Crucial precedent: Decoding India's Supreme Court ruling on lottery tax

March 12, 2025

Crucial precedent: Decoding India's Supreme Court ruling on lottery tax

It has been just over a month since India’s Supreme Court ruled that lottery distributors are not liable to pay service tax to the Union government, reaffirming that taxation on betting and gambling falls exclusively under state jurisdiction. SiGMA News sat down with corporate lawyer Divya Sharma in a candid chat, where she described the ruling as pivotal for the industry, ensuring legal certainty and reinforcing a stable regulatory framework.

“By upholding the states’ exclusive taxation authority, the decision not only prevents undue central intervention but also sets a crucial precedent for India’s evolving gambling and gaming landscape,” Sharma said.

Lottery distributors not providing a taxable service

The judgment, delivered on 11 February 2025 in Union of India & Ors. v. Future Gaming Solutions Pvt. Ltd. & Anr., dismissed an appeal by the Union government and upheld a Sikkim High Court ruling that struck down a 2010 law imposing service tax on lottery-related activities.

Justice Nagarathna, while delivering the judgment, said, “There being no agency, no service is rendered by the respondent-assessees as agents to the Government of Sikkim. Therefore, service tax is not leviable on the transactions between lottery ticket purchasers and the Government of Sikkim.”

Constitutional division of taxation powers

The SC’s decision is based on the Indian Constitution’s framework for taxation. Entry 62 of the State List (List II) grants states the exclusive power to tax betting, gambling, and lotteries. Additionally, Entry 34 of the same list gives states the authority to regulate these activities.

The union government had imposed service tax on lottery promotion, marketing, and organisation activities through an amendment to the Finance Act in 2010. This amendment introduced Clause (zzzzn), bringing lottery-related activities under the definition of “taxable services.” However, the Supreme Court upheld the Sikkim High Court’s decision that these activities do not qualify as a service.

The union government attempted to justify the tax under Entry 97 of the Union List (List I), which allows Parliament to tax matters not explicitly mentioned in the Constitution. The Supreme Court rejected this argument, reaffirming that betting and gambling are state subjects, and only state governments can impose taxes on lotteries.

“The Court held that only state legislatures have the power to levy taxes on lotteries, and the imposition of service tax by the Union was unconstitutional,” Sharma said. “The judgment further distinguishes between lotteries and trade, emphasising that lotteries are purely games of chance with no element of skill, unlike trade, which is skill-based. Since no agency relationship or service is involved, the Court ruled that service tax cannot be levied on transactions between lottery distributors and ticket buyers.”

Background of the case

The dispute began in 2010 when Parliament amended the Finance Act, 1994, to include lottery-related activities under taxable services. Future Gaming and Hotel Services Pvt. Ltd., along with other lottery firms, challenged the amendment in the Sikkim High Court.

The lottery companies argued that their business falls exclusively under state jurisdiction as a form of betting and gambling. They also contended that the Centre cannot impose taxes on state subjects using Entry 97 of the Union List.

On 29 November 2012, the Sikkim High Court ruled in favour of the lottery firms, striking down the relevant provision of the Finance Act, 2010. The court held that lottery distributors do not provide a service and, therefore, are not liable for service tax.

Impact on the lottery industry

The ruling provides relief to lottery firms, including Future Gaming and Hotel Services Pvt. Ltd., which had challenged the tax on the grounds that lottery-related activities do not fall under the definition of “taxable services” under the Finance Act, 1994.

Sharma stressed that the decision reinforces the legal framework governing lotteries in India.

“This ruling provides much-needed legal certainty to lottery distributors, ensuring they operate within a stable and predictable tax environment,” she said.