India’s apex court rules lottery distributors not liable for service tax

February 12, 2025

India’s apex court rules lottery distributors not liable for service tax

India’s Supreme Court on February 11 has ruled that lottery distributors are not liable to pay service tax to the union government. Dismissing an appeal by the union, the apex court upheld a Sikkim High Court decision that struck down a 2010 law imposing service tax on lottery-related activities.

This ruling provides relief to lottery firms, including Future Gaming and Hotel Services Pvt. Ltd. The court clarified that lotteries fall under “betting and gambling,” which only state governments have the authority to tax under the Indian Constitution.

Lottery distributors not providing a taxable service

A bench comprising Justices B.V. Nagarathna and N. Kotiswar Singh ruled that lottery distributors do not render any service to the government.

Justice B.V. Nagarathna, while reading out 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.”

The union government had imposed service tax on lottery promotion, marketing, and organisation activities by amending the Finance Act, 1994, through Clause (zzzzn) in 2010. This amendment brought lottery-related activities under the definition of “taxable services.” However, the Supreme Court upheld the Sikkim High Court’s decision, confirming that these activities do not qualify as a service under the law.

Constitutional division of taxation powers

The Supreme Court’s ruling was based on the Indian Constitution’s division of taxation powers between the union and state government. Entry 62 of the State List (List II) grants states the exclusive right to impose taxes on betting, gambling, and lotteries. Additionally, Entry 34 of the same list gives states the power to regulate such activities.

The union, however, had attempted to impose service tax by invoking Entry 97 of the Union List (List I), which allows Parliament to tax matters not covered under the Constitution. The Supreme Court rejected this argument, reaffirming that betting and gambling are state subjects, and only states can impose taxes on lotteries.

Background of case

The dispute originated 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 activities do not fall under “taxable service” as defined by the Finance Act. They contended that conducting lotteries is a form of betting and gambling, which falls exclusively under state jurisdiction. They also argued that Parliament 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 companies, striking down the relevant provision of the Finance Act, 2010. The court held that lottery distributors do not provide a service and are, therefore, not liable for service tax.

SC dismisses union government’s appeal

The union government challenged the Sikkim High Court’s ruling in the Supreme Court. However, the Supreme Court dismissed the appeal, affirming that no service is being provided to the state governments.

The ruling aligns with a 2024 August judgment by the Supreme Court that held the sale of lottery tickets by a state government is not a taxable service but a revenue-generating activity. The court observed that wholesale lottery purchasers do not promote or market a service provided by the state, making them exempt from service tax liability.

While the SC ruled out service tax, it clarified that lottery companies remain liable to pay gambling tax imposed by state governments under Entry 62 of the State List.