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Lotteries or its equivalents revolving around luck have always been prevalent in different forms, starting right from the Han Dynasty around 205 BC. Lotteries were also used in medieval India by the French and British as a way of recreation. After independence, Kerala became the first state in India to legalize lotteries in the year 1967. Later, Kerala also became the first state to put a taxation system on the collection of lotteries. This tax was levied according to the provisions of the Kerala Tax on Paper Lotteries Act, 2005 pursuant under section 5BA of the Kerala General Sales Tax Act (KGST). This was to collect more taxes and to increase state revenue collection. However, this Act was recently declared unconstitutional by the Kerala High Court.
This Act laid down provisions for the levy and collection of tax on paper lotteries in the State of Kerala. Recently, it was challenged on the grounds of lack of legislative competence and the lack of powers of the State. It was contended that only the Parliament was competent to legislate on the subject “lotteries organized by the Government of India or the Government of a State” by virtue of Entry 40 in List I of the 7th Schedule of the Constitution of India. It was in the exercise of this power that the Parliament enacted the Lotteries (Regulation) Act, 1998. This Act, however, does not provide for any tax on lotteries. It was further contended that since this subject is part of the Union List, the State of Kerala has no power to make a law on the same. The division bench of Kerala High Court that comprised of Justice C. K. Abdul Rehim and Justice T. V. Anil Kumar held that the Kerala Tax on Paper Lotteries Act, 2005 is unconstitutional and invalid. This meant that the State of Kerala would have to refund the amount already collected to the State of Sikkim.
Significance of this development
In 2005, due to the widespread sale of online lottery tickets, the Kerala Government banned all online and computerized lotteries. Only paper lotteries were to continue. The online dealers later filed a case claiming it to be discriminatory and a violation of Article 14. The Hon’ble Supreme Court dismissed the appeals against the ban. It held that “lottery is a species of gambling, which is considered a pernicious vice by civilized societies” and the State is well within its right to regulate such lotteries. It was also observed by the Court that since the online lotteries can run simultaneously, it can drive a naive buyer to exhaust all his savings.
The state of Kerala introduced a Section 5BA in the KGST Act to impose a license fee on lotteries. The validity of this section was challenged before the Kerala High Court. Later, it was declared unconstitutional by the Court according to the precedent laid down by the Apex Court. The Kerala government replaced the KGST Act with Kerala Value Added Tax Act, 2003 stating that the government will levy and collect tax on paper lotteries through a separate enactment. This separate enactment was the Kerala Tax on Paper Lotteries Act, 2005. Section 6 of this Act is the charging section which laid down provisions for levy of tax on paper lotteries.
The decision of the Kerala High Court calling the impugned Act as unconstitutional was another addition to the discussion of who can tax gambling and how. Since after independence, the Centre and States have been at loggerheads over taxation on gambling. The Supreme Court has through many decisions tried to clear the picture over the years. The present judgment is in line with what the Apex Court has had to say on the matter. The division bench of the Kerala High Court clarified that even though betting is specie of gambling, the term “betting and gambling” cannot be interpreted beyond its real meaning. The Kerala government, thus, lacks the legislative competence to impose a tax on state-organized lotteries.
This development not only brings forth the importance of lotteries for the economy of the States despite it being considered a vice but also clarifies the position of the State when it comes to legislating on such lotteries.
Laws regarding lottery in India
The subject of lotteries has been covered under various Acts and subsequent rules. The umbrella act, however, is the Lotteries (Regulation) Act, 1998. This Act is Central legislation that regulates the lotteries and lays down provisions for related matters. Section 2(b) of this Act defines a lottery as a scheme for the distribution of prizes by lot or chance to the participants.
Lotteries are a kind of gamble but there are separate laws for gambling such as the Public Gambling Act, 1987. Lotteries are banned in almost half the states in India. However, there is no blanket ban. Lotteries are legal in only 13 states including Sikkim, Kerala, and Maharashtra among others to the extent that a national collection of Rs. 46 crore per day has been recorded. Kerala alone recorded a collection Rs. 5,696 crore in the financial year 2015-2016. Lottery results are highly awaited in these States. For instance, in Mizoram, the weekly lottery, Samvad, is a much-awaited event.
Even in these 13 states, only state-run lotteries are permissible. Private lotteries are not permissible in the country. There are many state-specific laws on lotteries that vary from state to state. For example, the Maharashtra Tax on Lotteries Act, 2006 deals with the lotteries organized in the State of Maharashtra. Many State Acts have also been declared unconstitutional, like the Kerala Tax on Paper Lotteries Act, for exceeding their legislative power.
Regulations on lottery
- Lotteries Regulation Act, 1998
Section 4 of the Lotteries Regulation Act, 1998 sets the pre-requisite conditions following which lotteries may be organized, conducted, or promoted by the State. Some of these conditions include:
- State governments shall print lottery tickets that will bear the logo of the State government to ensure authenticity,
- No prizes can be offered on any pre-announced number or based on a single digit,
- State governments will sell tickets either itself or through their agents,
- They will also conduct the draws of all lotteries,
- The place of such a draw will be located within the State conducting the draw,
- There will be only one draw per week for a lottery and there cannot be more than six bumper draws of a lottery in a year.
This section also empowers the Central government to prescribe such other conditions.
Section 3 of this Act prohibits the organization, conduct, promotion of a lottery that is other than the lottery as per the conditions specified under section 4.
Section 5 gives the discretion to the concerned State to ban the sales of a lottery organized by any other State. The case laws have, however, established that a State cannot ban only one State from selling lotteries while allowing others. It either has to allow all States or ban them all.
Section 6 empowers the Central Government to prohibit lotteries that are in contravention of the provisions of this Act. The section lays down provisions for a penalty on a lottery organized, conducted, or promoted in contravention of this Act.
- Section 294A, Indian Penal Code, 1860
This section states that anyone keeping an office or place to draw a lottery not approved by the State Government is liable to be punished with imprisonment of either description for up to 6 months or with fine or both.
Further, this section also lays down punishment for a person who publishes a proposal to pay a sum or deliver goods, or to do anything to benefit based on the contingency of drawing a lottery.
- Section 30, Indian Contract Act, 1872
This section declares agreements made by way of a wager to be void. A suit cannot be brought forward for recovering anything that was to be won on any wager, or other uncertain events. In simple terms, if a person is duped while playing the lottery, he cannot recover damages. Even though lotteries are not banned, this section aims to discourage people from indulging in a game of chance.
However, despite the laws and the bans, the lottery system in India still contains various lacunae and loopholes. It is often seen that various sellers, sell the tickets in black by charging exorbitant rates, by selling counterfeit tickets. Furthermore, various sellers have also adopted the technique of ‘single-digit’ which fetches small prizes keeping the user hooked on. They also release bumper prizes every week which violates the Lottery Regulation Act. Various anonymous sellers have started online lotteries making it easier to increase their reach transcending geographical boundaries like the online lottery racket that was busted in Pondicherry in 2016.
- Lotteries (Regulation) Rules, 2010
These rules lay down additional rules for the regulation of lotteries including their conduct, organization, and promotion.
Constitutional angle
Constitutionally, lotteries have been a grey area. It means that they are neither banned nor are they legally enforceable. They are a huge source of revenue for the 13 states that permit lotteries as well as for the nation. But, on the other hand, if someone wins a lottery, they cannot approach the Court for the recovery of their winnings. Justice Dharmadhikari in Subhash Kumar Manwani v State of Madhya Pradesh (AIR 2000 MP 109) observed:
“The principle and purpose…to treat an agreement by way of wager as void is that the law discourages people to enter into games of chance and make earning by trying their luck instead of spending their time, energy and labor for more fruitful and useful work for themselves, their family and the society.”
Under Article 246 clause (1), Parliament has the exclusive power to make laws on matters enumerated in List I while the States have the exclusive power to make laws on subjects enumerated in List II. The legislative field of lotteries falls with the Central Government as provided under Entry 40 in the Union List. According to Entry 62 in the State List, the States also have the power to legislate on gambling and betting. This often leads to confusion.
However, through the years, the Hon’ble Supreme Court has clarified this situation in various judgments including H. Anraj & Others v State of Maharashtra [(1984) 2 SCC 292], J. K. Bharati v State of Maharashtra & Others [(1984) 3 SCC 704), State of Haryana v Suman Enterprises & Others [(1994) 4 SCC 217], and All India Kerala Online Lottery Dealers Association v State of Kerala [(2016) 2 SCC 161] among others. The Apex Court held that since the subject “Lotteries organized by the Government of India or the Government of a State” is specifically covered under List I, no State Legislature can touch it.
The Kerala Tax on Paper Lotteries Act, 2005 was recently held to be unconstitutional by a division bench of the Kerala High Court. It was held that the State of Kerala is not empowered to legislate on the lotteries run by it. On the other hand, the Bombay High Court upheld the constitutionality of the Maharashtra Tax on Lotteries Act, 2006 in Sri Mangal Murty Marketing v State of Maharashtra (writ petition no. 854 of 2007). In this case, the Court examined N V Marketing Private Limited v State of Maharashtra (writ petition no. 432 of 2007) and State of Meghalaya v State of Karnataka (2010). The Bombay High Court held that the Karnataka High Court was in error and that the State of Bombay was competent to enact such legislation.
Various lottery sellers have claimed that the ban on the sale of lottery tickets is a violation of their fundamental rights enshrined under Article 19(1)(g), which gives all citizens the right to practice any profession or trade or business. Though, Article 19(2) states that reasonable restrictions can be imposed on the rights guaranteed by clause (1) of this Article in the interest of the general public.
Lotteries are a game based on luck. This poses as a lucrative offer for those who shy away from hard work. It is also often a factor in the severance of various social relationships. Many such games are banned in several states as the winnings are based on luck and not skills. In the case of R. M. D. Chamarbaugwalla v Union of India (1957 AIR 699), a five-judge bench of the Supreme Court observed that the Indian Constitution created a welfare State and that the Constitution makers could not have intended to make any activity that encourages “a spirit of reckless propensity” to be included within the meaning of trade under Article 19(1)(g). Gambling incites a reckless disregard, and an increasing nature to earn more by working less. This leads to a loss of hard-earned money which leads to loss of livelihood and decreased standard of living. The Court Thus held that any ban on betting and gambling is not interfering with trade but keeping the trade unpolluted from social vices.
Critical analysis
On the ground level, lotteries often sow more trouble than the fruits that they reap. Lotteries are primarily a game of luck. They are very lucrative and addictive to people who waste away their time, money, and effort into chasing a dream to be rich overnight. This soon becomes a deadly addiction as people pin their hopes on their luck and waste away their resources. It also has a subsequent effect on social life.
The National Crime Record Bureau reported a 72% increase in lottery related crimes in 2016. As people drain their resources, they get pushed to poverty, lower quality of lifestyle, and chronic sadness. There is a well-established nexus between physical and verbal abuses against women and poverty. Lotteries also sap away a person’s motivation to work hard and lure him into falling back solely on luck. It is commonly said, “Those who win the lottery get money, and those who do not win get struggles”.
The vulnerable buyers become dependent on the sellers and are susceptible to the various malpractices of the sellers. This makes them fall in the trap of the sellers who use their vulnerability to charge higher prices. Furthermore, lotteries cannot be legally enforced. Thus, it is often seen that the sellers do not give the contestants their proper winnings.
A lottery isn’t just a shack based small household business anymore. It not only thrives underground but has also come out as a legal industry. It has a huge revenue turn over and accounts for a considerable share of the GDP. The taxation on the lottery industry also proves to be a contributor to the revenues of the respective states. For example, in the year 2015-16, the State of Punjab earned more than Rs. 55 crore from lotteries alone. The collection of revenue by the States has, however, taken a massive hit ever since the implementation of GST. Now, a major portion of the revenues goes to the Centre. According to the CEO of Sugal and Damini, the leading marketer of State Government issued lotteries, the estimated market of lotteries before GST was Rs. 10,000 crores to Rs. 12,000 crores. Though, after the implementation of GST, it has reduced to Rs. 6000 crores.
The money collected from the lotteries can also be used for constructive purposes. For example countries like England and China support their sports using money from the lottery. It is suggested that India can use similar strategies to boost and reform various sectors. But, out of the expected tax of about Rs. 15000 crores, only Rs. 3,500 crores were collected in the financial year of 2018-2019.
Lotteries are very difficult to control and stop. This is because of the ease of setting up a lottery, the ways it can be maintained illegally and the reach it can have, especially online. This causes a big problem for the administration. Lotteries are a big influence on people and contribute to the State’s revenue but there are no legal remedies if the winnings are not given. Furthermore, with the growing use of the internet, there are widespread online lotteries where people can view results and participate at the same time. This helps the sellers transcend geographical boundaries making it even more difficult for the states to restrain them.
The bans on the lotteries are also not very effective, as they spring up faster than they are stopped. They operate on a small scale and keep their customers baited with small prizes. This keeps the contestants believing their luck and they get addicted. Currently, there is an upshot in the online lotteries such as Lottoland, Powerball, and Euro Millions among others. These lotteries are played worldwide on the online platform and have a popular charm to them.
Conclusion
Lotteries can be both good and evil. They are a constant source of recreation, of enjoyment but can soon become an addiction that destroys the whole household. Lotteries should be limited up to a source of recreation and not be allowed to be a means of livelihood. It is practically impossible to eradicate private lotteries. So, it becomes very important to track and check private lotteries and get them mandated by the State. The States must also plug in all loopholes and try and make the system as airtight as possible.
They should also try and cap the limit of the lottery so that it only remains as a source of entertainment and not become a means of livelihood. The punishment that is given under the Lotteries (Regulation) Act and the IPC must be increased to ensure deterrence. A lottery often starts as a little weed and adds beauty to the garden. But if left unchecked and allowed to grow unregulated, it can soon take over the garden and destroy it. Thus, it is very essential to ensure that the lottery is only restricted to its role and is state-regulated and controlled.
Author: Shaurya Gupta from Campus Law Centre, University of Delhi.
Editor: Shalu Bhati from Campus Law Centre, Faculty of Law, University of Delhi.
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