States Have Legislative Competence To Levy Tax On Lotteries Run By Other States : Supreme Court Allows Appeals Of Kerala & Karnataka

In a significant judgment, the Supreme Court has held that State legislatures have the competence to levy tax on the lotteries organized by other states.

Holding so, a bench comprising Justices MR Shah and BV Nagarathna allowed the appeals filed by the States of Karnataka and Kerala challenging the judgments of Karnataka and Kerala High Courts which held that they lacked the legislative competence to levy tax on the lotteries organized by other states like Nagaland, Meghalaya and Sikkim.

In 2010, the Karnataka High Court had held that the State lacked the legislative competence to enact the Karnataka Tax on Lotteries Act, 2004 and struck it down. Likewise, in 2020, the Kerala High Court struck down the Kerala Tax on Paper Lotteries, Act, 2005. The States were directed to refund the tax collected under these legislations. 

Now, the Supreme Court has set aside these judgments of the Kerala and Karnataka High Courts.

Issue involved

The issue was regarding the interpretation to be given to the expression 'betting and gambling' in Entries 34 and 62 of List II of the Seventh Schedule of the Constitution of India.  

Whether "betting and gambling" include "lotteries" and whether States have the competence to tax them as per Entry 62 of the Constitution of India.

Also, whether Entry 40 of List I (Lotteries organised by the Government of India or the Government of States) restrict the power of States to levy tax on lotteries organized by the other states.

Another issue was whether the State legislations are void because of their extra-territorial application.

Findings of the Court

On an analysis of the Constitutional provisions, the judgment authored by Justice BV Nagarathna arrived at the following conclusions :

Lotteries come under the ambit of "betting and gambling"

"Lotteries' is a species of gambling activity and hence lotteries is within the ambit of 'betting and gambling' as appearing in Entry 34 List II.

It is only lotteries organised by the Government of India or the Government of State in terms of Entry 40 of List I which are excluded from Entry 34 of List II. In other words, if lotteries are conducted by private parties or by instrumentalities or agencies authorized, by Government of India or the Government of State, it would come within the scope and ambit of Entry 34 of List II.

Lotteries, except those organized by Govt of India or a Govt of a State covered under Entry 40 List I, come within State subject

Thus, the State legislatures are denuded of their powers under Entry 34 of List II only to the extent of lotteries organised by the Government of India or the Government of a State, in terms of Entry 40 of List I. In other words, except what is excluded in terms of Entry 40 of List I, all other activities which are in the nature of 'betting and gambling' would come within the scope and ambit of Entry 34 of List II. Thus, 'betting and gambling' is a State subject except to the extent of it being denuded of its powers insofar as Entry 40 of List I is concerned.

Entry 40 of List I does not take away the power of States to levy tax on other-state lotteries

Entry 62 of List II is a specific taxation Entry on 'luxuries, including taxes on entertainments, amusements, betting and gambling'. The power to tax is on all activities which are in the nature of 'betting and gambling,' including lotteries. Since, there is no dispute that lotteries, irrespective of whether it is conducted or it is organised by the Government of India or the Government of State or is authorized by the State or is conducted by an agency or instrumentality of State Government or a Central Government or any private player, is 'betting and gambling', 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 impugned are valid as the Karnataka and Kerala State Legislatures possessed legislative competence to enact such Acts.

Thus, the scope and ambit of lotteries organised by Government of India or Government of State under Entry 40 of List I is only in the realm of regulation of such lotteries. The said Entry does not take within its contours the power to impose taxation on lotteries conducted by the Government of India or the Government of State.

Legislations have territorial nexus

Lottery schemes by the Government of other States are organised/conducted in the State of Karnataka or Kerala and there are express provisions under the impugned Acts for registration of the agents or promoters of the Governments of respective States for conducting the lottery schemes in the State of Karnataka and the State of Kerala. This itself indicates sufficient territorial nexus between the respondents– States who are organising the lottery and the States of Karnataka and Kerala.

Principle of interpretation of Entries

The Court said that the following approaches are being adopted to interpret the entries in the Seventh Schedule :

1. The Entries in the different Lists should be read together without giving a narrow meaning to any of them. The powers of the Union and the State Legislatures are expressed in precise and definite terms. Hence, there can be no broader interpretation given to one Entry than to the other.

Even where an Entry is worded in wide terms, it cannot be so interpreted as to negate or override another Entry or make another Entry meaningless. In case of an apparent conflict between different Entries, it is the duty of the Court to reconcile them in the first instance.

2. In case of an apparent overlapping between two Entries, the doctrine of pith and substance has to be applied to find out the true nature of a legislation and the Entry within which it would fall.

3. Where one Entry is made 'subject to' another Entry, all that it means is that out of the scope of the former Entry, a field of legislation covered by the latter Entry has been reserved to be specially dealt with by the appropriate Legislature.

4. When one item is general and another specific, the latter will exclude the former on a subject of legislation. If, however, they cannot be fairly reconciled, the power enumerated in List II must give way to List I.

5. On a close perusal of the Entries in the three Lists of the Seventh Schedule of the Constitution, it is discerned that the Constitution has divided the topics of legislation into the following three broad categories: (i) Entries enabling laws to be made; (ii) Entries enabling taxes to be imposed; and (iii) Entries enabling fees and stamp duties to be collected. Thus, the entries on levy of taxes are specifically mentioned. Therefore, per se, there cannot be a conflict of taxation power of Union and the State. Thus, in substance the taxing power can be derived only from a specific taxing Entry in an appropriate List in the Seventh Schedule. Such a power has to be determined by the nature of the tax and not the measure or machinery set up by the statute.

Reasons for holding that state legislatures are not denuded of their power to levy tax on lotteris

The Court cited the following reasons for holding that Entry 40 of List I does not take away the power of the states to levy tax on other-state lotteries :

(a) Entry 62 of List II is a specific taxation entry on luxuries, including taxes on entertainments, amusements, betting and gambling. The expression 'betting and gambling' would have to be read ejusdem generis with entertainments and amusements. The tax is thus on the activity of 'betting and gambling' as it is on an activity.

(b) The expression 'betting and gambling' is also found in Entry 34 of List II. We have discussed at length above the content of the said expression and as to what it encompasses. The activity of 'betting and gambling' includes, inter alia, lotteries. Lotteries can be conducted by the Government of India or the Government of States or authorised by a State or be conducted by private entities in a State. Thus, a lottery conducted by any of the above entities, Government or private is an activity falling within the nomenclature of 'betting and gambling' which is the subject in Entry 34 List II. But what has been carved out of Entry 34 of List II is only lotteries conducted by the Government of India or the Government of any State. Therefore, all other types of lotteries continue to remain within the scope and ambit of 'betting and gambling' as an activity in Entry 34 of List II.

(c) Hence under Entry 62 of List II, the specific power to tax an activity which is 'betting and gambling' is reserved with the State legislature and cannot be read within the scope and ambit of Entry 40 of List I which is inherently restricted in its scope. We say so for the following reasons:

First, when a specific entry regarding taxation is provided in List II empowering the State Legislature to levy tax on a subject, namely, 'betting and gambling' amongst other similar activities, the same cannot be read by implication in an entry of List I namely Entry 40 of List I. This is because a taxation entry is separate and distinct from an entry dealing on a particular subject. This principle has been adequately explained by this Court in several judgments such as M.P.V. Sundararamier and followed in Hoechst Pharmaceuticals, Kesoram discussed above.

Second, a taxation entry or legislative power to levy a tax on 'betting and gambling' in the instant case, cannot be split between the Parliament and the State Legislature when the said power is expressly enumerated in Entry 62 of List II. This is the constitutional scheme under the three Lists. This is as per the constitutional scheme. This is also evident on a perusal of the Entries of List III (Concurrent List) which empowers both the Union as well as State Legislature to enact laws on subjects mentioned therein and the powers to levy a tax is conspicuous by its absence.

Third,the object and purpose o fEntry 62 of List II is to tax the activity of 'betting and gambling', whether it is conducted by a private entity or a State authorised entity or an instrumentality or agency or for that matter by the Government of India or the Government of any State. This is because irrespective of who organises a lottery scheme, it is ultimately a species of gambling. It is nobody's case that participation in a lottery scheme is not gambling. The said activity i.e. lottery scheme can be conducted throughout the territory of India provided a particular State grants permission to organise and conduct the said activity in that State. Thus, organisation and conducting of lottery can be a pan India activity of gambling and when a particular State permits a lottery scheme conducted by the Government of India or the Government of any State in that State, a tax is leviable on the same, which is a tax on gambling. Thus Entry 62 of List II empowers the State Legislatures to impose tax on 'gambling' irrespective of who or which entity is conducting it including the Government of India or Government of any State.

Fourth, 'betting and gambling' is a subject enumerated in Entry 34 of List II and is a State subject. Therefore, the permission for conducting any betting and gambling activities within a State, including conduct of a lottery scheme under the said Entry, gives competence to the State Legislatures to also tax the said activity irrespective of who conducts it. This is because what is being taxed is a gambling activity which is squarely covered under Entry 34 of List II and not on lottery per se conducted by Government of India or Government of a State.

Additional Solicitor General Senior Advocate N Venkataraman appeared for the State of Karnataka. Senior Advocate Pallav Shishodia appeared for the State of Kerala. Senior Advocate C Aryama Sundaram appeared for the State of Nagaland. Senior Advocate Arvind P. Datar, appeared for the State of Meghalaya and Advocate General Amit Kumar appeared for the State of Meghalaya. Senior Advocate SK Bagaria appeared for the State of Sikkim.

Case Title : State of Karnataka and another vs State of Meghalaya and another and other connected cases

Citation : 2022 LiveLaw (SC) 309

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