GST Council grappling with how to impose uniform tax rate on lotteries

Illustration by Binay Sinha
The fate of uniform or differential rates of GST on lotteries may be decided on the basis of an advice by the Attorney General K K Venugopal following the failure of the GST Council to reach a consensus on Friday.


The crux of the matter that has been referred to Venugopal is that there are currently two GST rates on lotteries. The state-run lotteries draw a 12 per cent and the state-authorised lotteries attract the peak rate of 28 per cent. 


By law, private players cannot run the lotteries. Entities such as S&D and the Esssel group market these lotteries to the masses or, put another way, they work as commission agents of the government. These are called state-authorised lotteries. Unlike state-run lotteries, state authorised lotteries can be sold outside the state as well. 


Currently, only 12-13 states, including Maharashtra, Goa, West Bengal, Punjab, Kerala, Arunachal Pradesh, Mizoram, Sikkim and the Bodoland area of Assam, run lotteries. The rest have banned them.  


The GST Council is grappling with how to impose a uniform rate of GST against the current differential rates. The proposal for a uniform rate has been recommended by All India Federation of Lottery Trade and Allied Industries. 


But according to Kerala finance minister and member of the GST Council, Thomas Isaac, the Federation cannot be recognised as ‘licensees’ of the government to run the lotteries but only as commission agents of the government. “Hence, they have no locus standi to raise the issue of taxation before the GST Council,” said Isaac.  The Kerala finance minister had pressed for voting in the Council on Friday, if the item is not postponed.


In the context of GST laws, it is a bit of an exception for an item categorised as 'acttionable claim" such as lotteries to be taxed. Lottery tickets are defined as an ‘actionable claim’ by the Central GST Act and classified as goods. However, an actionable claim is specifically covered under the negative list, Schedule III of the CGST Act, keeping it outside the scope of GST. But there are exceptions to Schedule III and the sale of lottery tickets is one of them. 


The 17th GST Council meeting specifically discussed the issue and decided to have the two different rates on state-run and state-authorised lotteries.  


However, later officials found that the differential was being misused by the trade and that, in reality, the bulk of them were paying tax at 12 per cent. The high differential rates also encouraged non-compliance by small businesses.


Instances have come to light of a hybrid model where lotteries were run in the name of the state but were effectively private lotteries.


According to the officials at the Centre, the 16 per cent variation between the two rates helped the larger states to exploit customers.


Increasing the rate on state-run lotteries to 28 per cent would lead to a revenue gain of approximately Rs 1,250 crore, according to government estimates. Kerala is one of the few states with a state-run lottery to collect additional revenue. 


However, smaller states such as Sikkim authorise private players to manage lotteries for them. In fact, the biggest lottery in India, Playwin Indian Lottery, is authorised by the Sikkim government and marketed by the Essel group.


Kerala is not in favour of either increasing the rate on state-run lotteries or lowering the rate on private ones. It fears that a uniform tax rate will affect thousands of lottery agents and sellers in the state, besides affecting the revenue of the states and the Centre.


“But Goa, Maharashtra, and Assam are keen on a rate reduction rate on state-authorised lotteries,” said a Central government official.


Assam is a strong advocate of a uniform tax rate of 18 per cent, arguing that the North Eastern states were lacking the ability to operate a lottery on their own and were therefore suffering badly.


While announcing that the matter has been referred to the Attorney General, Finance Minister Nirmala Sitharaman said the former was being asked to decide not about whether or not the GST Council can impose GST on lotteries but about Article 304 of the Constitution and whether lotteries should constitute one item attracting a uniform GST rate. "It is about clarity on the issue," she said. 


Article 304 empowers the states to impose reasonable restrictions on goods imported from other states. It also empowers the states to impose on these goods the tax rate which is the same as what is imposed on goods produced within the state.  Isaac believes that lottery distributors want to enter the market with a reduced GST rate and "plunder" the people. He is also against increasing the GST rate on state-run lotteries as Kerala is using the money earned through lotteries for welfare schemes.


For Abhishek Rastogi, a partner at Khaitan & Co, Article 304 has to be seen in the context of the broader objectives of GST in the public interest. “Any rate discrimination for supplies under the GST provisions is not a good sign and will again lead to rate buying," he said. Rate buying refers to the buying of goods in states where taxes are lower. 


Archit Gupta, CEO of ClearTax said since the principle governed by the GST law is in contradiction with the purpose of article 304, the issue to be settled is whether the states can have one or two rates — will it be untenable to have two rates within the states. 


“The GST Council has rightly referred the matter to the Attorney General for his view which is appropriate given the legal and constitutional issues at stake,” said Abhishek Jain, a partner at EY.

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