By way of a 2 November 2018 order, passed in Sri Mangal Murty Marketing v State of Maharashtra & Ors (Writ Petition 854/2007), the Bombay High Court has upheld the constitutionality of the Maharashtra Tax on Lotteries Act 2006. The taxation of lottery tickets and schemes in Maharashtra and across the country is a contested topic, which has led to multiple authoritative decisions. The judgment clarified that the taxation of lotteries falls under Entry 62 of the State List of the Constitution, as it falls within the ambit of the term 'betting and gambling', and because the powers of regulation and taxation of a subject in Schedule VII of the Constitution are distinct and separate.
Before the enactment of the Maharashtra Tax on Lotteries Act 2006, sales tax applied to the sale of lottery tickets. However, by way of its judgment in M/s Sunrise Associates v Government of NCT, Delhi & Ors, (2006 (5) SCC 603), the Supreme Court of India held that the sale of lottery tickets amounts to the sale of an actionable claim at best and does not fall within the ambit of sale of goods. Accordingly, when the state of Maharashtra repealed the Bombay Sales Tax Act 1959 and enacted the Maharashtra Value Added Tax (VAT) Act 2002, lotteries were excluded from paying VAT. When the Maharashtra Tax on Lotteries Act was enacted in 2006, the state of Maharashtra was empowered to levy and collect tax on the sale of lottery tickets from other states within Maharashtra.
Sri Mangal Murty Marketing is involved in the sale of lottery tickets organised by the government of Andhra Pradesh and Nagaland in Maharashtra. Sri Mangal Murty challenged the Maharashtra Tax on Lotteries Act on the grounds that the enactment of the legislation is beyond the legislative competence of the state legislature, because all powers related to "lotteries organized by the Government of India or the Government of a State" are vested in the Parliament alone, as per Entry 40 of the Union List of Schedule VII of the Constitution.
Writ Petition 854/2007 was filed in 2007 but was consequently dismissed after a Division Bench of the Bombay High Court upheld the constitutionality of the Maharashtra Tax on Lotteries Act by way of its judgment in N V Marketing Pvt Ltd v State of Maharashtra (Writ Petition 432/2007). However, the petition was restored to its file on 23 March 2017 in light of the Karnataka High Court's decision in State of Meghalaya v State of Karnataka (WA 2251/2007), which held that the state government did not possess the legislative competence to enact a law similar to the Maharashtra Tax on Lotteries Act. The finding in Meghalaya v Karnataka went against the assumption made in N V Marketing that the term 'lotteries' can be read into Entry 62 of the State List of Schedule VII of the Constitution, which deals with the taxation of betting and gambling activities. While various prior judgments supported such an interpretation, the Karnataka High Court stated that the absence of the term 'lotteries' in Entry 62 of the State List and its presence in Entry 40 of the Union List of Schedule VII of the Constitution indicates that the taxation of lotteries cannot be read into Entry 62 of the State List. Instead, since there is no specific entry regarding the taxation of lotteries, the right to tax lotteries is a residual right of Parliament under Entry 97 of the Union List.
The question posed before the Bombay High Court was whether the enactment of the Maharashtra Tax on Lotteries Act was constitutional (the original view of the Bombay High Court in N V Marketing) or whether it was beyond the scope of the state's legislative competence (the view of the Karnataka High Court in Meghalaya v Karnataka). The Bombay High Court examined both judgments in light of the other judicial pronouncements of the Supreme Court. The three relevant entries in the Constitution include:
- Entry 40 of the Union List – lotteries organised by the government of India or the government of a state;
- Entry 34 of the State List – betting and gambling; and
- Entry 62 of the Tax on Luxuries, including taxes on entertainment, amusement, betting and gambling.
In N V Marketing the Bombay High Court held that the Maharashtra Tax on Lotteries Act was within the legislative competence of the state legislature as it is an admitted position of law that lotteries fall under the ambit of 'betting and gambling' and hence the taxation of lotteries would be covered under Entry 62 of the State List (the power of taxation of a subject is distinct from that of the regulation of a subject, and taxation is not incidental to the regulation of a subject).
In Meghalaya v Karnataka the Karnataka High Court held that the enactment of the Karnataka Tax on Lotteries Act, which is pari materia to the Maharashtra act, is unconstitutional as there are three distinct lists in Schedule VII of the Constitution and since only Entry 40 of the Union List deals with the subject of lotteries, they cannot be included in the phrase 'betting and gambling'. Therefore, the taxation of lotteries falls under Entry 97 of the Union List as a residuary power.
In Writ Petition 854/2007, the Bombay High Court examined two judgments by the Supreme Court and conclusively held that lotteries fall under the ambit of 'betting and gambling'. In B R Enterprises v State of Uttar Pradesh (AIR 1999 SC 1867), the Supreme Court laid down that there was an undeniable nexus between the concepts of 'lottery' and 'betting and gambling', because they all involve a lack of skill to win a prize. The Bombay High Court drew the conclusion that this undeniably places the term 'lottery' within the scope of 'betting and gambling'. Further, as per the Supreme Court's judgment in Sunrise Associates, a lottery is not a commercial activity and is by nature a kind of gambling.
The Bombay High Court re-examined the decision in N V Marketing and its reliance on the judgment of State of West Bengal v Kesoram Industries (2004 10 SCC 201), in which the Supreme Court held that when the regulation of a subject is mentioned in the Union List, but its taxation is not mentioned in the list, the ability to tax the subject does not automatically become a residuary power under Entry 97 of the Union List.
Therefore, the Bombay High Court held that its decision in N V Marketing was valid because the Meghalaya v Karnataka decision incorrectly differentiated between lotteries and betting. Even if they are distinct subjects in the regulations (Entry 40 of the Union List and Entry 34 of the State List), there is no mention of the taxation of lotteries in the Union List. However, the taxation of betting and gambling and of lotteries is listed under Entry 62 of the State List, and accordingly, the Kerosam decision applies. Therefore, the enactment of the Maharashtra Tax on Lotteries Act, which deals with the taxation of lottery schemes alone, is within the legal power of the Constitution and the competence of the state legislature.
The legality and taxation of lottery schemes in Maharashtra has been at the centre of a catena of judgments, from State of Bombay v RMD Chamarbaugwala (AIR 1957 SC 699) to Writ Petition 854/2007. The decisions issued by the courts have been conclusive, as per N V Marketing, but were challenged through the writ petition, which was catalysed by the contrary judgment made by the Karnataka High Court in Meghalaya v Karnataka wherein the fundamental question of whether a lottery can be classified as 'betting and gambling' under the scheme of separation of powers in the Constitution was addressed.
However, the Bombay High Court ultimately decided that this classification is settled in law and that the Karnataka High Court had erred in its decision. Accordingly, the state of Maharashtra has the power to tax lottery schemes of other states, and this is neither discriminatory nor arbitrary in nature. Therefore, owners of such businesses in other jurisdictions should bear in mind that the sale of lottery tickets within the territory of Maharashtra is subject to the tax rates provided under the Maharashtra Tax on Lotteries Act.
For further information on this topic please contact Sairam Subramanian or Rajeswari Mukherjee at Khaitan & Co by telephone (+91 11 4151 5454) or email ([email protected] or [email protected]). The Khaitan & Co website can be accessed at www.khaitanco.com.
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