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State Of Karnataka And Anr. Etc. vs State Of Meghalaya And Anr


The subject matter of this legal dispute was the interpretation of two entries in the Seventh Schedule of the Indian Constitution that deal with “lotteries organized by the Government” (Entry 40 of List I) and “betting and gambling” (Entries 34 and 62 of List II). The main question was whether the Central Government (List I) is the only body with the ability to tax lotteries, or if State Legislatures (List II) are also able to do so.


The case concerns legal challenges put forth by the States of Kerala and Karnataka concerning their respective jurisdictions’ ability to tax lotteries.

1. Karnataka: The Karnataka Tax on Lotteries Act, 2004 was passed by the State of Karnataka. The purpose of this Act was to levy taxes on the winnings from state-run lotteries and the sale of lottery tickets. The main question on the table is whether the Karnataka State Legislature was authorized by the constitution to pass this legislation and impose these taxes.

2. Kerala: In a similar vein, the State of Kerala enacted the Kerala Act, 2005, with the intention of taxing lotteries held within its borders. Kerala’s legal argument centers on the constitutionality of the tax and its legislative authority to impose it.

The central question in these cases is whether the State Legislatures in question had the constitutional right to pass laws taxing lotteries and whether those laws were within the purview of their legislative authority as specified by the Indian Constitution.


  1. Whether the placement of ‘lotteries organized by the Central/State Governments’ in Entry 40 of List I excludes taxation power under Entry 62 of List II.
  2. Whether taxation on ‘betting and gambling’ falls within Entry 62 of List II.
  3. Evaluation of the legislative competence of Karnataka and Kerala State Legislatures’ Acts under Entry 62 of List II.


  • Type of Taxation: The Karnataka Tax on Lotteries Act, 2004 levies taxes on gambling activities, which are specifically classified as falling under Entry 62 of List II, rather than the sale of lottery tickets. It was argued that these taxes were not the same as goods and services tax (GST), value added tax (VAT), or sales tax.
  • Legislative Competence: The Karnataka State Legislature claimed that the Karnataka Tax on Lotteries Act, 2004 was in accordance with the powers granted under Entry 62 of List II, and therefore it possessed the necessary legislative competence to enact it.
  • Distinction between Regulatory and Taxing Powers: A focus was laid on differentiating between regulatory powers (e.g., Entry 40 of List I) and taxing powers. The argument emphasized that, according to prior legal decisions, taxing entries cannot be absorbed by regulatory entries.
  • Non-extraterritoriality: Even though lotteries were run by other states, the taxes collected were not extraterritorial because they were applied to gambling activities within the State of Karnataka.
  • Lotteries and Trade/Commerce: It was argued that lotteries, even when run by the State, did not fall under the protections of Article 19(1)(g) or Article 301 of the Constitution because they did not fall under the category of trade and commerce.
  • Legislative Authority: Kerala’s argument was in line with Karnataka’s, highlighting the Kerala State Legislature’s legislative authority to levy taxes on lotteries operating within its borders in accordance with the Kerala Act, 2005.
  • Imposition of Advance Taxes: The Kerala Act, 2005 permitted taxes to be imposed prior to any lottery drawing, subject to challenge. According to the appellant, Section 10 of the Act made this advance tax requirement legal.
  • Burden of Tax Passed to Consumers: The appellant claimed that there was a presumption that an indirect tax borne by an assessee was passed on to consumers, citing legal precedents such as Mafatlal Industries Ltd. v. Union of India. They refuted assertions that consumers did not bear the full cost of taxes from 2006 to 2010.
  • Kerala Lottery Ban: The appellant drew attention to the Central Government’s decision to stop running lotteries in Kerala as a result of documented frauds. The appellant also noted that, should the argument opposing the state’s authority to tax lotteries be accepted, it should be made prospectively in order to support the non-refunding of recoveries that have already been made.

These arguments highlighted the constitutional and legal grounds the appellants cited to support their justification for taxing lotteries in their individual states.


  • Lack of Legislative Competence – Since the Parliament had exclusive jurisdiction over lotteries, the state of Karnataka did not hold the authority impose taxes on lotteries run by other states or the Indian government (Entry 40, List I). Entries 34 and 62 of List II specifically excluded government lotteries, thereby restricting the authority of State Legislatures.
  • Impugned Act as Sales Tax and Extra-Territorial Operation – Under the pretense of controlling lottery drawings, the Act appeared to impose sales tax, which had been declared unlawful in earlier court decisions. Lottery-related activities like printing tickets and holding draws took place outside of Karnataka, so there was no territorial connection to support the tax imposition.
  • Exigencies of North-Eastern States – States like Nagaland face financial hardship due to Section 10 of the Act’s requirement for advance tax deposits, which could result in taxes on unsold lottery tickets. Similar laws being applied in different states could lead to multiple taxes on the same event, which would negatively affect the organizing states’ revenue.

The responders contended that states like Nagaland would face economic difficulties as a result of Karnataka’s Act, which went beyond its legislative authority. For these reasons, they requested that the appeals be dismissed.

  • Lotteries not Allowed in Betting or Gambling Categories: According to Entries 34 and 62 of List II, lotteries run by the Indian or State governments do not fall under the category of “betting and gambling.”
  • The Kerala Lotteries Act was ambiguous; it made no distinction between the taxing event and the tax measure, which could lead to the imposition of sales tax in the name of controlling lottery draws.
  • Tax on Sale of Lottery Tickets: The Act appeared to tax the sale of lottery tickets, but it also vaguely taxed paper lotteries.
  • No Use for Unjust Enrichment: Cited the Mafatlal Industries Ltd. case to refute Kerala’s claim of unjust enrichment and argued that it doesn’t apply to states.
  1. State of Meghalaya –
  • Parliament’s sole authority over state lotteries – They contended that state lotteries are solely under the purview of Parliament, citing the Government of India Act, 1935 (Entry 47, List I).
  • Power to Tax Under List I Entry 40: They maintained that Entry 40 of List I permits unrestricted legislation pertaining to lotteries organized by states and central governments.
  • Inter-Governmental Immunity at Risk: They claimed that it was against the principles of intergovernmental immunity to withhold Union funds, charge interest, and impose penalties for unpaid taxes.
  • Aspects Doctrine Rejected: They rejected the idea that the legislation’s purpose is to tax lotteries, which is the exclusive purview of Parliament, and dismissed the significance of the pith and substance doctrine.



             Counterpoints to the State of Meghalaya’s Proposal:

  • List I Not Self-Subsuming, Entry 97: Taxation authority under Entry 97 of List I cannot be directly subsumed by Entry 40 of List I. Before using Entry 97, the power must run out under certain Entries.
  • Comparing with List I Entry 42: They drew attention to the similarity between Entry 42 of List I and Entry 62 of List II regarding interstate commerce, wherein State powers were genuinely subordinated to exclusive Union power.
  • Interpretation of Article 246(1): They claimed that Lists I and II are mutually exclusive and that it is impossible to read them separately.
  1. STATE OF KERALA – Counterpoints to the contentions of state of Meghalaya.
  • Division of Taxing and Regulatory Authorities: They emphasized that the domains of legislation pertaining to taxes and regulations are separate and distinct. Lotteries are governed by state law, not by federal law (Entry 62 of List II).
  • ‘Betting and Gambling’ in Context: They noted that the contexts of List II Entries 34 and 62—one for regulation and the other for taxation—are different.
  •  Particular Entry Restrictions General Description: They contended the idea that a particular taxing entry restricts the application of a general regulatory entry, thereby assisting in the understanding of List II Entry 62.
  • Effect of GST on List II Entry 62: They claimed that, taking into account the current tax environment, the interpretation of Entry 62 of List II relates to previous taxes with the implementation of the GST regime.


  1. Evaluation of Legislative Ability: The Court’s main objective was to determine whether the Acts in question were constitutionally permissible, with a particular focus on how they related to the legislative Entries.
  2. Preventing Confusing Interpretations: The ruling emphasized how important it is to reconcile Entries in order to avoid interpretations that could make any one Entry meaningless or incompatible with other entries.
  3. An explanation of taxation power: The court emphasized that the authority to impose taxes cannot be assumed implicitly; rather, it must be granted expressly.
  4. The court emphasized how crucial it is to determine whether the Acts violate any particular constitutional clauses that restrict the authority of the legislature.
  5. Federalism and Intergovernmental Immunity: The Union is not permitted to tax a state’s income or property under Article 289. Nonetheless, the Union may levy taxes in specific situations pertaining to State government operations under Article 289, clause (2).
  6. Legislative power should be interpreted broadly when it comes to a legislature’s ability to impose taxes. It includes the power to enforce laws, choose which things are taxable, set rates, create systems for collecting taxes, stop tax evasion, and designate officials in charge of collecting taxes.
  7. Refund of Ultra Vires Taxes: A taxpayer has the right to request a refund from the government if it is determined that a tax is unconstitutional or exceeds legal authority. Even in cases when there is no objection, payments made in these situations may be deemed erroneous and may be refunded.
  8. The doctrine of unlawful enrichment states that a taxpayer may not be eligible to request a refund from the government if they have already recovered the money and transferred the tax burden to another party. In cases where there have been windfall gains and no tax burden, refunds are frequently denied.
  9. Determining the Taxation of Constitutional Entries: The ruling explores the meaning of the taxing entries in List I (Union List) and List II (State List) of the Seventh Schedule. It makes a distinction between other general subjects of legislation and taxation, which is a separate matter for legislative competence.
  10. Preventing Conflicts Between Lists: It is important to interpret the entries in List I and List II to prevent conflicts between them. When disputes emerge, an attempt should be made to resolve them and identify the relevant legislative area. To determine the legislative field to which a particular law pertains, the “pith and substance” doctrine is employed.
  11. Distinction Between the Authority to Tax and the Authority to Regulate: The ruling highlights the differences between the authority to tax and the authority to regulate or control. While regulation and control concentrate on regulating actions, taxation seeks to raise money. The authority to impose taxes must be given expressly; it cannot be inferred or assumed.
  12. Knowing the Nature of Taxes: Knowing the subject, the measurement, and the legislative field of a tax is necessary to determine its nature. More important than any unintended outcomes or repercussions of the levy are its goal and intent.

ACTS UNDER CONSIDERATION BY THE COURT – The Lotteries (Regulation) Act of 1998, the Karnataka Tax on Lotteries Act of 2004, and the Kerala Tax on Paper Lotteries Act of 2005 are the Acts that are discussed in the text.

  1. The Lotteries (Regulation) Act,1998 
  •  It was passed by the Parliament and governs how State Governments conduct lotteries.
  •  Outlines the circumstances in which a State Government may plan, carry out, or encourage lotteries.
  •  Outlines guidelines for sales, draws, and other lottery-related activities; prohibits specific lotto-related acts.
  1. The Karnataka Tax on Lotteries Act, 2004:
  • Imposes taxes on lottery programs run by the Indian government, state governments, or organizations that have bilateral agreements with India.
  •  Describes lotteries as plans to distribute prizes through ticket sales in a way that is dependent on chance.
  •  Requires promoters to pay taxes at specified rates for various kinds of draws.
  1. The Kerala Tax on Paper Lotteries Act, 2005:
  •  Imposes taxes on lotteries held on paper in Kerala.
  •  Lotteries run in Kerala by the Indian government, state governments, or foreign organizations are subject to taxes.
  •  Indicates prices for various draw kinds and necessitates promoter registration.
  • These Acts mainly regulate and tax lotteries run by governments or other organizations in particular areas, defining the terms, rates, and processes for both taxation and operation.


  1. Interpretation of the Constitution’s Seventh Schedule Entries:
  • The ruling provides a thorough framework for interpreting the constitutional provisions pertaining to legislative authority found in the Seventh Schedule:
  • Reading Entries Together: It is best to read entries from various Lists together without giving any of them a specific interpretation. The court should settle disputes between Entries.
  • Doctrine of Pith and Substance: The true nature of legislation is ascertained by applying the doctrine of pith and substance when entries overlap.
  • *Particular versus Broad Entries: When it comes to legislative matters, specific entries are more important than general ones.
  • Tax Authority: The Seventh Schedule’s specific tax-related Entries must be the source of the authority to impose taxes.
  1. Taxation and Legislative Competence: The ruling addresses Article 265 of the Constitution, highlighting the necessity of legal authority in order to impose taxes. It says that the authority to tax must be expressly listed in the applicable Lists and cannot be inferred.
  2. Analysis of Gambling and Lottery-Related Entries:
  • The ruling classifies lotteries as a type of gambling and addresses List I (Union) and List II (State)’s respective authority over lotteries:
  • Differentiation of Entries: Entry 40 of List I covered lotteries run by the Government of India or a State, whereas Entry 34 of List II covers other types of lotteries.
  • Taxation Authority: List II Entry 62 expressly gives the authority to impose taxes on gambling activities, such as lotteries. This authority includes lotteries run by different organizations.
  • Taxation vs. Regulation: Entry 40 of List I designate the government’s authority to regulate lotteries, but Entry 62 of List II retains the authority to impose taxes on gambling activities, including lotteries.


The ruling comes to the conclusion that State Legislatures have the power to impose taxes on lotteries under Entry 62 of List II, regardless of whether the Government of India, a State, or another organization is in charge of organizing them. It underlines that the State Legislature still has the authority to impose taxes on gambling-related activities, such as lotteries. All things considered, the ruling carefully examines the legislative entries, especially those pertaining to lotteries and gambling, in order to determine the precise taxing authority that the State Legislatures are entitled to under the Constitution.


  1. https://indiankanoon.org/doc/1669283/
  2. https://www.scconline.com/blog/post/2022/08/06/state-of-karnataka-v-state-of-meghalaya-more-questions-than-answers/
  3. https://itatonline.org/digest/verdicts/state-of-karnataka-anr-etc-vs-state-of-meghalaya-anr-etc-supreme-court/

Written by Vimla Choudhary an intern under legal vidhiya.

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