In the case of Bangalore Turf Club Limited & Ors. v. State of Karnataka [W.P. No. 11168/2018 (T-RES)], the Karnataka High Court held that the Horse Race Clubs are liable to pay GST only on commission received for the service provided and not the entire bet amount.
The Petitioner in the present case is engaged in the business of race club and primarily conducts horse racing along with the facilities of betting by punters. The punter places the bets with the help of a totalisator managed by the Petitioner or with the help of a bookmaker licensed by the Petitioner.
The functioning of these bets are like a normal betting system where the winning punter has to surrender the receipt and receive the amount won from the losing punter and commission is charged by the Petitioner for holding the amount of the bet.
Prior to the enforcement of the Goods and Services Tax (‘GST’), the Petitioner was considered as the service provider under Chapter V of the Finance Act, 1994 and the services tax was applicable only on the commission earned by the Petitioner.
After the implementation of GST, an amendment was brought in Rule 31A of Central Goods and Services Tax Rules, 2017 (‘CGST Rules’) wherein sub-rule (3) was inserted in Rule 31A because of which the GST was to be levied on the entire amount of bet that is managed by the Petitioner.
- Whether Rule 31A(3) of the CGST Rules is ultravires the Central Goods and Services Tax Act, 2017 (‘GST Act’)?
- Whether the Petitioner is liable to pay GST on the commission or on the total amount collected in the totalisator?
CONTENTIONS OF THE PARTIES
The Petitioner contended that Rule 31A of the CGST Rules is contradictory to Article 246A read with Article 366 (12A) of the Constitution of India as it is exceeding the constitutional mandate conferred upon the Legislation to levy GST on the supply of goods and services basis the principle that no tax can be charged without any supply.
The Petitioner further contended that every supply to attract levy of GST should essentially comprise four mandatory components i.e. taxable event, taxable person, measure of tax and rate of tax; imposition of tax without assessment of these components will be considered contrary to law.
The Petitioner also contended that constitutional mandate under Article 246A of the Constitution of India is being violated because Rule 31A (3) of the CGST Rules is imposing tax liability on the Petitioner for the entire amount of bet when the Petitioner is not supplying any bet.
The Petitioner contended that Rule 31A of the CGST Rules is also ultravires Section 7 of the CGST Act as the supply of bets is not in the furtherance of Petitioner’s business and the Petitioner is still made liable to pay tax. The impugned Rule in the case is exceeding the mandate under Section 7 of CGST Act by levy of tax on the amount that is not received by the Petitioner as income or consideration.
The Respondent contended that the CGST Act itself is mandating to levy tax on actionable claim and the actionable claim is not defined in the CGST Act but is defined in the CGST Rules. According to the CGST Rules, betting is considered as an actionable claim.
The Respondent further contended that the contention of the Petitioner regarding Rule 31A of the CGST Rules being ultravires the CGST Act and the amendment inserting sub-rule (3) should be rejected stating it a figment of imagination because actionable claim was existing in the CGST Rules from the very beginning and the amendment is only clarifying the position of petitioner in the business of betting, cannot be considered as legally sound and must be dismissed.
DECISION AND FINDINGS
The High Court of Karnataka (‘High Court‘) observed that Rule 31A (3) of the CGST Rules does not confer with the provisions of the CGST Act and hence is ultravires to the Act and should be struck down for the following reasons:
- The Petitioner only holds the amount received by the totalisator for a specific period in its fiduciary capacity and receives consideration for it in the form of commission, and as soon as the race gets over the money is distributed to the winners. Therefore, betting cannot be considered as the furtherance of business or in the course of business of the Petitioner and the entire amount held by the totalisator cannot be considered as consideration as per the CGST Act.
- The High Court also observed that Rule 31A(3) of the CGST Rules is completely removing the difference between the totalisator and a bookmaker by levying tax on 100% amount indulged in bet.
- The bookmaker is indulging in betting and receiving consideration on it while totalisator services are provided by the Petitioner for a fair and smooth betting process and receives commission for the same. Hence, there cannot be any supply of goods or bets by the Petitioner as per the CGST Act.
- The High Court also observed that Rule 31A of the CGST Rules is making the Petitioner a Supplier of bets but Petitioner cannot be a Supplier of bets as the Petitioner only provides the services of totalisator and does not supply bets to the punters. Hence, the Petitioner cannot be made liable to pay tax on the entire amount of bet and cannot be considered as a Supplier of bets.
In view of the above, the High Court held that the Petitioner cannot be held liable for paying tax on the entire amount collected for the bet but is only liable to pay tax on the amount of the commission earned.
The High Court has given a very rational decision as Rule 31A (3) of the CGST Rules was not only contradicting with the CGST Act itself but was also in violation Article 246A read with Article 366 (12A) of the Constitution of the India.
Rule 31A(3) is leaving no difference between the bookmaker and totalisator and is charging tax on the entire amount indulged in the bet for a specific period of time, whereas the actual income of the totalisator is the consideration earned by him for providing the services and the entire amount of the bet cannot be considered as the consideration of totalisator.
The Petitioner in this case is holding the amount of the bet in its fiduciary capacity and after completion of the race, such amount is distributed to the winners of the bet. Therefore, a tax on the entire amount of the bet cannot be levied.
The judgment does a very in-depth analysis of the CGST Rules and also considers the question of bet amount being an actionable claim and concludes that Rule 31A(3) of the CGST Rules should be struck down as it is ultravires the CGST Act.
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