Petitioner is liable to pay GST only on commission earned in betting of Horse Race and not on the total amount of bets : Karnataka High Court

Rule 31A(3) of CGST Rules (valuation) is quashed by Karnataka High Court as it exceeds the scope of GST Act.

The Circular No.27/01/2018 dated 4.1.2018 is also quashed insofar as it concerns the petitioners.

Rule 31A of CGST Rules

Petitioner is liable to pay GST only on commission (income) portion and not the entire amount received by them in fiduciary capacity. Making the entire amount liable for payment of GST would take away the principle that a tax can be only on the basis of consideration even under the CGST. This can be nothing different from that of a stock broker or a travel agent - both of whom are liable to pay GST only on the income - commission that they earn and not on all the monies that pass through them. Therefore, Rule 31A(3) insofar as it declares that the value of actionable claim in the form of chance to win in a horse race of a race club to be 100% of the face value of the bet is beyond the scope of the Act.  - High Court

Petitioner

The petitioners is carrying on the business of a race club, which includes lay-out and preparing any land for running of horse races, steeplechases of races of any other kind and for any kind of athletic sports. The petitioners particularly conduct horse racing and facilitates betting by the punters. The petitioners by themselves do not bet, but only facilitates punters in their betting activity. It is the punter who places the bet either with a totalisator run by the petitioners or a book-maker licensed by the petitioners.

If a horse backed by the punter wins, the winning punter is required to surrender the receipt and receive the winning amount. It means, a losing punter’s money is used to pay the price money of the winning punter. The price money is distributed by the petitioners to the winning punter and out of the amount, Commission is set apart to be taken by the petitioners. This is the broad modus of functioning of the petitioners.

Up to 30th June 2017 the petitioners claim to have discharged payment of service tax on the commission so retained and the betting tax under the provisions of the Mysore Betting Tax Act, 1932. On and from 1st July 2017, the Mysore Betting Tax and the Service Tax provisions stood repealed and the Goods and Services Tax laws were brought into force.

From the appointed day i.e., 01-07-2017 a GST was brought into force. Till the onset of these taxes, the petitioners were treated as service providers under Chapter-V of the Finance Act, and Service Tax was levied on the petitioners’ commission alone. After the CGST regime began, an amendment was brought into Rule 31A by insertion of Rule 31A(3) to the CGST Rules. The amendment made GST payable by the petitioners on the amount of bet that gets into the totalisator. It is this amendment that is called in question by the petitioners in this writ petition on the ground that the Rule is made beyond the powers conferred under the CGST Act, which would render it to be ultra vires and has sought a consequential declaration that the CGST and KSGST be restricted only to the Commission that the petitioners get on holding the amount in the totalisator for a brief period.

The learned Senior Counsel appearing for the petitioners has vehemently argued and raised the following contentions:

(1) Rule 31A (3) violates Article 246A read with Article 366 (12A) and exceeds the constitutional mandate given to the Parliament and Legislature to levy tax only on the supply of goods and services on the principle that if there is no supply there is no tax.

(2) Rule 31A (3) in effect imposes tax on the petitioners on the entire bet value without the petitioners supplying any bet, thus violating constitutional mandate of Article 246A.

(3) According to the learned counsel, every tax contains four components – taxable event, taxable person, rate and measure of tax. Without assessment on all this, imposition of tax is contrary to law.

(4) The impugned Rule 31A(3) is ultravires Section 7 of the CGST Act since the supply of bets is not in the course or furtherance of petitioners’ business and is made liable to pay tax. The impugned Rule exceeds the mandate under Section 7 by levying GST on the amount that is not received by the petitioners as consideration.

Revenue

On the other hand, the learned Additional Government Advocate representing the respondents would submit that the Act itself has mandated levying of tax on an actionable claim; What is actionable claim is not defined under the Act, it is in the Rules; Betting is also an actionable claim in terms of the Rules; the petitioners cannot contend that for the first time under Rule 31A the petitioners were made liable for payment of GST on the amount received through totalisator.

Since actionable claim is and was existing in the Act from the beginning the amendment has only clarified the role of the petitioners in the field of betting. Therefore, he would submit that the contention of the petitioners that Rule 31A is ultravires the Act and the amendment is to be rejected as a figment of imagination and cannot be construed to be legally sound and would submit that the writ petition is to be dismissed.

Issue

(1) Whether Rule 31A(3) of the CGST Rules is ultravires the CGST Act?

(2) Whether the petitioners are liable to pay GST on the commission set apart or on the total amount collected in the totalisator?

Since both the issues are intertwined, the same are taken up together and considered.

High Court

The entire lis revolves around the fact whether Rule 31A(3) runs counter to the provisions of the Act with particular reference to sub-section (2) of Section 7. Sub-section (2) of Section 7 declares actionable claims to be neither goods or services except lottery, betting and gambling. Rule 31A(3) which came into effect from 23.01.2018 inserted Rule 31A(3) to depict value of supply in case of lottery, betting, gambling and horse racing. Sub- rule (3) declare the value of supply of actionable claim in the form of chance to win in betting, gambling or horse racing in a race club shall be at 100% face value of the bet or the amount paid into the totalisator. Therefore, the act which deals with supply of goods, consideration, business would not apply to the function of the totalisator. Making the entire bet amount that is received by the totalisator liable for payment of GST would take away the principle that a tax can be only on the basis of consideration even under the CGST. The consideration that the petitioners receive is by way of commission for planting a totalisator. This can be nothing different from that of a stock broker or a travel agent - both of whom are liable to pay GST only on the income - commission that they earn and not on all the monies that pass through them. Therefore, Rule 31A(3) insofar as it declares that the value of actionable claim in the form of chance to win in a horse race of a race club to be 100% of the face value of the bet is beyond the scope of the Act. This is also, inter alia, in the light of the fact that the activity of the petitioners being a game of skill and not a game of chance as is held by the Apex Court in the case of K.R.Lakshmanan (supra).

I declare Rule 31A(3) of the Central Goods and Services Tax Rules, 2017 as amended in terms of notification dated 23.01.2018 as ultra vires the provisions of the Central Goods and Services Tax Act, 2017 Act and resultantly, quash the same only insofar as it concerns the petitioners.

Consequently, I declare Rule 31A of the Karnataka Goods and Services Tax Rules, 2017 as ultra vires the provisions of the Karnataka Goods and Services Tax Act, 2017 and resultantly quash the same insofar as it concerns the petitioners.

Sequentially, the clarification/Circular No.27/01/2018-GST dated 4.1.2018 vide Annexure ‘A’ is also quashed insofar as it concerns the petitioners.

The petitioners shall be entitled to all consequential benefits that flow from the aforesaid orders.

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