The Supreme Court has ruled that service tax cannot be levied on the sale of online or paper lotteries as there is no service provider relationship between the stockists and the state government which authorises them to sell them.

A bench comprising Justice B.V. Nagarathna and Justice N. Kotiswar Singh passed the judgment while dismissing a batch of appeals filed by the Union government challenging various judgments passed by the Sikkim High Court which had upheld the lottery operators’ plea that they should not be subject to a service tax levy.

The lottery operators argued that they did not render any form of service to the State. Moreover, the power to levy the tax on lotteries was vested with the state governments and not the Union government — a plea that was upheld by the Sikkim High Court in several cases since 2012.

Aggrieved by these judgments, the Centre had filed a batch of appeals against various such orders.

Interpreting the various amendments to the Finance Act, 1994 since 2012 with regard to the levy of tax on lottery operators, Justice Nagarathna, who authored the judgment, said the high court had rightly struck down as ultra vires clause (zzzzn) to sub-section (105) of Section 65 of Finance Act, 1994 as introduced vide Finance Act, 2010.

The apex court said the clause was enacted in contravention of Article 248 of the Constitution of India read with Entry 97 - List I to the Seventh Schedule. Article 248 relates to the exclusive power of Parliament to make any law with respect to any matter not enumerated in the concurrent list or state list.

However, Article 248 is subject to the limitation imposed by Article 246 A, specifically clause (2) which says: “The legislature of every state has the power to make laws with respect to goods and services tax imposed by the Union or by such state.” The State can make its own law on certain subjects relating to taxation.

The Apex court noted that the Finance Act, 2012, by an amendment of Finance Act, 1994, introduced the Negative List under Section 66D which comprises various services on which no service tax can be levied or collected. The List includes the activity of betting, gambling or lottery. Hence, no service tax on the conduct of the lottery can be levied by the Union government.