2018 (4) TMI 1009 - HC - GST

Kerala GST Rule Struck Down, Lottery Business Allowed to Proceed

M/s. Teesta Distributors Versus State of Kerala,

The court held that Rule 56(20A)(iii)(d) of the Kerala State GST Rules exceeded the State's legislative competence and was struck down. Other challenged ... Right to carry lottery business - Use of Kerala GST Act, 2017 and police power to interfere into the lottery business - practical difficulty in following of 56(20A)(d) of the Kerala State GST Rules - Production of unsold lotteries before the authority within 48 hours - Challenge to the GST Rules, 2017 on a premise that these rules are colourable exercise of delegated legislation to interfere with rightful conduct of lottery business in the State - Held that:- Rule 56(20A)(d) refers to satisfaction entered by the authority as to the violations of the Lotteries (Regulation) Act. This Court is of the view that the above Rule has to be struck down as the State has no power to constitute one more authority under the Kerala State GST Rules to enter satisfaction as to the violations of the lottery. The Indian Constitution do not recognise police power as such. The police cannot act merely based on the information given by the Tax officials. The police power in relation to the violation of the provisions of Lotteries Regulation can be exercised only in accordance with the Lotteries Regulation. The petitioners pointed out the practical difficulty in complying Rule 56(20A)(II) within 48 hours. Explanation as above, certainly, is meritorious. The Court cannot brush aside such an explanation. How far an action can be initiated for non compliance is a vexing question to be decided by this Court. The petitioners should not be prevented from the sale of lottery for non compliance of Rules 56(19) and 56(20A) of the Kerala State GST Rules, in respect of which they have explained their practical difficulty in complying the same. In respect of the other Rules, the petitioners having expressed their willingness to comply the same in the writ petition itself, I need not advert to the consequence and non compliance of such Rules. Rule 56(20A)(iii)(d) of the Kerala State GST Rules is struck down holding that the State has no legislative competence to formulate such Rule. Issues Involved:1. Scope of State's police power and tax regime to interfere with the sale of other State lotteries.2. Validity of certain rules under the Kerala State Goods and Services Tax Rules, 2017.3. Application of Integrated Goods and Services Tax Act, 2017 (IGST Act) vs. Kerala State GST Act.4. Justification of police power used by the State to interfere with lottery business.5. Validity of the notice (Ext.P26) issued by the Deputy Commissioner of State Goods & Services Tax Department, Kerala.Issue-wise Detailed Analysis:1. Scope of State's Police Power and Tax Regime to Interfere with the Sale of Other State Lotteries:The case raises an important question regarding the State of Kerala's use of police power and tax authority to interfere with the sale of lotteries from other states, specifically Mizoram. The petitioners, distributors of Mizoram State lottery, argue that Kerala's actions, including the seizure of lottery tickets and police involvement, are unjustified and violate their rights to conduct business.2. Validity of Certain Rules under the Kerala State Goods and Services Tax Rules, 2017:The petitioners challenge the validity of Rules 56(19) and 56(20A) of the Kerala State GST Rules, arguing that these rules are a colorable exercise of power and encroach upon the Union Government's authority under Entry 40 of List I, Schedule VII of the Constitution. The court holds that Rule 56(20A)(iii)(d) is beyond the State’s legislative competence and strikes it down. However, the challenge to the vires of other rules is negatived, as they are deemed necessary for proper assessment of GST.3. Application of IGST Act vs. Kerala State GST Act:The petitioners argue that the sale of lotteries is governed by the IGST Act since the sale and place of supply are in different states, thus Kerala officials cannot take action against them. The court leaves this question open for the primary authority to decide after hearing the petitioners, noting that the petitioners themselves are unclear about the applicable regime.4. Justification of Police Power Used by the State to Interfere with Lottery Business:The court examines whether the State is justified in using police power to interfere with the lottery business through tax officials. It concludes that the State has no power to legislate on the subject of lotteries, which falls exclusively under the Parliament's domain. Therefore, Rule 56(20A)(d) is struck down as it allows tax officials to enter satisfaction regarding violations of the Lotteries (Regulation) Act, which is beyond their authority.5. Validity of the Notice (Ext.P26) Issued by the Deputy Commissioner of State Goods & Services Tax Department, Kerala:The petitioners challenge Ext.P26, which directed them to comply with certain statutory provisions and prevented them from proceeding with their business. The court holds that the Deputy Commissioner’s demand to prove compliance with the Lotteries (Regulation) Act is beyond his authority. The court quashes Ext.P26 to the extent it forbids the petitioners from proceeding with the sale of lottery and directs that any objections raised by the petitioners regarding jurisdiction should be considered within one month.Conclusion:The writ petition is disposed of with the following directions:1. Rule 56(20A)(iii)(d) of the Kerala State GST Rules is struck down.2. The challenge to the vires of other rules is negatived.3. Officials under the Tax Department have no power to determine compliance with the Lotteries (Regulation) Act.4. Ext.P26 is quashed to the extent it forbids the petitioners from selling lottery tickets.5. Any objections regarding jurisdiction should be addressed by the Deputy Commissioner within one month.