Goods & Services Tax (GST) in IndiaService TaxTaxService Tax Cannot Be Imposed On Lottery Promotion And Marketing Activities Linked To Actionable Claims

INTRODUCTION

The Supreme Court in Union of India v. Future Gaming Solutions (P) Ltd., Civil Appeal No. 4289-4290 of 2013, decided on 12.02.2025, ruled that the business of promoting and marketing lotteries is not subject to service tax under the Finance Act, 1994, and is inseparable from the actionable claim of lottery tickets themselves.

FACTS

Future Gaming Solutions (P) Ltd. (hereinafter referred to as “the Respondent”) was in the business of promoting, marketing, and selling lottery tickets on behalf of the Government of Sikkim.

The Union of India (hereinafter referred to as “the Appellant”) had served notices requiring service tax from the Respondent under the Finance Act, 1994, on the grounds that the Respondent’s activities of promotion, marketing, and conducting lotteries amounted to taxable services. The Respondent argued that lotteries are actionable claims not covered by tax legislation under the category of goods and services and therefore the levy of service tax was not permissible.

During the pendency of the issue before the High Court and the Supreme Court, the Finance Act was subjected to important amendments:

• Through the Finance Act, 2010, an Explanation was introduced to the definition of ‘taxable service’ under Section 65(105) (zzzz), so, that it is made clear that promotion, marketing, organizing, or in any other way helping in getting lotteries organized shall be treated as a taxable service, specifically addressing the uncertainty of taxability of such activity.
• Thereafter, in the Finance Act, 2015, Section 66D was incorporated covering the negative list regime where ‘actionable claims’ except lottery, betting, and gambling were excluded and made it clear that lottery, betting, and gambling are not excluded from the service tax coverage.
• More clarifications and circulars were released during 2016-17, reaffirming the Union’s stand that services involved in the promotion and marketing of lotteries would be subject to tax, regardless of the basic nature of lotteries as actionable claims.

The Respondent had instituted several writ petitions in the Hon’ble High Court of Sikkim, which ruled in favour of the Respondent, holding that the business of marketing and promotion of lotteries cannot be taxed by way of service tax as lotteries constitute actionable claims.

Aggrieved with the High Court’s ruling, the Appellant sought relief in the Hon’ble Supreme Court, contesting the judgment and claiming validity of service tax on the activity of the Respondent with respect to lotteries.

ISSUES BEFORE THE SUPREME COURT

1. Whether or not the activity of promoting, marketing, and organizing lotteries conducted by the Respondent is a ‘taxable service’ under the Finance Act, 1994.

2. Whether or not the levy of service tax on the activity of promoting, marketing, and organizing lotteries amounts to an impermissible tax on actionable claims.

CONTENTIONS OF THE PARTIES

The Appellant had argued that the Hon’ble High Court had misinterpreted the levy of service tax. It said that the Finance Act, 1994, does not tax actionable claims per se but the service of providing such actionable claims, in this instance, the business of promoting, marketing, and conducting lotteries on behalf of State Governments. The Appellant stressed that there exists a clear distinction between the lottery ticket, which is an actionable claim, and the business of conducting and promoting the lottery, which is a service.

It was also argued that the service provided in marketing and promoting lotteries is an independent and distinct taxable event in addition to the transfer of actionable claims and can be taxed as a service under the legislative jurisdiction of the Union under Article 248 and Entry 97 of List I of the Seventh Schedule of the Constitution.

The Appellant relied on statutory construction and precedents bringing out the fact that the exclusion of actionable claims from the definition of goods under Article 366(12) and under the Sale of Goods Act, 1930, does not exclude such taxation of services arising in relation to such actionable claims. It contended that the character of the transaction needs to be scrutinized in entirety, considering the activity performed by the Respondent, which squarely comes within the definition of the taxable services under the Finance Act, 1994.

The Appellant further presented that the High Court’s line of approach frustrates the intent behind the service tax regime by bringing about an artificial distinction that restricts the taxing jurisdiction of the Union on services and requested the Supreme Court to overturn the ruling and affirm the levy.

On the contrary, the Respondent argued that the transaction relating to lotteries is the type of actionable claims, which are specifically outside the scope of goods and services for taxation under Indian law.

The Respondent contended that sale and distribution of lottery tickets are inherently connected with the actionable claim embodied in the lottery, and hence, any endeavour to impose service tax on such activity would be equivalent to an indirect tax on the actionable claim itself, which is not permissible under the law.

The Respondent relied upon Sunrise Associates v. Govt. of NCT of Delhi, (2006) 5 SCC 603, where the Hon’ble Supreme Court ruled that a lottery ticket is an actionable claim and cannot be held as goods for the sales tax legislation, contending that the same principle is applicable in the context of service tax. The Respondent also argued that marketing, promotion, and organization of lotteries cannot be separated from the sale of lotteries, since these are integral to the same transaction, and imposing service tax on such activities would amount to taxing the actionable claim indirectly.

Furthermore, the Respondent contended that the Finance Act, 1994, has to be harmoniously construed with provisions of the Constitution and previous judicial pronouncements in order to make the exclusion of actionable claims honoured. The Respondent argued that the High Court had rightly understood the legal and factual context, and there was no reason for the Supreme Court’s interference.

DECISION AND FINDINGS

The Supreme Court held that lotteries are actionable claims and that actionable claims are neither goods nor services. The Hon’ble Court pointed out that Article 366(12) read with Entry 54 of List II of the Seventh Schedule makes it explicit that actionable claims cannot be included in the definition of goods, and hence, States cannot tax actionable claims as goods.

The Supreme Court also held that the move of the Union of India to charge service tax on the service of promotion, marketing, and organization of lotteries under the Finance Act, 1994, in effect constitutes charging tax on actionable claims per se. The Court made it clear that the mere characterization of the activity of promotion and marketing of lotteries as a ‘service’ does not change the characteristic nature of the transaction, which is organically linked with the transfer of actionable claims and cannot therefore be taxed as service.

The Court also weighed the changes introduced by the Finance Act, 2010 and Finance Act, 2015, as well as the clarificatory circulars issued thereafter, and held that administrative clarifications or statutory amendments cannot trump the constitutional prohibition against the taxation of actionable claims under the service tax system.

Considering the above legal position, the Hon’ble Supreme Court held that service tax on the promotion, marketing, and organization of lotteries is not permissible under the Constitution and that such imposition of tax would be an indirect tax on actionable claims, which is outside the legislative domain of the Union as per the Finance Act, 1994.

Consequently, the Hon’ble Court affirmed the ruling of the High Court and set aside the demand notices made by the Appellant for service tax on the activities of the Respondent involving promotion and marketing of lotteries.

AMLEGALS REMARKS

This ruling supports the constitutional doctrine that actionable claims, such as lotteries, fall outside the purview of indirect taxation under the service tax regime, irrespective of legislative efforts to extend related activities into the tax fold. The Hon’ble Supreme Court’s decision makes it clear that the nature of a transaction cannot be modified by simply tagging related activities as “services” when they are inherently linked with the passing on of actionable claims.

It further reaffirms the dominance of constitutional constraints over statutory provisions and guarantees that legislative jurisdiction under the Finance Act, 1994, cannot be used to tax actionable claims indirectly by way of service tax. It emphasizes the judicial methodology of looking at the essence of a transaction in deciding its taxability, thus ensuring constitutional discipline in indirect tax matters.

The decision will have far-reaching implications for transaction structuring related to actionable claims, so that activities inherently related to actionable claims are protected from service tax liability unless there is a constitutional modification or specific provision authorizing such taxation. It also emphasizes the need for harmonious interpretation of statutory provisions and constitutional requirements, so as to achieve certainty and clarity in the application of tax legislation in India.

~Team AMLEGALS

For any queries or feedback, feel free to reach out to laksha.bhavnani@amlegals.com or hiteashi.desai@amlegals.com