State GST Authorities Can’t Look Into Violations Of Lottery Regulations: Kerala HC Strikes Down Provision In Kerala GST Rules [Read Judgment]

In Teesta Distributors v. State of Kerala, the High Court of Kerala has struck down Rule 56(20A)(iii)(d) of the Kerala State GST Rules, 2017 (“KGST Rules”) as being ultra vires for lack of legislative competence.

The petitioner is a distributor of lottery, organised and conducted by the Government of Mizoram. The Deputy Commissioner of State Goods & Services Tax Department, Kerala, had issued notice to the petitioner directing the petitioner to prove that the lottery to be held by them is in compliance of the Lotteries (Regulation) Act, 1998, furnish details as provided under Rules 56(19) and 56(20) of the KGST Rules and comply with the conditions put forth in Rule (20A) of the KGST Rules. On the same day as the issuance of notice, the police came to the godown of the petitioner and seized several goods including lottery tickets. An FIR was also registered against the petitioner the next day.

The petitioner moved the high court to highlight the grievances it faced regarding interference of sale of tickets by the Government of Kerala using police power and the authority of officials under the Kerala State Goods and Services Tax Act, 2017. The main contention of the petitioner was that the seizure made invoking Rule 56(20A) was an act of collusion between the Deputy Commissioner and the police. It was argued that Rule 56 (20A) is ultra vires as it is a colourable exercise of delegated legislation to interfere with the rightful conduct of lottery business in the state.

Rule 56(20A)(iii)(d) of the KGST Rules provides, “Violations of the Lotteries (Regulation) Act, 1998 (Central Act 17 of 1998) and the Rules made thereunder, if any, detected by any authority shall be informed to the police for initiating action under section 7 of the said Act and to the Government for initiating action under section 4 of the said Act.”

It was argued that the Lotteries (Regulation) Act, 1998 is a self-contained act and the Parliament alone is competent to legislate in respect of the offences for violation of Lotteries (Regulation) Act, 1998.The police power referred under Section 7of Lotteries (Regulation) Act, therefore, can be exercised only in accordance with the provisions under the Lotteries (Regulation) Act and the State has no power to legislate on such subject on which the Parliament alone has the power to legislate. It was also pointed out that the self-assumed satisfaction of violations by the officials of the Department of Tax can in no way result in initiating action against the petitioners under the Lotteries (Regulation) Act, 1998.

Opposing the contentions of the petitioner, it was argued by the State that Rule 56 (20A) is not ultra vires as it has been made for the proper assessment of levy of GST and was necessary for fair and complete assessment of GST.

Justice A Muhammed Mustaque, the single judge who considered the matter accepted the contentions of the petitioner and struck down Rule 56 (20A) observing the following:

“It is to be noted that Rule 56(20A)(d) refers to satisfaction entered by the authority as to the violations of the Lotteries (Regulation) Act. This Court is of the view that the above Rule has to be struck down as the State has no power to constitute one more authority under the Kerala State GST Rules to enter satisfaction as to the violations of the lottery. The Indian Constitution does not recognize police power as such. Therefore, the police power depend upon the source of power to legislate.”

 Further, it was observed that “Lotteries (Regulation) Act deals with the manner in which violation of lottery will have to be dealt with. Section 8 of the Lotteries (Regulation) Act states that the offences under the said Act shall be cognizable and non-bailable. Therefore, the police will have to enter a satisfaction as to the violation before proceeding against the offenders. The police cannot act merely based on the information given by the Tax officials. The police power in relation to the violation of the provisions of Lotteries Regulation can be exercised only in accordance with the Lotteries Regulation. The State's competency to legislate on the subject under the head 'Betting and Gambling' in Entry 34 of List II, Schedule VII of the Constitution cannot empower the police officials or the tax officials to declare the lottery organised by the State of Mizoram as illegal and to interfere with such business of the petitioners.”