DECEMBER 29, 2017

By Karan Talwar, Adv.

WHAT are actionable claims?

The Transfer of Property Act defines actionable claim to mean "a claim to any debt, other than a debt secured by mortgage of immovable property or by hypothecation or pledge of movable property, or to any beneficial interest in movable property not in the possession, either actual or constructive, of the claimant, which the civil courts recognise as affording grounds for relief, whether such debt or beneficial interest be existent, accruing, conditional or contingent ". Illustrations of actionable claims would be right to recovery insurance money, arrears of rent, benefits of a contract, account receivables, lottery, betting etc. Being a "claim", it is an incorporeal right.

Actionable Claims under VAT and Service Tax

Most States had excluded "actionable claims" from the definition of "goods" for the purpose of levy of sales tax. Thus, no sales tax was payable on transfers of actionable claims. Similarly, the definition of service also excluded "actionable claims" under service tax law. In particular "betting, gambling and lottery" were included in the negative list. Service tax was however sought to be imposed on transactions that facilitate actionable claims such as in relation of promotion, marketing and selling etc of lottery tickets; and conducting/organizing chit funds.

The taxation of lotteries under service tax has also been a subject matter of litigation indicating the problems with taxing actionable claims. The Sikkim High Court in the cases of Future Gaming Solutions v. UoI, - 2013-TIOL-904-HC-SIKKIM-ST, Future Gaming Solutions v. UoI, - 2012-TIOL-1096-HC-SIKKIM-ST and Future Gaming & Hotel Services v. UoI, - 2015-TIOL-2398-HC-SIKKIM-ST held that buying and selling of lottery tickets does not constitute a service and also struck down the vires of the levy as implemented in Finance Act, 2010, 2012 and 2015 respectively. Recently however in Future Gaming & Hotel Services v. UoI - 2017-TIOL-589-HC-SIKKIM-ST the validity of the levy as introduced on facilitating sale of lottery tickets was upheld. But, it was also held that in the absence of a computation mechanism, the value for the service could not be segregated and thus the levy could not be implemented. One waits to see how the Hon'ble Supreme Court will resolve this protracted litigation.

Taxes on betting and gambling in India

The States were empowered under Entry 62 of List II of the Seventh Schedule tolegislate with reference to "Taxes on Luxuries, including taxes on entertainments, amusements, betting and gambling". Accordingly, States had imposed taxes on betting. Substantial revenue was for instance generated from taxing bets made on horse racing. Typically, the levy took the shape of a tax on the admission into a race club on the entry fee; and a totalizator tax and betting tax which was paid on the full stakes put in by a punter on purchase of a betting ticket. Pertinently, the Supreme Court in State of Bombay v. RMD Chamarbaugwala, AIR 1957 SC 699 had in the context of the constitutional validity of gambling prize competitions observed that "To collect tax from the promoters is not to tax the promoters but is a convenient way of imposing the tax on betting and gambling and indirectly taxing the gamblers themselves." Thus, the tax was in effect a tax on gambling and betting by the backers/gamblers.

International experience on taxing betting and gambling

At this juncture, it is interesting to note the international experience on taxing such transactions. Under Article 135 (1) (i) of the EU Council Directive 2006/112/EC, Member States are mandated to exempt betting, lotteries and other forms of gambling, subject to the conditions and limitations laid down by each Member State. The policy basis for such an exemption is that it based on practical considerations as gambling transactions do not lend themselves easily to the applicability of VAT. (See Leo-Libera GmbH v. Finanzamt Buchholz in der Nordheide, Case C-58/09). However, Australia on the other hand follows a margin basis of taxation under its GST law with respect to betting and gambling. In simplistic terms the tax base is generally the total stake money less the winnings paid out. Effectively the tax is levied only on the commission and/or administrative charges collected by the betting/gambling houses.

GST on Actionable claims - Lottery, Betting and Gambling

It was in this Indian and international backdrop that the law makers took a decision to tax "actionable claims" under GST by including them within the definition of "goods". Section 7 (2) (a) read with Sl. No.6 of Schedule III to the Central GST Act, 2017 however provides that Actionable Claims other than lottery, betting and gambling shall be neither a supply of goods nor a supply of services. Thus, effectively only the actionable claims of lottery, betting and gambling are subjected to GST. The policy basis for doing this is evidently the fact that the Government was earning substantial revenue by taxing lotteries, betting etc which are now subsumed in GST.

GST Rate

Specific provisions have been made in Notification No.1/2017 - Central Tax (Rate) dated 28.6.2017.In Sl. No.242 of Schedule II of the Notification, Lotteries 'run' by State Governments are taxed at 6%. With the inclusion of State GST, the rate effectively becomes 12%. Sl. No. 228 of Schedule IV on the other hand, taxes lotteries 'authorized' by State Governments (private lotteries) at 14%. With State GST the effective rate is 28%. Interestingly, while the Customs Tariff Headings are specifically mentioned for all items in the Schedules along with the Description of goods, a "-" has been inserted for Lotteries. It is done so, presumably on the basis that the Customs Tariff based on HSN, deals with only material/tangible goods and not intangibles.

Rate for actionable claims of betting and gambling?

Ironically, there is no entry dealing with actionable claims for betting and gambling in the GST Notifications specifically prescribing the rate for their taxability.In actual practice, a ticket may be issued for betting to a punter, and the ticket itself may be classifiable under Sl. No.128 of Schedule II which deals with "stock, share or bond certificates and similar documents of title" or under Sl. No.132 which deals with "Other Printed Matter". The explanatory notes to the HSN for Heading 4907 exclude lottery tickets which are serially numbered and printed on special security paper and classify Lottery tickets, scratch cards, raffle tickets and tambola tickets under Heading 4911. In any event, the CGST Rate for both Heading 4907 and 4911 is 6% and with State GST the effective rate would be 12%. However, it may be contended that in a transaction of betting, the supply of ticket is only incidental and that the ticket is only an evidence of a contractual right. The ticket itself may have no value being only a slip of paper. Such reasoning also weighed with the Constitutional Bench of the Hon'ble Supreme Court in the case of Sunrise Associates vs. Govt. of NCT Delhi - 2006-TIOL-4O-SC-CT-LB, while dealing with lottery tickets as actionable claims. It was held that the tickets in themselves are not goods in the context of lottery and are merely evidence of the right to win a prize. On the same analogy, it is unlikely that the ticket for betting/gambling itself may be taxed as if the entire stake money is the value of the ticket.

While pursuing this line of thought further, one must consider Sl. No.453 of Schedule III to above-mentioned Notification which is a residuary entry and provides as follows:

"453. Any Chapter Goods which are not specified in Schedule I, II, IV, V or VI"

The question that arises here is, whether actionable claims of betting and gambling satisfy the requirements of Sl. No.453 for which it is necessary that the said items be goods. This requirement is clearly satisfied by virtue of the definition of "goods" including actionable claims. But one cannot stop there. Sl. No 453 also requires that the goods fall under "Any Chapter". The Explanation (iii) to Notification No.1/2017 - Central Tax (Rate) dated 28.6.2017 provides that the term Chapter when used in the said Notification refers to a Chapter of the Customs Tariff. Being an inchoate/intangbile right there appears to be no entry in the Customs Tariff/HSN for an actionable claim of betting/gambling. This is made more apparent by the fact that even the entries for Lottery in in Sl. No.242 of Schedule II and Sl. No. 228 of Schedule IV do not have a corresponding reference of a specific Chapter of the Customs Tariff or use the words "Any Chapter". There is only the "-" which indicates that there is indeed no corresponding classification in the Customs Tariff. On the same analogy a plain view of Sl. No.453 would be that it does not cover actionable claims of betting/gambling since there is no specific Chapter in the Customs Tariff dealing with the same.

It is well settled that a rate of tax has to specified for the levy to be implemented. In the absence of a rate the enforcement of levy would fail. Thus, the way the present provisions are worded the levy on actionable claims of betting and gambling appears to be unenforceable.

Services in relation to betting and gambling

However, there are also specific provisions inserted for taxing services in relation to betting and gambling. In particular Sl No.34 of Notification No.11/2017-Central Tax (Rate) in Heading 9996 deals with Recreational, Cultural and Sporting Services. In Sl No.34(iv) services provided by a race club by way of totalisator or license to a bookmaker in such club are taxable at 14% (with SGST effectively 28%). In Sl. No.34 (v) Gambling is taxable at 14% (with SGST effectively 28%). In Sl. No.34 (vi) a residuary entry for other recreational, cultural and sporting services other than those contained in the rest of Sl No.34 are taxable at 9 % (with SGST effectively 18%). The question that would then arise is as to whether such services would cover the entire value as placed by a punter/gambler in the form of stake money. Given that the definition of "goods" for the purpose of GST includes actionable claims, and "services" are "anything other than goods" would the entire stake money be taxable. Another way of looking at the whole issue would be that the consideration for the services can at best be only the administrative/commission charges recovered from the winnings for that is the consideration of organizing/facilitating the act of betting/gambling. The winnings would only be relatable to the actionable claim.

CBEC GST FAQs

Two questions were posed and captured in the Queries relating to GST on Services, received from various sectors and circulated as an e-flier. Firstly, what would be the methodology on valuation with reference to casinos. It was clarified that, "Thus, GST @ 28% would apply on entry to casinos as well as on betting/ gambling services being provided by casinos on the transaction value of betting, i.e. the total bet value, in addition to GST levy on any other services being provided by the casinos (such as services by way of supply of food/ drinks etc. at the casinos). Betting, in pre-GST regime, was subjected to betting tax on full bet value." The second question was posed with reference to what would be the tax base for horse racing. It was clarified that " GST would be leviable on the entire bet value i.e. total of face value of any or all bets paid into the totalisator or placed with licensed book makers, as the case may be. Illustration: If entire bet value is Rs. 100, GST leviable will be Rs. 28/- ."

Thus, it is clear that the Departmental authorities are keeping in mind that in the pre-GST regime the entire value of the stake was subject to betting tax. However, it is well settled in the taxation statutes that a plain reading of the provisions as they stand should apply. The tax treatment under the old law would not apply unless there is clear language to support the same result. The aforesaid clarifications do not deal with the issue of actionable claims at all. Moreover, the clear position under GST is that "actionable claims" have been included in the definition of "goods" and thereby excluded from the definition of "services". Thus, the notification prescribing the rate for services could never include the value of the actionable claim with reference to gambling and/or betting.

Composite Supply in Betting and Gambling

When we proceed further in our analysis on the nature of the transaction when a gambler bets with stakes, or a punter buys a racing ticket, it is clear that a punter/gambler is supplied (i) an actionable claim; (ii) a ticket/chip; and (iii) a service of organizing/facilitating the betting/gambling for an administrative fee/commission. In parimutual/pool betting there are even further complications of who makes the supply to whom as the punters bet against each other and the betting house would only be acting as a facilitator for ensuring the winnings goto the winner. But even assuming that the betting house or gambling house is making a supply of the above mentioned three elements, it would be seen that there are multiple supplies being made while a ticket/chip for betting/gambling is given to the punter/gambler. Given that this is a standard industry practice it would be possible to argue that this is nothing but a composite supply with the three elements naturally bundled together, and thus the question that would remain is as to what constitutes the principal/predominant supply to arrive at the taxability. Given that a gambler/punter buys the ticket/chip with the intent to win, and also that most of the money paid goes into generating the winnings, it once again appears reasonable that it is the element of the actionable claim that predominates. Thus, in accordance with Section 8(a) of the CGST Act, 2017, the tax liability would be determined as if the composite supply is a supply of the principle supply, namely the actionable claim of betting/gambling.

The Gamble

Thus, the question remains - What is the rate of tax on the actionable claim of betting/gambling? Nothing appears to be specified. Does the entire levy fail on applying the yardstick of composite supplies? The answer appears to be quite a gamble. In any event, it appears taxing the entire bet/gambling value under the category of services is plainly incorrect.

(The author is a practicing lawyer at Karan Talwar and Associates, Hyderabad and the views expressed are strictly personal.)