The Sikkim High Court on Wednesday provided double relief to lottery distributors in two separate judgments delivered on 14th October: in one order, the court struck down amendments in the 2015 budget (Finance Act) which imposed service tax on lottery distributors and in a separate order, the same bench struck down Rule 3(11) of Lotteries Regulation (Rules), 2010 as being ultra vires of the parent statute.
a. Service tax matter
In the matter M/s. Future Gaming & Hotel Services Pvt. Ltd. along with M/s. Summit Online Trade Solutions Pvt. Ltd. v. Union of India & Others, a division bench comprising of Justices MM Rai and SP Wangdi struck down provisions of the Finance Act as amended in 2015, which imposed service tax on lottery distributors. Finance Act 2015 had introduced an explanation which excluded lottery distribution services from the negative list of betting, gambling and lottery (which is exempt from service tax).
The High Court opined that distribution services offered by lottery operators wherein they either purchase lottery tickets in bulk from state governments or market and promote lotteries organised by the state government are actionable claims and therefore excluded from the definition of service.
The Court further noted that taxation of gambling, betting and lottery falls within the jurisdiction of the state government by virtue of entry 62 of List II of Schedule VII of the Constitution and therefore the central government may not have power to impose service tax.
Further, the bench also observed that by insertion of an explanation in the Finance Act, 2015, the original scope of definition of service was sought to be expanded, which was ultra vires and not permitted as per recognised rules of statutory interpretation.
The judgment comes as a major relief for lottery distributors Sugal & Damani as well as Martin Groups, who have been fighting a long legal battle over various amendments and notifications issued by the central government imposing service tax in various forums. Kamlesh Vijay, Group CEO of Sugal & Damani said, “We feel vindicated that the Sikkim High Court has accepted our contentions and struck down service tax imposed on lottery distributors. The Sikkim High Court has directed the central government and all its agencies to refrain from collecting any amount of service tax from lottery distributors in terms of our prayer before the court. This is a positive development for the lottery and gaming industry.” (Sugal & Damani group company, Summit Online Trade Solutions was party to the litigation)
b. Writ petition challenging the validity of Rule 3(11) of the Lotteries Regulation (Rules), 2010
In a related development, the same bench of Justices Rai and Wangdi in M/s. Shubh Enterprises v. Union of India & Others, struck down Rule 3(11) of the Lotteries Regulation (Rules), 2010 which allowed states under whose jurisdiction lotteries are being sold to charge a minimum fee of two thousand rupees from the organising state.
The High Court reasoned that there was no provision under the parent legislation, i.e. the Lotteries (Regulation) Act, 1998 which permits levy of such fee or charge. Further, the bench noted that under the constitutional provisions, the Parliament is given the power to merely regulate the sale of lotteries by state or central governments, while the power to tax or levy fees on such activities lies with the respective state governments.
Both these decisions are expected to provide respite to lottery operators and agents. Advaita Legal Senior Partner AR Madhav Rao appeared for the lottery operators in both the matters. Additional Solicitor General Kaushik Chanda appeared for the Union of India in the challenge to the Lotteries Regulation (Rules) while Advocate DK Singh appeared for the Union of India in the service tax matter. The Sikkim government was represented by Additional Advocate General JB Pradhan in both the matters.