Court Declares GST Rules Ultra Vires, Petitioners Liable for Commission Only

The court declared Rule 31A(3) of the CGST Rules and Rule 31A of the KSGST Rules as ultra vires the provisions of the CGST Act and KSGST Act, respectively. It held that the petitioners are liable for payment of GST on the commission they receive for the service rendered through the totalisator and not on the total amount collected in the totalisator. The court quashed the impugned rules and the related clarification/circular, entitling the petitioners to all consequential benefits.

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Issues Involved:
(1) Whether Rule 31A(3) of the CGST Rules is ultravires the CGST ActRs.
(2) Whether the petitioners are liable to pay GST on the commission set apart or on the total amount collected in the totalisatorRs.

Issue-Wise Detailed Analysis:

1. Whether Rule 31A(3) of the CGST Rules is ultravires the CGST ActRs.

The petitioners challenged the legislative intent of making them liable to pay GST on the entire bet amount received by the totalisator and sought to declare the amendments dated 25-01-2018, which inserted Rule 31A(3) to the CGST Rules, as ultra vires the CGST Act. The petitioners argued that 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. They contended that Rule 31A(3) imposes tax on the entire bet value without the petitioners supplying any bet, thus violating the constitutional mandate of Article 246A. The petitioners further argued that the impugned Rule is ultravires Section 7 of the CGST Act since the supply of bets is not in the course or furtherance of their business and is made liable to pay tax.

The respondents countered that the Act itself has mandated levying of tax on an actionable claim, and betting is also an actionable claim in terms of the Rules. They argued that the amendment has only clarified the role of the petitioners in the field of betting and should not be construed as ultra vires the Act.

The court analyzed the components of tax, including taxable event, taxable person, rate of tax, and measure of tax, as interpreted by the Apex Court in various cases. It emphasized that the measure of tax must have a nexus to the taxable event. The court noted that the CGST Act defines various terms such as actionable claim, business, consideration, goods, recipient, and supplier. The spirit of these definitions is that there must be goods and supply for a taxable event to occur. The court concluded that Rule 31A(3) perforates the nexus between the measure of tax and the taxable event by making the petitioners liable to pay tax on the entire amount received in the totalisator, which is held in a fiduciary capacity.

2. Whether the petitioners are liable to pay GST on the commission set apart or on the total amount collected in the totalisatorRs.

The court considered the activities of the petitioners and the function of the totalisator. It noted that the totalisator is a system of betting on horse races where the aggregate stake, less an administration charge and tax, is paid out to winners in proportion to their stakes. The petitioners retain a commission and distribute the remaining amount to the winners. The court referred to judgments from English Courts and the Apex Court, which held that a contract by a backer who puts money into a totalisator is not a contract by way of gaming or wagering.

The court observed that the petitioners' activity of providing totalisator service and receiving commission for it does not constitute betting. It held that betting is neither in the course of business nor in furtherance of business of a race club for the purposes of the Act. The court emphasized that the petitioners hold the amount received in the totalisator for a brief period in a fiduciary capacity and are liable to pay tax only on the commission received for the service of holding the amount in the totalisator.

The court further analyzed the definition of consideration under Section 2(31) of the Act, which includes any payment made in respect of the supply of goods or services. It concluded that the consideration received by the petitioners is only the commission for providing totalisator service. The petitioners do not supply bets to the punters and, therefore, cannot be held liable to pay tax on the entire amount collected in the totalisator.

Conclusion:

The court declared Rule 31A(3) of the CGST Rules and Rule 31A of the KSGST Rules as ultra vires the provisions of the CGST Act and KSGST Act, respectively. It held that the petitioners are liable for payment of GST on the commission they receive for the service rendered through the totalisator and not on the total amount collected in the totalisator. The court quashed the impugned rules and the related clarification/circular, entitling the petitioners to all consequential benefits.

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