Lottery Distributor Not Liable To Pay Service Tax : Supreme Court Rejects Union's Appeals

The Supreme Court today(February 11) upheld the orders passed by the High Court of Sikkim which declared as unconstitutional clause (zzzzn) of the Section 65(105) of the Finance Act, 1994 as inserted by the Finance Act, 2010.

The said clause introduced the activity of "promotion, marketing, organising or in any other manner assisting in organising game of chance, including lottery" as a new category of taxable service.

The petitioners are private limited companies engaged in the business of sale of paper and online lottery tickets, respectively, organised by the Government of Sikkim. The clause (zzzzn) of the Section 65(105) of the Finance Act, 2010, came to be challenged on grounds that the activity performed by them does not fall within the purview of "taxable service".

Further, lottery distributors contended that the conduct of lottery is an act of "betting and gambling" which the State legislature under Entry 62, List II of Seventh Schedule has exclusive competence. The Parliament under Entry 97, List I of Seventh Schedule cannot levy any tax in respect of any activity falling under entries 34 and 62 of List II.

By the said order, a bench of then Chief Justice Permod Kohli and S.P. Wangdi of the High Court struck down clause (zzzzn) of the Section 65(105) of the Finance Act, 2010, as ultra vires to the Constitution.

The High Court held it in favour of the petitioners stating that the activities of lottery distributors do not constitute a service. Thus, it is beyond the purview of taxable service. It also held that the activity of promotion, marketing, organising or in any other manner assisting in organising game of chance, including lottery is included in the expression "betting and gambling" under Entry 62 of the List II, Seventh Schedule and the State Legislature alone is competent to levy tax on such activity. 

Today, the Supreme Court dismissed the appeals filed by the Union Government against the Sikkim High Court's judgment.

A bench of Justice B.V. Nagarathna and Justice NK Singh held that the relationship between the lottery distributor and the State of Sikkim was principal-principal and not principal to agency. Since there is no agency in the relationship, the Respondents(distributors) were not liable to pay service tax, as they are not rendering any service to the State Government.

"There being no agency, no service is rendered by the respondent-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 and the Government of Sikkim," Justice Nagarathna read out the operative portions of the judgment.

However, the Respondents will continue to pay the gambling tax levied by the State under Entry 62, List II.

The Supreme Court affirmed the finding of the High Court that lottery comes under "betting and gambling" under Entry 62 of State List and hence, only the State Government can levy tax. The judgment followed the 2024 verdict in K Arumugham v Union of India which held that sale of lottery tickets by a State Government is not a service but an activity to earn additional revenue, and hence the wholesale lottery purchasers are not promoting or marketing any service rendered by the State so as to attract service tax liability under the head "business auxiliary service."

Case Details: UNION OF INDIA AND ORS. v. FUTURE GAMING SOLUTIONS P.LTD. AND ANR.ETC ., C.A. No. 4289-4290/2013 & connected matters 

Citation : 2025 LiveLaw (SC) 189

AOR Arjun Garg along with Advocate Sagun Srivastava, Kriti Gupta and Saaransh Shukla represented Future Gaming Solutions.

Click here to read the judgment