The Supreme Court of India (Supreme Court) in State of Karnataka v. State of Meghalaya1 has upheld the constitutional validity of the Karnataka Tax on Lotteries Act, 20042 (the Karnataka Act) and the Kerala Tax on Paper Lotteries Act, 20053 (the Kerala Act) by observing that the States of Karnataka and Kerala had the legislative competence to pass the impugned Acts under Entry 62 of List II in Schedule 7 to the Constitution of India4 (Constitution). However, in coming to its conclusion, the Supreme Court has left a few questions unanswered.
The High Court of Karnataka, by orders dated 27-12-20105 and 7-3-20116, had observed that the Karnataka Act was unconstitutional as the Karnataka Legislature did not have the legislative competence to pass the said Act. The High Court of Kerala passed similar orders dated 30-4-20207, 9-8-20218 and 10-8-20219, thereby observing that the Kerala Legislature could not have passed the Kerala Act.
Therefore, the States of Karnataka and Kerala were directed to refund the amount deposited by the respondent States (Nagaland, Sikkim, Arunachal Pradesh, and Meghalaya). Hence, the present proceedings before the Supreme Court have been instituted by the States of Karnataka and Kerala.
Issue before the Supreme Court
The primary issue before the Supreme Court was whether by giving Parliament the power to regulate “lotteries organised by the Government of India or the Government of a State” under Entry 40 of List I10, would the power of State Governments to levy tax on the same under Entry 62 of List II11 read with Entry 34 of List II12 be also taken away?
Analysis by the Supreme Court
Before deciding the issues in the present case, the Supreme Court discussed the constitutional scheme relating to legislative competence under Article 24613 read with Schedule 714 to the Constitution.
At the outset, the Supreme Court observed that the power to legislate under Article 246 of the Constitution must be read in light of the entries in the three lists under Schedule 7 as they “define the respective areas of legislative competence of the Union and State Legislatures”. When the courts find any conflict between the entries, an attempt must be made to reconcile them by applying the doctrine of pith and substance. As per the said doctrine,
58. … if an enactment substantially falls within the powers expressly conferred by the Constitution upon the legislature which enacted it, it cannot be held to be invalid merely because it incidentally encroaches on matters assigned to another legislature….15
Therefore, where a conflict between the different entries specified in Lists I and II arises, the power of Parliament to enact under List I will supersede if the two powers cannot be reconciled with one another. But if the enactment is in pith and substance, falling within any of the entries in List II, a State's legislative competence cannot be challenged on the ground that the subject is covered by the Union or Concurrent List.
After analysing the above constitutional scheme, the Supreme Court discussed the following authorities:
In M.P. V. Sundararamier & Co. v. State of A.P.16, the issue was whether Parliament had the sole competence to tax on inter-State sales and thus a State Act levying sales tax, namely, the Madras General Sales Tax Act, 1939, was unconstitutional? Whereas Entry 42 of List I17 pertained to inter-State trade and commerce and gave Parliament the sole power to enact laws in respect of the said entry, Entry 54 of List II18 empowered the States to impose tax on inter-State sales.
The Supreme Court observed that the State Governments were empowered under Entry 54 of List II to impose a tax on inter-State sales, subject to the restrictions stipulated under Article 286(2) of the Constitution19. It was also observed that while enacting Entry 42 of List I, the power to tax on inter-State sales could have been included therein only and not left to be implied by the courts. Therefore, the impugned Madras General Sales Tax Act, 1939, was upheld.
The Supreme Court then relied on State of W.B. v. Kesoram Industries Ltd.20 to state, inter alia, the following principles of law:
Under the Seventh Schedule, there is a “distinction between the general subjects of legislation and heads of taxation”.
The power of taxation is distinct from the power to regulate and control a particular field.
The different entries of Lists I and II have to be construed in a way so that any conflict is avoided. However, if there is a conflict, first, an attempt must be made to reconcile them. Secondly, the doctrine of pith and substance must be applied to understand the entry in which the impugned legislation falls. Finally, the courts, after determining the legislative field in which the legislation concerned falls, must analyse whether the “incidental trenching upon another field of legislation be ignored”?
Finally, the heads of taxation are expressly provided for in Entries 83 to 92-B under List I21 and Entries 45 to 63 in respect of List II22. Heads of taxation are not there in List III. Further, the residuary power of Parliament under Article 248(2)23 read with Entry 97 in List I24 is only applicable to those items which are not mentioned in Entries 45 to 63 in respect of List II. Thus, In Hoechst Pharmaceuticals Ltd. v. State of Bihar25 also, the Supreme Court had observed that taxation is considered as a distinct matter for purposes of legislative competence.
In Union of India v. Harbhajan Singh Dhillon26, the Supreme Court observed that Entry 97 of List I provides Parliament with residuary powers. Under Article 248 of the Constitution, Parliament has the sole power to enact a law with reference to a subject not provided in either the Concurrent List or the State List. Further, under Article 248(2) of the Constitution, this residuary power includes the power of levying a tax not mentioned in either of those two Lists. Finally, it was also held that under the Constitution, power to tax cannot be derived from power to regulate on a field as there can never be an implied power to levy tax (also observed in Synthetics and Chemicals Ltd. v. State of U.P.27).
Discussion qua the present issue
The Supreme Court observed that under Entry 40 of List I, Parliament passed the Lotteries (Regulation) Act, 199828 (the Lotteries Act) for regulating lotteries. Section 3 of the Lotteries Act29 “prohibits a State Government from organising, conducting or promoting any lottery except subject to the conditions provided under Section 430 of the Act”. Section 4 of the Lotteries Act empowers a State Government to organise, conduct or promote a lottery, subject to the conditions laid therein. Hence, by virtue of the Lotteries Act, Parliament has regulated the conduct of lotteries by the Union Government of India and the State Governments. Interestingly, this Act has no provision regarding taxation. It is only concerned with organisation of lotteries.
The Karnataka Act has been enacted by the State of Karnataka to levy tax on lottery scheme in accordance with the mandate of Section 6 of the same. Section 2(4) of the Karnataka Act31 defines lottery as a scheme “for distribution of prizes by lot or chance to those persons participating in the chance of a prize by purchasing tickets organised by the Government of India or the Government of a State or a Union Territory or any other country having bilateral agreement or treaty with the Government of India”. Therefore, the Karnataka Act does not levy tax on lotteries which are being conducted by private entities. The Supreme Court noted that as the Preamble of the Karnataka Act itself states that the Act is to provide for levy and collection of tax on gambling, the State Legislature of Karnataka has clearly indicated that the lottery means gambling.
The Kerala Act provides for the levy and collection of tax on paper lotteries conducted within Kerala, at such rates as mandated under Section 6 of the Act32. The expression “lottery” has been defined similarly to the Karnataka Act.
Placing reliance on the dictionary meanings and House of Lords Select Committee Report, it was observed that lotteries are a species within the genus of “betting and gambling”. Therefore, “betting and gambling” activities include a whole gamut of activities including lotteries. It was opined that lottery has an inherent element of chance and “the expression ‘to take a chance' is itself synonymous to a gamble”. To conclude this observation, the Supreme Court also cited RMDC (Mysore) (P) Ltd. v. State of Mysore33. The Supreme Court thus held that one of the essential features of a lottery is its inherent gambling trait, irrespective of whether the lottery scheme is being conducted by the Government of India, State Government, or a private entity.
Coming back to the facts of the present case, the Supreme Court noted that by virtue of Entry 40 of List I, where the lotteries are being organised by the Indian or the State Governments, it is only Parliament which has legislative competence to enact laws with respect to the same throughout the country. This is so because lotteries are a source of revenue for the Indian Government and thus to maintain people's trust in the same, it is Parliament which has the power under Entry 40 of List I of the Constitution to make laws with respect to the conduct of lotteries throughout India.
However, the Supreme Court held that the power to impose tax on the lotteries conducted by the Indian Government or the State Governments still vests with the State Governments by reading Entries 34 and 62 of List II together.
In light of the law as discussed above, it was noted that Entry 62 of List II specifically provides for taxation on “betting and gambling”. Further, the expression “betting and gambling”, which also appears in Entry 34 of List II, also includes lotteries as discussed above. Therefore, what has been carved out of Entry 34 of List II and inserted in Entry 40 of List I is only Parliament's power to regulate lotteries being conducted by the Indian Government or the State Governments. Lotteries conducted by private entities continue to remain within the scope of Entry 34 of List II. However, under Entry 62 of List II, the power to tax betting and gambling (which includes lotteries) has been reserved with the State Governments only.
The Supreme Court thus concluded that the Karnataka and Kerala Acts are constitutional as they derive their legislative competence from Entry 62 of List II.
Analysis and conclusion
At the outset, the authors respectfully submit that there cannot be a blanket categorisation of lotteries as a species within the genus of betting and gambling. As also noted in this judgment, lotteries as a concept generally refers to tickets sold by the Government or its instrumentalities for equitably distributing scarce resources and/or raising money for society.34 These tickets can be sold for getting a school admission, electricity connection or an apartment. That is the precise reason that the expression “lotteries organised by the Government of India or the Government of a State” comes in the Union list. Betting and gambling operate in different fields and are thus defined slightly differently.35 These activities are more seen as law and order problems and are therefore under the State List. In fact, under Section 15 of the UK Gambling Act, 2005, national lotteries have been excluded from the ambit of betting and gambling.36
Further, the Supreme Court in this judgment could have discussed the suggestions of Law Commission Report No. 27637. In this Report, the Law Commission had suggested that Parliament may enact a model law to regulate gambling and the States can then enact their own Acts on the basis of the model law. However, no action has been taken by Parliament yet. With the advent of internet and globalisation, gambling and betting are expected to transcend provincial boundaries. Thus, a national policy regulating gambling is urgently required.
Finally, the Supreme Court has failed to discuss the effect of the Constitution (101st Amendment) Act, 2016, after which, Entry 62 of List II reads as “taxes on entertainments and amusements to the extent levied and collected by a panchayat or a municipality or a Regional Council or a District Council”. Therefore, the said entry no more uses the expression “betting and gambling”. This implies that the States no longer have the power to impose tax on betting and gambling activities and the same would thus come within the residuary powers of Parliament under Article 248(2) of the Constitution read with Entry 97 of List I.
* Advocate-on-Record, Supreme Court of India. Author can be reached at <firstname.lastname@example.org>.
** Advocate, Supreme Court of India. Author can be reached at <email@example.com>.
11. Constitution of India, Sch. 7 List II Entry 62. The Supreme Court in this judgment has relied on the text of Entry 62 of List II which stood prior to the Constitution (101st Amendment) Act, 2016. The unamended entry read as — “Taxes on luxuries, including taxes on entertainments, amusements, betting and gambling”.
34. Oxford Learner's Dictionaries, <https://www.oxfordlearnersdictionaries.com/definition/american_english/lottery
35. Oxford Learner's Dictionaries, <https://www.oxfordlearnersdictionaries.com/definition/english/betting>;
Cambridge Dictionary, <https://dictionary.cambridge.org/dictionary/english/gambling>.