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How a dispute over taxing lotteries almost derailed GST

LiveMint logoLiveMint 20-06-2017 Nidheesh M.K.

Bengaluru/New Delhi: On 18 June, the delicate consensus on goods and services tax (GST) was all but wrecked. The reason? A disagreement over the taxing of the sale of private and state-run lotteries. 

Even after a 45-minute debate, the 17th meeting of the GST Council held in New Delhi was unable to arrive at a consensus on taxing lotteries at the lowest rate of 5%. 

The outlier in the debate was Kerala finance minister Thomas Isaac. Outnumbered and unable to convince his colleagues, the mild mannered yet combative minister threatened to walk out.

Over the last two decades lotteries run by private individuals has completely overturned the business in Kerala where, traditionally the only player was the state government

His argument was that the proposed rate of taxation of lotteries was unjust. He argued that lotteries should be taxed at the highest rate of 28%.

An insider described the exchanges as heated.

With neither side willing to blink and Isaac threatening inclement action, the fear was that, with less than a fortnight to go for the roll-out of GST, it could derail plans to implement India’s most important piece of indirect tax reform.

The buzz is that finance minister Arun Jaitley requested Jammu and Kashmir finance minister Haseeb Drabu, who shares a personal friendship with Isaac, to broker a compromise. In turn, Drabu proposed that lotteries from the state be taxed at 12%, and those from outside, at 28%. Isaac reluctantly agreed and peace was restored.

In fact, in his briefing after the GST Council meeting on Sunday, Jaitley referring to the episode, without sharing the details, said “a large part” of the deliberations were taken up by lotteries which posed “a very contentious issue.” 

In a phone conversation, Isaac clarified that his insistence for a higher tax rate on lotteries was not so much with the idea of generating revenues as with the problem of addressing a social problem.

Over the last two decades lotteries run by private individuals has completely overturned the business in Kerala where, traditionally the only player was the state government.

Consequently, successive Kerala governments have demanded that lotteries be banned completely, alleging malpractices by these private players.

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In fact, it was one of the issues that led to a public outcry against Isaac in 2011, during his previous stint at the state’s finance minister.

“I would have outright banned all, but then I will have to ban my own lottery also where there are some one lakh poor, handicapped persons employed,” Isaac said. 

Clearly, political compulsions is the reason driving Isaac’s defiance.

“I don’t want revenue. I am more interested in having peace in Kerala; revenue is the last concern,” he said. 

K.N. Harilal, a professor of economics at the Thiruvananthapuram-based Centre for Development Studies, was of the view that the Kerala state-run lottery was “highly socially responsible lottery with every penny accounted for and funds used to further development.”

“But not so the private players in this game who are known to cheat the clients as well as the state exchequer,” he said.

“There is a political consensus in Kerala to ban the private players but legally that could present a problem” if the state-run lottery is allowed to function, he said. “The next best thing is to impose high taxes on it,” Harilal added.

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