The Supreme Court on Tuesday ruled that the lottery distributors are not liable to pay service tax to the Central government and it is the state government alone which can impose taxes on the lotteries and not the Centre.

Dismissing the Central government’s appeal against the Sikkim High Court judgment, Justice BV Nagarathna and Justice Nongmeikap Kotiswar Singh in a ruling today, said, “The detailed analysis of the relevant provisions of the Finance Act, 1994, and amendments made (2012, 2015 & 2016) thereto in light of the clauses of the Agreements highlighted during the course of submissions as well as the judgments of this Court, would not persuade us to take a different view from what the Sikkim High Court has taken.”

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Noting that 2012, 2015 and 2015 amendments to the 1994 Finance Act to impose service tax on the sole distributors of the lotteries by the Central government were unsuccessful, Justice Nagarathna ,speaking for the bench , said, “In the circumstances, we find that at each stage, the amendments made to the Finance Act, 1994, in order to impose service tax on the sole distributor/purchaser of the lottery tickets (respondents-assessees herein – (Future Gaming Solutions Pvt. Ltd. and others), ) have been unsuccessful. ”

Justice Nagarathna further said, “We have reasoned that the amendment to the said definition would in no way detract from the substance of the relationship between the state government and the sole distributor or purchaser of the lottery tickets which is one of principal to principal and not of principal-agent.”

Having spelt out the nature of relationship between the Sikkim government and the sole distributors, the top court in its judgment said, “There being no agency and no service rendered by the respondents-assessees herein as an agent to the Government of Sikkim, service tax is not leviable on the transactions between the purchaser of the lottery tickets (respondents-assessees herein) and the Government of Sikkim.”

Dismissing the appeal by the Central government, the top court said, “we find no merit in the appeals filed by the Union of India and others. Hence these appeals are dismissed. The appeal filed by the assessee is disposed accordingly.

The Central government had approached the apex court in an appeal against the November 29, 2012, Sikkim High Court judgment which had held that the conducting of lotteries falls within the scope and ambit of betting and gambling as per Entry 62 – List II of the Seventh Schedule of the Constitution and therefore, on the very same activity of betting and gambling, service tax cannot be levied.

The High Court had said that the power to tax the activity of “betting and gambling” is within the exclusive domain of State Legislature under Entry 62, List II, the Parliament in the exercise of its residuary power under Entry 97, List I to Seventh Schedule of Constitution of India lacks legislative competence to impose any tax including “service tax” on such activity.”