GST Levy on Lottery and Taxable Goods: Constitutional Validity Upheld

This case revolves around a writ petition filed by Skill Lotto Solutions Pvt. Ltd., an authorized agent for the sale and distribution of State-run lotteries in Punjab, challenging the taxation of lotteries under the Central Goods and Services Tax (CGST) Act, 2017. The petition questions the legal validity of defining lottery as a ‘goods’ under Section 2(52) of the CGST Act and seeks to address its discriminatory nature as it allegedly violates Articles 14, 19(1)(g), and 301 of the Indian Constitution.

Background of the Case

The petitioner, authorized for selling and distributing State-run lotteries, contends that the imposition of Goods and Services Tax (GST) on lottery tickets is unlawful. It argues that GST should not apply to lotteries since they are not classified as goods in the legal sense. The petition also highlights the confusion between goods, actionable claims, and services in the context of lottery tickets, suggesting that the inclusion of actionable claims as goods for GST purposes is unconstitutional.

The petitioner particularly objects to the government’s decision to treat the lottery as goods under GST, which leads to a tax on the full face value of the lottery tickets, including the prize money, which is not considered income for the petitioner. Furthermore, the petitioner challenges the discriminatory nature of the taxation system that applies to only certain actionable claims like lotteries, betting, and gambling, while excluding other similar claims.

Petitioner’s Arguments

The petitioner presented the following arguments to support its case:

• Lottery as a Non-Goods Item: The petitioner argued that lottery tickets do not qualify as goods under the Constitution. Citing the Constitution Bench’s judgment in Sunrise Associates v. Govt. of NCT of Delhi, the petitioner contended that lotteries are not goods but actionable claims, and thus, not taxable under the GST framework for goods.
• Violation of Constitutional Rights: The petitioner claimed that the levy of tax on lotteries is discriminatory and violates the fundamental rights guaranteed under Articles 14, 19(1)(g), and 301 of the Constitution. It argued that the law creates an unjust distinction by taxing only lotteries, betting, and gambling, while other actionable claims remain untaxed.
• GST on Face Value: The petitioner contested the taxation of the face value of lottery tickets, which includes the prize money that is eventually paid to the winners. It argued that since the prize money is not income for the petitioner, it should not be part of the taxable value.
• Exclusion of Prize Money: The petitioner also sought exclusion of prize money from the taxable value of lottery tickets, asserting that the prize money component is not part of the business’s income and should not attract GST.

Respondent’s Arguments

The respondents, represented by the Union of India and the Additional Solicitor General, countered the petitioner’s claims with the following points:

• Lottery as Goods: The respondents maintained that the inclusion of actionable claims like lotteries under the definition of goods in Section 2(52) of the CGST Act is constitutionally valid. The respondents referenced the Constitution Bench judgment in Sunrise Associates, which had already determined that lotteries are actionable claims and can be considered goods for taxation purposes under the GST framework.
• Legislative Competence: The respondents argued that Parliament has the constitutional authority to impose GST on lotteries under Article 246A, which empowers the Union Parliament to levy tax on goods and services. They emphasized that the legislative competence of Parliament to define goods and services for taxation purposes is expansive and valid.
• No Violation of Article 14: The respondents dismissed the claim of hostile discrimination, asserting that the inclusion of lotteries, betting, and gambling in the GST net is rational and based on the economic policy objectives. They contended that it is within the power of the legislature to tax these activities, given their economic impact and regulation by the State.
• GST Rate on Face Value: Regarding the tax on the face value of lottery tickets, the respondents argued that the levy was in accordance with the statutory provisions of the CGST Act, 2017, and related rules. They also pointed out that Rule 31A provides the method for determining the taxable value of lottery tickets, which includes prize money.

Supreme Court’s Analysis

The Supreme Court analyzed the following key aspects in the case:

• Definition of Goods: The Court reviewed the definition of ‘goods’ in the context of the CGST Act and the Constitution. It referred to the legal meaning of goods, noting that the Constitution’s definition is inclusive, and includes actionable claims. The Court upheld the inclusion of actionable claims within the definition of goods for the purpose of GST, in line with the judgment in Sunrise Associates.
• Legislative Competence: The Court affirmed that the Parliament has the competence to enact laws related to goods and services tax under Article 246A. The Court noted that the Parliament’s power to define goods and services for tax purposes is plenary and does not violate any constitutional provisions.
• Discriminatory Taxation: The Court considered the petitioner’s claim of discriminatory taxation. It found that the exclusion of certain actionable claims like lottery, betting, and gambling from the tax net does not amount to unconstitutional discrimination. The Court acknowledged that lotteries are distinct in nature, having been historically regulated and taxed as such, and thus, their taxation under GST serves a legitimate purpose.
• Taxable Value of Lottery: The Court also ruled on the exclusion of prize money from the taxable value of lottery tickets. It determined that the statutory provisions under Section 15 and Rule 31A of the CGST Act clearly outline how the taxable value of lottery tickets should be calculated. The Court held that prize money should not be excluded for the purpose of GST calculation.

Supreme Court’s Judgment

The Supreme Court ruled in favor of the respondents, upholding the constitutionality of the GST levy on lotteries under the CGST Act, 2017. The Court dismissed the petitioner’s plea and issued the following conclusions:

• Taxation of Lottery as Goods: The Court upheld the inclusion of lottery as goods under the CGST Act, affirming that actionable claims can be classified as goods under the law, as decided in previous judgments.
• Legislative Authority: The Court concluded that Parliament has the authority to impose GST on lotteries, and there is no violation of the Constitution or fundamental rights.
• No Violation of Article 14: The Court rejected the claim of hostile discrimination, stating that the selective taxation of lotteries, betting, and gambling is rational and based on policy considerations.
• GST on Face Value: The Court ruled that the entire face value of the lottery ticket, including prize money, is taxable under GST, in accordance with the relevant statutory provisions.

Conclusion

The judgment reaffirms the legislative competence of Parliament to impose GST on lotteries and confirms the legality of the tax structure as per the CGST Act, 2017. The ruling highlights the inclusion of actionable claims within the definition of goods and sets a precedent for how taxes on lotteries, betting, and gambling will be regulated in the future. The Court also emphasized that the judiciary does not interfere with the economic policy decisions of the legislature unless there is a clear constitutional violation.

Petitioner Name: Skill Lotto Solutions Pvt. Ltd..
Respondent Name: Union of India & Others.
Judgment By: Justice Ashok Bhushan, Justice R. Subhash Reddy, Justice M.R. Shah.
Place Of Incident: Punjab.
Judgment Date: 03-12-2020.

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