Government to lose thousands of Crores by introducing a new levy – Lottery Agency wins a lottery from Government
WE told you so. On 29th February 2008, when the Government proposed to amend the Finance Act (now don't tell me government did not do it – Parliament did – what we so richly attribute to the mighty Parliament is actually the handiwork of some babu's half baked creative genius), we reported- Selling of Lottery Tickets brought under Service Tax net – what happens to DGCEI's mega case? Government to lose more than a thousand Crores by introducing a new levy.
More than a year before that in February 2007, we had warned the government, Any apathetic attempt to clarify it in the Budget may lead to pathetic erosion of revenue for the past period.
In February 2008, we pointed out, “When no such thing was done in the 2007 Budget, we assumed that wiser counsel prevailed with the Board, but now we understand that wisdom cannot be sustained. The Government has done exactly what we cautioned them against and thereby the Government will most likely lose about Rs.2112 Crores.“
And that is exactly what happened. The Government's clarification has ensured that it has lost Crores and maybe forever. Without the explanation, there was a chance, with it what little chance was there, was totally wiped off. Often clarifications are costly.
Well, it all started with the DGCEI initiating cases against lottery agencies for evading service tax. They were charged with providing service under Business Auxiliary Service. Commissionerates also picked up the intelligence. Now what in Business Auxiliary Service was the Department trying to tax?
The definition of BAS reads as
(19) “business auxiliary service” means any service in relation to, —
(i) promotion or marketing or sale of goods produced or provided by or belonging to the client; or
(ii) promotion or marketing of service provided by the client; or
So 19(i) deals with promotion/ marketing of goods while 19(ii) deals with services.
Now does selling of lottery tickets involve marketing of goods or services?
Apparently everyone in Government thought it fell in the first category that is promotion/marketing of goods.
The Sikkim High Court held that lottery ticket was not goods and therefore no tax can be levied on their sale. This judgement was delivered on 18.09.2007.
While the Revenue promptly appealed to the Supreme Court, it waited for the opportunity of the 2008 budget to change the law.
The following explanation was added to the definition:
Explanation.— For the removal of doubts, it is hereby declared that for the purposes of this sub-clause, "service in relation to promotion or marketing of service provided by the client" includes any service provided in relation to promotion or marketing of games of chance, organised, conducted or promoted by the client, in whatever form or by whatever name called, whether or not conducted online, including lottery, lotto, bingo;
So now Lottery had been specifically included in the second sub-clause under services. If lottery is not goods, it can be taxed as service.
In a classic judgement delivered yesterday, the Supreme Court emphatically held.
1. Lottery Tickets are not goods and so not taxable under the first limb of the definition – marketing of goods.
2. The explanation inserted by Finance Act has no retrospective application.
3. Just by writing, “for the removal of doubts” will not make the explanation a clarificatory one.
4. When two views are not possible, a clarification is not required.
5. Running lottery by the State may be tolerated; morality aspect may not be relevant, there is no service involved.
6. Parliament is competent to create a legal fiction, the fiction cannot be retrospective.
So the Revenue Appeal was dismissed. And the Supreme Court held that the Service Tax, if any was payable only from May 2008. IF ANY – The question whether the levy was constitutionally void was not considered by the Supreme Court as it was not a question before it. Had the explanation not been inserted, while the matter was pending before the Supreme Court, the arguments before and the decision of the Supreme Court would have been different.
In its anxiety to promote the cause of tax collection with utter disregard to judicial pronouncements by hasty amendments to the statute, the Government of India is not only ruining the cause of tax collection but the very basis of supremacy of law.
Today we bring you this landmark judgement. See Breaking News.
Also see
1. Service Tax and Budget - Will it turn out to be a lottery for Lottery Industry
2. Bangalore DGCEI detects service tax evasion of Rs 2263 Cr; recovers Rs 55 Cr last calendar year
3. Dear FM, please tax 'law' and 'lottery'