A bumper draw of sorts is currently on, with more than Rs 2,000 crore as the sum at stake. And, the amount seems to be only a teaser of what can be bigger jackpots that the taxman is gunning for, from the lottery industry.

The lottery industry has been contributing significantly to the exchequer of the governments, particularly the States running the lottery, observe Mr D. Arvind and Mr J. V. Niranjan, Chennai-based indirect tax experts associated, as partner and senior manager, respectively, with BSR & Co, a firm of chartered accountants.

State governments have been angling for a slice of the pie by seeking to levy sales tax on the sale of lottery tickets happening within their State, they add, in a recent e-mail interaction with Business Line.

Excerpts from the interview, in the context of the taxmans move against a Coimbatore-based lottery agent, Martin Lottery Agency Ltd:

Have the State governments been successful in nibbling at the pie?

Unfortunately for the State governments, the Supreme Court held not long ago that lottery tickets are not goods, and at most an actionable claim, in the Sunrise Industries case, reversing the long-standing position held in the H. Anraj case that lottery tickets are goods. This Supreme Court decision is the denouement for the States to levy sales tax on lottery. Now that one chapter is over, it is time to begin another.

That explains the current initiative?

True. The Central Government not wanting to be left far behind has woken up to the possibility of levying service tax on lottery business. This seems to be logical step as the power to tax services as of now vests with the Central Government. Also, now that the apex court has held that lottery is not goods, attempts are being made to bring lottery agents into the taxable service fold.

What type of service would that be?

The ubiquitous service called BAS (business auxiliary service) is what the Government has relied upon for issuing what is considered to be the biggest show-cause notice in the history of indirect tax, far surpassing the notice issued to ITC. While the ITC notice was for around Rs 800 crore, the Martin notice, we understand, is for Rs 2,112 crore.

How does the lottery business operate?

A quick look at the way this business functions would be a good starting point to understand this notice. Though, technically, the State government runs the lottery business, it outsources much of the work, especially the distribution and sale of lottery tickets. For this purpose, it appoints sole selling agents.

What are the functions of such a sole selling agent?

He has to ensure that the ticket is properly distributed and sold. The sole selling agent promotes the sale of the lottery tickets. Apart from this, under the terms of the agreement entered into by him with the State government, he is also responsible for the preparation of accounts for the sale of tickets as well as statements of gross revenue, prize money paid, expenses on consumables, commissions and bonus to retailers and sellers, publicity, etc., in connection with the lottery game. He may also be authorised to distribute the prize money.

Is Marin one such agent?

Yes, Martin Lottery Agency Ltd is the sole agent of paper lottery for the Governments of Sikkim, Meghalaya, Punjab and Maharashtra, and the company is also sub-distributor for the paper lottery for the Governments of Arunachal Pradesh and Tamil Nadu. Obviously, the company generates revenue through these activities.

Now, what is the stand of the taxman?

The taxman appears to have taken the position that in terms of the agreement with the State Government, the activities of Martin, such as sales promotion, organising of draws, distribution of prize money in certain cases, publicity of the schemes, and maintenance of accounts, fall under the category of BAS.

Does the issue lend itself for arguments, both for and against?

It appears that the Revenue has a point in taking the position that marketing or promotion of goods or services of a client is taxable under BAS. In fact, the definition of BAS includes this as a taxable service.

On the other hand, trading in services should not attract service tax. While the issue whether lottery is a service or not brooks no discussion, it is certainly worthwhile examining if the ownership of the lottery ticket passes on to the sole selling agent or whether it vests with the State Government till the same is sold to the ultimate buyer of the ticket. If the ownership is successively transferred from the State Government to the buyer, the issue might take a different turn.

Do you see an easy and quick resolution of the matter at hand?

Doubtful. It is quite likely that the issue would travel all the way up to the apex court. And the journey would be long and arduous. Interestingly, it may end as the biggest draw in the history of the country, irrespective of the winner.

D. MURALI