State has legislative competence to levy tax on lotteries run by other states: SC

The Supreme Court on Wednesday declared that a State has got legislative competence to levy tax on lotteries run by other States in its territory. It also upheld the validity of the laws passed by Karnataka and Kerala to impose a tax on such lotteries.

A bench of Justices M R Shah and B V Nagarathna held that the States of Karnataka and Kerala can impose a tax on lotteries conducted by other States, saying ‘lotteries’ is a species of gambling activity and hence comes under the State subject as per the Constitution.

"There are express provisions under the Acts of Karnataka and Kerala for registration of the agents or promoters of the governments of respective States for conducting the lottery schemes over there. This itself indicates sufficient territorial nexus between the respondents–States who are organising the lottery and the States of Karnataka and Kerala," the bench said.

The top court allowed an appeal filed by the States of Karnataka and Kerala against the decisions by their respective High Courts which had held that they had no legislative competence to impose taxes on lotteries run by the other North Eastern States like Nagaland, Arunachal Pradesh, Meghalaya, Sikkim and ordered them to refund the money.

"We find that the High Courts were not right in holding that the respective State Legislatures had no legislative competence to impose a tax on the lotteries conducted by other States in their States," the bench added.

Both Karnataka and Kerala governments sought to rely upon the Karnataka Tax on Lotteries Act, 2004 and the Kerala Tax on Paper Lotteries, Act, 2005 to impose taxes.

Additional Solicitor General N Venkataraman, appearing for Karnataka, contended tax under question, is neither a tax on the sale of lottery tickets nor on lotteries as actionable claims. It is a tax on gambling traceable to Entry 62 of List II of the Constitution. Kerala adopted the submission by Karnataka.

The North Eastern States, on the other side, said both Karnataka and Kerala sought to impose a tax on the sale of lottery tickets which is not permissible and their laws sought to operate extra-territorially. They also said States must not be permitted to curtail the rights of North- Eastern States to conduct lotteries in view of their exigencies to generate revenue.

The top court, however, held 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 (by Karnataka and Kerala) are valid as the State Legislatures possessed legislative competence to enact such Acts," the bench said.

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