery, the distributor buys the lottery rights from the state and sells tickets to the public on a margin. The court considered this structure to be without the defining features of a service provider-recipient relationship contemplated under the Finance Act.

The courts sided with the argument of the respondents that the marketing and selling of lottery tickets were inherent to the gambling activity itself. As the sale of lottery tickets was not categorized as goods or services, these related activities could not be artificially segregated and taxed as service tax.

The 2010, 2012, and 2015 Finance Act amendments attempted to impose service tax on lottery operations by way of Clause (zzzzn) in 2010. It was, however, struck down in 2012 by the Sikkim High Court, calling it unconstitutional for it trespassed on the states’ domain as per Entry 62 of the State List. Despite further amendments in 2012 and 2015, courts consistently ruled in favor of the respondents, reaffirming that taxation on betting and gambling falls under state jurisdiction. The judiciary upheld the constitutional division of powers, emphasizing federalism and preventing the Union from overriding states’ exclusive taxation rights.

Conclusion

The ruling of the Supreme Court in Union of India vs. Future Gaming Solutions Pvt. Ltd. upholds the constitutional separation of powers by acknowledging that taxation of lotteries comes solely under the purview of the state. In its ruling against the levy of service tax on lottery sellers, the Court has reaffirmed the legislative independence of states in the areas of betting and gambling. This ruling acts as an essential precedent in the maintenance of federalism and safeguarding the power of states with regard to taxation from encroachment by the center. Furthermore, it identifies the necessity for demarcation by the legislature to preclude ambiguity and conflicting situations between the Union government and state governments. The ruling further consolidates the doctrine of cooperative federalism such that taxation finds its place where it was meant to under the Constitution.

[1] ICSI (n.d.) GST on Lottery in India: An Overview. Available at: https://www.icsi.edu/media/webmodules/GST_on_Lottery_in_India-AnOverview.pdf (Accessed: 27th Feb,2025).

[2] RGICS (n.d.) Federalism in India: Part 3 – Fiscal Relations. Available at: https://www.rgics.org/wp-content/uploads/Federalism-in-India-Part-3-Fiscal-Relations.pdf (Accessed: 27th Feb,2025).

[3] Pahle India Foundation (2024) Lottery in India: White Paper. Available at: https://pahleindia.org/wp-content/uploads/2024/03/Lottery-in-India-White-Paper.pdf (Accessed: 27th Feb,2025).