Levy Of GST On Entire Bet Amount in Horse Races : Karnataka High Court Stays Order Declaring Rule 31A(3) Of CGST Rules, 2017 Ultra Vires

A division bench of Justice Satish Chandra Sharma and Justice Sachin Shankar Magadum has thus admitted the appeal filed by the Union of India, challenging the judgment.

Additional Advocate General Dhyan Chinnappa appearing for the state and Advocate Vikram Huilgol appearing for the Union of India drew the attention of the court towards the judgment delivered in Skill Lotto Solutions Pvt. Ltd. vs. Union of India  which upheld the validity of Rule 31A (3) governing valuation of supply of actionable claim in the form of chance to win in betting, gambling or horse racing in a race club on which the tax is calculated, while pressing for interim relief.

This prompted the Bench to order that,

"This Court has also heard learned counsel for the respondents and is of the opinion that the appellants have been able to make out a prima facie case for grant of interim relief. Resultantly, the operation of the impugned order shall remain stayed till the next date of hearing. List on 07.10.2021."

The Bangalore Turf Club Limited and Mysore Race Club Limited had approached the court challenging the legislative intent of making the petitioners liable to pay Goods and Services Tax ('GST' for short) on the entire bet amount received by the totalisator.

The High Court while allowing the petitions filed by the Bangalore Turf Club Limited and Mysore Race Club Limited had said, "The petitioners shall be entitled to all consequential benefits that flow from the aforesaid orders."

A single bench of Justice M Nagaprasanna had also noted that "The tax is only on the supply of goods and services; on a value determined under Section 15 of the Act which deals with the value of taxable supply."

"Rule 31A(3) in the form that it is, perforates the nexus between the measure of tax and the taxable event as the fully paid value into the totalisator is directed to be assessed for payment of GST under the Act. Therefore it becomes necessary to consider Rule 31A(3) qua the activity of the petitioners and that becomes the kernel of the entire issue", the Court had opined.

The court had also observed,

"A totalisator does not indulge in betting. In my opinion, betting is neither in the course of business nor in furtherance of business of a race club for the purposes of the Act. Petitioners hold the amount received in the totalisator for a brief period in its fiduciary capacity. Once the race is over, the money is distributed to the winners of the stake. It is for a certain period between input of money by the participants and the output of money to the winners of stake during the race the petitioners hold that money in its fiduciary capacity for which the consideration that the petitioners receive is the commission."

Further, the court had opined, "The act which deals with supply of goods, consideration, and business would not apply to the function of the totalisator. Making the entire bet amount that is received by the totalisator liable for payment of GST would take away the principle that a tax can be only on the basis of consideration even under the CGST."

Accordingly, it had then held:

"Article 246A which introduced the Goods and Services Act, 2017, the definitions and other provisions of the Act do not bring in the activity of the petitioners under the ambit of the Act. Rule 31A(3) travels beyond what is conferred upon the Rulemaking authority under Section 9 which is the charging section, by way of an amendment to the Rule. The totalisator is brought under a taxable event without it being so defined under the Act nor power being conferred in terms of the charging section which renders the Rule being made beyond the provisions of the Act. The same follows the impugned KSGST Rules which are identical to the impugned CGST Rules. Therefore, Rule 31A(3) which does not conform to the provisions of the Act will have to be held ultra vires the enabling Act and consequently opens itself for being struck down."

Case Title: The Union of India and Bangalore Turf Club Limited

Case No: WA 727/2021

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