Elections 2017: Some mistakes I made while making predictions

Results in five states – Goa, Manipur, Punjab, Uttarakhand, and Uttar Pradesh – were declared yesterday. I got a few things rights and a few things wrong. This post is an endeavor to downplay the rights and overplay the wrongs.

Goa

Prediction

Actual Results

AAP – 9 | BJP – 16 | INC – 13 | Others – 2 [+ – 2]

 

AAP – 0 | BJP – 13 | INC – 17 | Others – 10

Admittedly, I got Goa wrong. Not entirely though. While AAP was not the force I thought it was, I managed to get the bit about the legislative assembly being hung right. I had given BJP a slight edge in Goa compared to the INC on account of Manohar Parrikar. He was and remains a popular leader in Goa and while things are yet to play out, it is quite likely that he may end up heading a coalition government in Goa despite INC being the single largest party in Goa. Is AAP done in Goa? Most likely, yes. Not because parties die out. But because AAP is a relatively smaller movement-based party with a small resource base to tap into. The lack of even a single foot in the door, is a blow to the organizational efforts in Goa. They might get a few seats the next time around. But they won’t lead Goa in the next elections either. A decisive mandate like Delhi is just not on the cards.

Manipur

Prediction

Actual Results

BJP – 20 | INC – 30 | Others – 10 [+ – 3]

 

BJP – 21 | INC – 28 | Others – 11

Manipur seems to be in line with the prediction – another hung legislative assembly with an indecisive mandate. When I made the prediction late January that the BJP will have about 20 seats in the house in Manipur, there was some flak. It was after all a jump up of 21 seats. But there are two factors that I had factored in – (1) Modi is a brand and he is making a nationwide push; and (2) he who has control of the armed forces in Manipur, has an advantage when going to polls and during the polls (not saying the armed forced make people vote in a particular manner but the armed forces’ control of the state allows for decisions like who can hold rallies when etc. etc. to tilt in favour of the party ruling at the national level). The BJP has made massive inroads into Manipur. A BJP-led government is not unlikely in Manipur anymore and 2022 or sooner, we may see it. For now, Okram Ibobi Singh should return as the Chief Minister of Manipur for a fourth time. Two of his three previous times, he has been short of a majority and yet has managed to have a full term. Of course the BJP “kidnapping” independent MLA’s might prolong this saga and may even lead to a court battle.

Punjab

Prediction

Actual Results
AAP – 35 | INC – 65 | SAD+BJP – 17 [+ – 5]

 

AAP – 22 | INC – 77| SAD+BJP – 18

Congress win? Check. SAD+BJP not being annihilated like many exit polls predicted? Check. Estimation of AAP’s influence in Punjab? Not so much. What I thought was AAP’s, was actually the INC’s. Captain Amarinder Singh led a great campaign. An INC win was never in doubt. This was the Captain’s last call with the voters (possibly) and he gave it his all. But what is really interesting is the AAP situation. They may not have reached where they would have liked to be, but they have made a big start and in the next 10 years, I predict an AAP-led Government in Punjab. Unlike Goa, AAP has more than a foot in the door and is the largest party in opposition. We all know AAP can make some noise. The upstart is here and INC and SAD+BJP will have to learn to live with it, maybe even lose to it.

Uttarakhand

Prediction

Actual Results
BJP – 38 | INC – 27 | Others – 6 [+ – 3]

 

BJP – 57 | INC – 11 | Others – 2

One would have thought that Harish Rawat after his constitutional win over the Modi-led Government’s attempts to topple him less than a year ago, would be able to remain atleast in a credible opposition. He has been decimated. A BJP government in Uttarakhand seemed almost certain, but the quantum of the win is significant. Once 3/4ths of a legislative assembly belong to one party, you can forget debate. The fact that Harish Rawat also lost from both the seats he contested from takes away the presence of a dominant leader in the legislative assembly. Dr. Indira Hridayesh will have to hold the fort for the INC in the legislative assembly. Who, however, will command this dominant majority in Uttarakhand is not clear – the lack of a chief ministerial face is astonishing, explained only by the fact that both Satpal Maharaj and Vijay Bahuguna are INC defectors and may not inspire confidence amongst the rank and file of BJP.

Uttar Pradesh

Prediction

Actual Results
BJP – 155 | BSP – 45 | SP + INC – 190 | Others – 14 [+ – 10]

 

BJP – 312 | BSP – 19 | SP + INC – 54| Others – 18 [+ – 10]

Could not have gotten it more wrong! I could have said plus-minus 100 and I still would have missed BJP’s tally by more than 60! Key take aways? Narendra Modi is – like it or not and I do not – the most dominant brand in India right now. The man can sell sim cards and win elections. He is a forceful speaker and can rally the masses. Equal kudos have to go to Amit Shah who it seems is one of the sharpest electoral minds the country has seen – appointment of Keshav Prasad Maurya, the young first time MP from Phulpur, as the state unit chief was a masterstroke. It helped make significant inroad into the vote bank BSP, not to mention the SP+INC. So much so that BSP supreme Mayawati may not have a Rajya Sabha seat come 2018. Ideally he should become the chief minister too.

Conclusions

I have been making predictions about the Lok Sabha and Assembly elections since 2004. I like doing it because it involves reading up on the issues, the personalities, and most importantly parts of India that I have not even visited. At the risk of blowing my own trumpet, I have almost always picked the winner of the contest right. The only time I have been as wrong in my calculations as in Uttarakhand and Uttar Pradesh this time was in 2015 when Delhi went to polls and Arvind Kejriwal swept – quite literally – through Delhi with 67 out of the 70 seats in the legislative assembly.

Is there a common lesson between that massive miscalculation and the aforesaid miscalculations? I think, yes. Both were individual driven campaigns and I assigned more weight in my analysis to the candidates/parties and the issues. Most people who voted AAP in 2015 in Delhi did not know a lot about AAP’s economic platform. They did, however, know what Arvind Kejriwal looked like and what he was saying. In 2017, I think the same stands true for Uttarakhand and Uttar Pradesh. People are swept away by Modi’s powerful rhetoric. His message is loud and he unabashedly, in a very presidential manner, asks for votes in his name and not the BJP’s. In future, I need to factor in individuals more than parties and traditional voting patterns. I did not see Indira Gandhi campaign and command a national audience in the 70s and the 80s like my parents did. They tell me she was a forceful campaigner. I am seeing Narendra Modi campaign and command a national audience today.

An Economic Blunder? Yes. A Political Blunder? Most Likely.

On November 8, 2016, Prime Minister Narendra Modi announced an immediate on two of the most predominantly circulated currency notes – 500 and 1000.[i] People were given until the end of the year to exchange their “stashes” with the newly minted 500 and 2000 currency notes. Along with the pain of exchanging cash by standing in long queues in the winters came the stigma of “if you exchange, then you must have black money” / “if you protest, you must have black money”.

In the present post, I intend on focusing on what has been aptly described as a ‘mammoth tragedy’[ii] and discuss the possible political ramifications of the same. I am reserving the unconstitutionality of the move for a later post.

I

Anyone who heard the Prime Minister talk on November 8, 2016 would have noticed that the issue was ‘black money’.[iii] The action was demonetisation. The Prime Minister had fought an election on the platform of eradicating ‘black money’ and it seemed he was going after it. Of course, since November 8, 2016, we have heard a lot of other post-facto reasons for why the move was necessary – curbing fake money; fighting terrorism; recapitalising banks; and making India digital and so on and so forth. Let us not even discuss the flip-flop-flip-flop of withdrawal rules and exemptions which even the staunchest supporters of the Prime Minister agree have damaged his reputation. What really bothers me is the challenge of ascertaining the actual purpose of a given action when unintended post-facto consequences are routinely declared as intended goals. The continuous addition of ‘intended’ goals, daily change of rules, and the misery of standing in lines for what is legitimately yours worsened by poor execution, make demonetisation a mammoth tragedy.

II

On the economic side, there is little doubt that the Prime Minister has very little understanding of economics and his advisors are perhaps just as ignorant or extremely servile. When an Oxbridge educated economist who has had the unique distinction of serving as Chief Economic Adviser, Secretary in the Ministry of Finance, Governor of the Reserve Bank of India, Finance Minister, and two-term Prime Minister of India, called the move a “mammoth tragedy”, the Prime Minister’s ‘troll army of bhakts’ labelled it as political opposition coming from a weak former Prime Minister and harked back to 2G and Coalgate. As expected, there was no active engagement with the economic foundation of the critique by anyone inside the Government.

But the Government must take stock when it is criticised by hugely eminent people with an expertise in the area. First of the block, I believe, was former Chief Economist of the World Bank and former Secretary of Treasury of the United States, Lawrence Summers. Soon after, former Chief Economic Adviser and former Chief Economist of the World Bank, Kaushik Basu called demonetisation “a ham-fisted move that will put only a temporary dent in corruption, if even that, and is likely to rock the entire economy”. Harsher views were expressed by one of the world’s tallest welfare economists, Dr. Amartya Sen, who incidentally happens to be a Nobel laureate and a Bharat Ratna. In this laundry list of critics are some other big names as well – Meera Sanyal (Former, Raghuram Rajan, Arun Shourie, Jean Dreze, and Duncan Innes.

Per contra, the big names supporting the Government’s move include Amitabh Bachan, Ajay Devgn, Anupam Kher, Baba Ramdev, Virendra Sehwag, Sri Sri Ravi Shankar, and Virat Kohli. It does not take a rocket scientist to do the math – their combined knowledge of economics and monetary policy falls miserably short of any of the people in the previous paragraph. What these people are great at is rallying the masses. If the battle is one of public perception, and it unfortunately is, then Amitabh Bachan rishtey main toh Manmohan Singh ke baap lagtey hain and Virat Kohli can knock Amartya Sen out of any park. But does the Government really think people would not eventually see through the façade.

III

The criticism aside, let us turn to the actual impact of the move on the Indian economy. There is little doubt that the past year (even though I personally label it as the worst year of my still young life) had seen decent rural demand owing to a good monsoon and the 7th Pay Commission had served as the icing on the cake. That said trade numbers have been low, industrial production has been tanking, and very little job creation has been taking place. Yet we had demand rising, people had cash for discretionary spending, and the economy seemed on track for 8% growth. Demonetisation has cut those tracks out – demand has fallen, discretionary spending has come down, supply chains have been disrupted, production has fallen, confidence in currency has been shaken, and people are standing in lines to get access, sometimes not even that, to their own money. To my mind, a 5-6% growth would be a lucky break. Weirdly enough, the move was timed to coincide with both sowing season and peak-tourism season. Both, needless, to say, rely heavily on cash, and the scarcity thereof has forced both of them to take a hit.

Worst hit, however, is the informal sector. 90% or so of India’s workforce still receives their wages in cash. Many on a daily basis. This is your agriculture worker or a construction worker. While some may have bank accounts, most do not. Naturally they do not have debit or credit cards to go digital. PayTM karo? How do they add money on their PayTM accounts which they cannot access even otherwise on their often non-smart phones assuming they have them. Tragically their suffering is worse than the actual black money hoarders, most of whom have since times immemorial kept their ill-gotten wealth in land, gold, or foreign exchange not to mention often outside India. Ironically if somebody was tempted to keep their black money in cash, the Government has made it easier with the smaller-in-size higher-in-value 2000 rupee note.

IV

Elections loom in key states for BJP. There is Uttar Pradesh where the BJP did phenomenally well in the 2014 elections and would be hoping to come back to power after 15 years. There is Punjab where the BJP has been in power with the Akali Dal for the past 10 years and despite setbacks such as Arun Jaitley losing from Amritsar and Navjot Singh Sidhu defecting, the BJP would be hoping to retain power riding on the coattails of the Akali Dal. There is Uttarakhand where the BJP tried and very publicly failed to usurp the constitutionally elected government of Harish Rawat. And there is Goa where the BJP has claimed to be the true choice of the people and from where Defence Minister Parrikar hails. Manipur too goes to polls, but the BJP would probably be okay with the Congress retaining power there considering the Congress has all three MPs from the state and even in the legislative assembly BJP only has six MLAs. Will the BJP suffer in these states owing to its move? I think so.

Uttar Pradesh and Punjab are largely agrarian states. Even the ardent supporters of the move, have now started moving away from the Government’s narrative on account of long lines, daily policy changes, and the sheer frustration of there not being enough cash in the banks even when you reach the end of the line. That coupled with the lack of a state leader to justify the BJP-led Government’s move, could be quite fatal to the BJP. In Punjab, they have an ally. But the ally has not sprung to the BJP’s defence too readily.

Goa seems to be a typical case where in do biliyon ki ladai, bandar… walks away with the prize. I recently came back from Goa and Arvind Kejriwal is more ubiquitous on the long winding roads of Goa than he was on the radio with his “main Arvind Kejriwal…”. Both the Congress and the BJP have had their fare share of controversies and Kejriwal could really be a party pooper.

Uttarakhand and Manipur could go either way. While demonetisation has surely affected people in the two states, some amount of anti-incumbency may neutralise the effect.

All in all, the real test is Uttar Pradesh. If after winning 70 of the 80 seats in the General Elections in 2014 (from 10 out of 80 in 2009), the BJP does not atleast quintuple its present tally of 41 MLAs and thereby secure a majority in the Vidhan Sabha, the Modi-led BJP will struggle to put a positive spin on demonetisation and continue to promote Prime Minister Modi as the best thing to happen to India.

[i] According to figures, 86.4% of the currency in circulation in India which translates to Rs. 14.18 Lakh Crores.

[ii] The term is borrowed from former Prime Minister Manmohan Singh’s speech in the Rajya Sabha and his op-ed piece in The Hindu http://www.thehindu.com/opinion/lead/Making-of-a-mammoth-tragedy/article16779252.ece.

[iii] The Prime Minister actually mentioned “black money” 18 times.

A Tough Question, A Hard Choice – Relationship Between Part XII and Part XIII of the Indian Constitution*

“To preserve the balance of trade in favour of a nation ought to be a leading aim of its policy. The avarice of individuals may frequently find its account in pursuing channels of traffic prejudicial to that balance, to which the government must be able to oppose effectual impediments.” ~ Alexander Hamilton [Alexander Hamilton, Continentalist No. 5, Papers 3: 75 (18th April, 1782)]

***

“Difficult and complicated problems are raised by Part XIII of our Constitution largely due to defective drafting.” ~ HM Seervai [HM Seervai, Constitutional Law of India 2587 (4th edn.)]

The state’s power of taxation and the value and need of freedom of trade, commerce and intercourse (hereinafter “freedom of trade”) are two opposite ideas – necessitating that a balance is found. While the value of freedom of trade is undeniable; as with all freedoms, it cannot be limitless. Similarly, the power of taxation is an element of a state’s sovereignty but such sovereignty cannot be allowed to run amok and trample on constitutional rights and values.

Issues of freedom of trade and taxation are not unique to India. In fact Hidayatullah, J notes in Automobile Transport Ltd. v. State of Rajasthan, AIR 1962 SC 1406 (hereinafter “Automobile”) that Latham, CJ of the High Court of Australia is known to have said,

“that when he died, S. 92 [of the Australian Constitution which is in pari materia to Art. 301 of the Indian Constitution] would be found to be written on his heart!”

Part XIII of the Constitution is a vital albeit flawed pillar of our Constitution and reflects a core constitutional value – federalism. The economic unity of the country would be a dream if individual states could erect barriers and impinge on freedom of trade.

Before I dive into the core of the post, it would be prudent to briefly discuss the relevant provisions.

  • Art. 301 is the general blanket provision that mandates that trade, commerce and intercourse be free throughout India.
  • Art. 302 is an exception to Art. 301 and gives the power to the Parliament to impose restrictions on the freedom mandated under Art. 301.
  • Art. 303(1) is an exception to the exception in Art. 302 and restrains the Parliament from imposing restrictions under Art. 302 discriminatorily. It also restrains a state from doing so (interestingly Art. 302 never gives any power to the States in the first place!).
  • Art. 303(2) is an exception to the exception’s exception. Confused? Rightly so. Art. 303(2) allows the Parliament to act in contravention of Art. 303(2) when there is scarcity of a particular good in any part of India.
  • Art. 304 applies to states and is a non-obstante clause. It overrides Art. 301 and 303 and allows states to levy taxes on “imported” goods as long as same tax is imposed on like local goods (quite like the concept of national treatment in international trade law). It also allows states to impose “reasonable restrictions” on the freedom mandated under Art. 301. The latter part (Art. 304(b)) is pretty much an analogue to Art. 302, except that the consent of the President is required before introduction of a bill seeking to impose “reasonable restrictions”.

Seeing the above, one thing is clear – Part XIII is not the brightest beacon of skillful drafting and has been rightly criticized over the years. [See Automobile, para 10 (Das, J). See also HM Seervai, Constitutional Law of India 2601 (4th edn.)]

In this post – that I am going to divide into three parts – I will discuss and briefly analyze I) the opinions in Atiabari Tea Co. Ltd. v. State of Assam and Ors., AIR 1961 SC 232 (hereinafter “Atiabari”); II) the opinions in Automobile; and III) finally pick the one I believe reflects the correct constitutional position on the impact of taxation on the freedom of trade and commerce.

I. Atiabari – “Free from what?”

In Atiabari the Supreme Court of India was concerned with a tax that was levied on goods that were carried across the State of Assam. By a majority of four to one, the Court – Gajendragadkar, J writing for himself Das Gupta and Wanchoo, JJ; Shah, J concurring; Sinha, CJ dissenting – held that the impugned Act was in fact void as it violated the freedom of trade as set out in Part XIII.

Gajendragadkar, J’s judgment is a median between Shah, J’s concurrence and Sinha, CJ’s dissent. His reasoning in large part is dominated by the impact the Court’s decision will have on the legislative power of the States and the Parliament and thus shows an appreciation of the concerns put forth by Sinha, CJ in his dissent [Atiabari, para 35 (Gajendragadkar, J)]. There is no doubt that the majority is right in holding that tax laws are not per se outside the purview of Part XIII of the Constitution [Atiabari, para 50 (Gajendragadkar, J)] and if a tax impinges on Part XIII, the Court can step in and remedy the situation. However, the question then is when does a tax impinge on Part XIII? Do all taxes have to comply with Part XIII? The majority said no and I concur with them. It would be an unreasonable construction of the Constitution if all taxes had to satisfy the requirements of Part XIII. So what then forms the basis for an enquiry into a possible conflict with Part XIII? Gajendragadkar, J’s answer is that when taxes ‘directly and immediately’ restrict trade they fall within the scope of Art. 301.

The test of “direct and immediate” comes from Australia – much like the wording of Art. 301 – however, the majority in its reliance on the Australian jurisprudence related to S. 92 of the Australian Constitution failed to consider that the provisions of Part XIII were quite different from S. 92, even though S. 92 had been the ‘inspiration’ for Part XIII. Part XIII of our Constitution was internally adequate insofar that the various articles (Arts. 301-307) provided the principles and the exceptions to them. On the other hand, S. 92 of the Australian Constitution was a standalone so wide in it’s wording that the Australian Courts had to devise ways to protect any measure – no matter how necessary and/or reasonable. While our understanding was primarily inspired by Commonwealth v. Bank of New South Wales [1950] AC 325, a case that was overruled in 1988 by in Cole v. Whitfield (1988) 165 CLR, the law has not moved and our understanding of freedom of trade is still the same. Thus, it is apposite that a larger bench is being set up to reconsider Atiabari and Automobile.

Shah, J’s opinion gives freedom of trade as wide a meaning as is possible. Unfortunately, this is why it cannot be accepted. It is also why both the majority [Automobile, paras 10-11 (Das, J); Automobile, para 38 (Subba Rao, J)] as well as the minority [Automobile, para 124 (Hidayatullah, J)] in Automobile rejected it. The problem with Shah, J’s wide-view of Art. 301 is that it could be effectively wielded as a weapon against acquisition of property by the state, imposition of tariffs, licensing regimes, price-control, nationalization, taxation, for that matter any form of regulation. It would essentially force the State to become a bystander as “free trade” creates what can best be described as chaos.

Sinha, CJ’s dissent is the opposite of Shah, J’s in that while Shah, J would strip the State of almost all powers of regulating trade, commerce and intercourse, Sinha, J would preserve all taxes, so long as they are not discriminatory and thus prevent the erosion of the States’ authority to levy taxes under Arts. 245 and 265. A consequence of this would be the possibility that the State can abuse its powers of taxation. However, possibility of abuse alone is not reason to whittle down a particular power, especially when other checks exist. Sinha, CJ also rightly notes that Australian jurisprudence is unhelpful as our Constitutional framework is distinct from the Australian framework [Atiabari, para 25 (Sinha, CJ)]. However, most of Sinha, CJ’s arguments are easily taken care of by the majority [Cf. Atiabari, para 12 (Sinha, CJ) with Atiabari, para 37 (Gajendragadkar, J)] as well as by reference to the Constituent Assembly Debates [Builders’ Association of India v. Union of India, (1989) 2 SCC 645, para 2 (Venkataramiah, J). See also V. Niranjan, The Upcoming Controversy Over Articles 301-304 of the Constitution – Taxation and Part XIII of the Constitution of India (2011) 5 SCC(J) 72, 99].

II. Automobile – Clarifying So Little

Atiabari was decided on September 26, 1960. Within 191 days of the judgment in Atiabari (the Union and the States were not happy with the Court’s interpretation of Part XIII), a 5-Judge Bench of the Supreme Court passed an Order on April 4, 1961 stating that the matter decided in Atiabari requires consideration by a larger bench. Thus, Automobile came up before a 7-Judge Bench. It is interesting to note that the sanctioned judge strength of the Supreme Court of India in 1962 was 14 Judges. 5 of these had already decided Atiabari. 7 new judges heard Automobile, effectively meaning that 12/14 judges of the Supreme Court, not to mention some of the brightest legal minds of to ever grace the bench, had weighed in on the issue of freedom of trade. What is sad is that the issue still remains convoluted. This speaks to the complicated nature of the issue and the reality of there probably being no right answer.

In Automobile the Supreme Court was concerned with a tax on inter-state transportation imposed by Rajasthan. By a majority of four to three, the Court – Das, J writing for himself, Kapur and Sarkar, JJ; Subba Rao, J concurring; Hidayatullah, J dissenting and in doing so joined by Ayyangar and Mudholkar, JJ – held that the impugned Act did not violate the freedom of trade as set out in Part XIII.

As with Atiabari, let us begin with the majority judgment. The majority in Automobile agrees with the majority in Atiabari, however, adds a clarification. Seervai suggests that this clarification in effect overruled Atiabari and the word clarification was merely judicial courtesy [HM Seervai, Constitutional Law of India 2597 (4th edn.)]. Later judgments of the Supreme Court, however,  have maintained the opposite and do not see Automobile as overruling Atiabari [Jindal Stainless Ltd. (2) v. State of Haryana, (2006) 7 SCC 241, para 9 (Kapadia, J); Jindal Stainless Ltd. (3) v. State of Haryana, (2010) 4 SCC 595, para 4 (Order)]. I tend to agree with the latter view, inasmuch, while I agree with Seervai that Gajendragadkar, J and Das, J differ in their interpretation of the provisions of Part XIII, that plus the clarification in and of itself does not overrule Atiabari. However, Mathew, J observes in Automobile that Automobile “practically overruled” the decision in Atiabari.

Coming to the substance of the clarification. The majority held that regulatory measures and compensatory taxes do not come within the purview of the restriction under Art. 301 and therefore, such measures are not required to comply with Art. 304(b) [Automobile, para 17 (Das, J)]. Whether a need existed to introduce concept of compensatory taxes to already muddled waters or not is debatable.

With all due respect, Subba Rao, J in his concurrence creates more confusion than provide clarity [See Automobile, paras 31, 33-34, 36 (Subba Rao, J)]. A reading of these paragraphs makes one wonder what his true position is, especially with regard to non-commercial intercourse and the value of Australian jurisprudence. Apart from the internal conflicts, little emerged as novel from Subba Rao, J’s judgment that has not already been accounted for by the majority.

With even more respect to Hidayatullah, J, the dissenting opinion – extremely well written as it is – borders on verbosity. He discusses the entire Australian jurisprudence on point and the evolution of the relevant provisions in light of the colonial history of India. He argues that there are two types of taxes – one that fall on all people, both tradesman and non-tradesman and these are not covered by Part XIII [Automobile, paras 125-126 (Hidayatullah, J)]. This point stands to reason since if all taxes could be considered from the prism of Part XIII, the Income Tax Act, 1961 would probably be prime candidate for multiple challenges.  The other type of taxes cover only tradesman for the reason that they are tradesman. Those taxes can be covered under Part XIII [Automobile, para 127 (Hidayatullah, J)].

On the facts he concludes that the tax at hand in Automobile was directly and immediately imposed on tradesman by reason of their trade, and was not on an activity ancillary to the trade [Automobile, para 136. (Hidayatullah, J)]. He also disagrees with the majority that the impugned tax was regulatory. In my opinion, all that emerges from the minority’s judgment – is a very eloquent difference of opinion with no real clarity on the true position of law.

III. First Among Equals?

In my above analysis, I have mentioned some drawbacks of each of the opinions which leads me to the conclusion that all of them are at some level unsatisfactory. While Atiabari and Automobile are currently pending reconsideration by a larger bench of 9 Judges [Jindal Stainless Ltd. (3) v. State of Haryana, (2010) 4 SCC 595, para 14 (Order)]; until such time as that Bench gives its decision, Atiabari clarified by Automobile hold the field. So which opinion best reflects the correct constitutional position?

By process of elimination, Shah, J is the first to lose the race. His view is far too wide and goes against the clear (sometimes obscure) wording of the Constitution of India. Closely behind him is Sinha, CJ (regrettably so, as on principle I agree with him that the states’ powers of taxation should be preserved to the largest extent. However, his judgment and my views are not reflected in the structure of the Constitution).

Subba Rao, J’s concurrence added little value to the question at hand and in fact was riddled with internal contradictions about certain points – one such point being non-commercial intercourse. Hidayatullah, J’s dissent as I have noted above is a dissent with the interpretation of facts more than the principle. I found little in his judgment to affect my choice or understanding of the issue.

That leaves the majority in Atiabari and the majority in Automobile. The latter written by Das, J is sound. However, it must be noted that Das, J agrees with Atiabari as decided and only tries to clarifies that an exception exists as to regulatory and compensatory taxes without actually delineating what would be covered by the exception. What kind of compensations must be made for a tax to be really compensatory? It must be borne in mind that a tax by definition does not oblige a State to indulge in a quid pro quo like a fee does as was observed by Chinnappa Reddy, J in a later case [International Tourist Corporation v. State of Haryana, (1981) 2 SCC 318, para 8]. In light of this Gajendragadkar, J’s opinion for the majority in Atiabari is the winner for me as the matter stands.

The reason for my choice is that even though Gajendragadkar, J places a lot of importance on Australian jurisprudence (which should not be the case as the structures of the Constitutions are distinct. While we have a more federal structure, with states enjoying wide powers, Australian provinces enjoy lesser autonomy as is evidenced from a bare reading of the Australian Constitution), the test of “direct and immediate” seems to work in the Indian context. That said a word of caution must be sounded against reliance on foreign decisions [Arvind P. Datar, Inter-State Trade, Commerce, and Intercourse, in The Oxford Handbook of the Indian Constitution, 491].

What are the other options? Exclude all taxes? That is untenable. Include all taxes? That is untenable too. Strike a balance and see what actually hits the freedom mentioned in Art. 301? That is what he did. Does this have drawbacks? Yes. The test of “direct and immediate” is a subjective one the power of determination of what affects Art. 301 “directly and immediately” to the judiciary while at the same time eating away at states’ autonomy. But that is a cross we must bear for the other options are worse.

With 9 Judges of the Supreme Court set to hear Jindal Stainless Ltd. & Anr. Etc. v. State of Haryana & Ors. Etc., CA No. 3453 of 2009 the week beginning 18th July, it would be interesting to see which way the Court would go. I envisage a “clarificatory” overrulling of Automobile.

 

*The present post is adapted from a paper written in 2013 during college while studying for an elective course titled “Constitutional Aspects of Taxation”.

In Defence of Vijay Mallya

Let’s leave our inner Arnab Goswami at the door and try and think – what is so unique about Vijay Mallya’s case that the banks with generous support from the media have converted Mallya into a poster child for over-leveraged businesses and their eventual descent into non-performing assets?

Certain facts are admitted:-

  • A 17-bank consortium led by SBI lent money to Kingfisher Airlines, a public limited company in which Mallya was a promoter-shareholder.
  • The amount owed by Kingfisher Airlines to the banks is about Rs. 9,000 crores.
  • Mallya has given a personal guarantee for certain parts of the aforesaid debt. Most reporting suggests about Rs. 1500 crores is the personal guarantee.
  • Mallya has always had a penchant for luxury.

There is really no point in discussing the concept of the corporate veil and limited liability except to say that unless fraudulent conduct (the Ramalinga Raju kind) is proved the veil ought not to be pierced and there is no reason to go behind the company. Also some conspiracy theorists have already started alleging corruption and political pressures facilitating loans. If proved, yes it affects the case. But the pivot rests on “if proved”.

In a recent statement Mallya claimed that banks have received an aggregate of Rs. 1,244 crores from various sales of assets. Another Rs. 1,250 crores is deposited with the Karnataka High Court. I am inclined to believe the statement because I haven’t seen one bank rebut this. Also why make a brazen statement when you know every two-bit journalist is out looking for an ‘exposé’. So about 28% of the debt is backed by assets even today.

Now lets take SBI’s case. It is widely being reported that SBI is owed Rs.1,623 crores of which it has already recovered Rs. 155 crores. Further it turns out Mallya had guaranteed another portion of the debt with his Goa Villa which until a few years ago was the place to be for anybody who was anybody. SBI can sell it and recover whatever is the going rate of real estate.

That leaves the question of SBI’s hypothecation over certain trademarks of Kingfisher Airlines which are valued at about Rs. 6 crores. Quite literally peanuts. But that is the value today! If hindsight is with what we saw commercial decisions, then there would be no depressions ever! Lehmann Brothers would not have gone under and Donald Trump would never have filed for bankruptcy. At the time the money was given to Kingfisher Airlines, the trademarks in question were valued at Rs. 4,111 crores. Was the valuation correct? I doubt it. But I also doubt the valuation of the Flipkart ilk. If SBI did not do its due diligence, then we should be plastering the picture of SBI’s then management on TV and not Mallya’s. Which individual does not overvalue their property? The same logic obviously applies to banks other than SBI as well.

Turning to the question of personal guarantees. The law in India does not allow a summary attachment of the assets of the guarantor. A process has to be followed, a court order secured, and eventual attachment takes place. It is reported all around that proceedings are pending before various DRT’s. Will this take time? Yes. Is that Mallya’s fault? No. Is the system biased against banks and recovery? Not really. Banks can and have gotten court orders against Mallya using the assets which form the basis for his personal guarantee. Truth shall out and the assets will be sold if the banks make out their case.

Defaults of his company don’t become his merely because he owns an IPL team or because he likes to get pictures clicked with women in bikinis. We need to assess the problem of corporate debt independent of the personality of the promoter. A satvik-teetotaler-virgin industrialist is no guarantee for corporate success. Various Indian companies are grossly over-leveraged. Caravan’s story on Essar comes to mind [Doing the Needful]. Not to mention various lesser-name companies such as Bhushan Steel and Winsome Diamonds. Lack of deep corporate bond market in India does not help and Mr. Jaitley’s proposal to develop the market further in his budget proposals is a step in the right direction.

So why have this hoopla where we have declared a person an absconder when the truth (subject to correction) remains that till date no court of law has declared Mallya an absconder? Recovery will happen when it happens. And more often than not it does not happen. But that is the name of the leveraged corporate lending game. Big returns, big risks.

 

* Citations have been omitted because all the information cited above has been reported in the newspapers in the past week.

** Happy to read rebuttals to the above position.

 

Swachh Bharat Cess – Did we need another levy?

On November 6, 2015 the Central Board of Excise and Customs notified the Swachh Bharat Cess as applicable on services w.e.f. from November 15, 2015. Effectively this takes the service tax rate from 14% to 14.5%. The levy itself is not news really as the Finance Minister had mentioned it in his budget speech and in fact the proposed levy was 2%. However, the manner in which the levy was introduced and implemented raises many questions not to mention the fact that if we are going to have a cess for education and cleanliness, then what exactly does the government do with actual taxes!

Before I dive in, it is important to distinguish between a cess and a tax. A cess in my opinion is a specie of tax [per contra a majority in State of West Bengal v. Kesoram Industries Ltd., (2004) 10 SCC 201 held that a cess can also be a fee], only unlike a tax it is collected for a specific administrative expense such as health, education, or in the present case cleanlinessMoreover, a cess is ideally levied on the tax and not as an increment of percentage of an existing tax. That said, it can be levied as an increment of an existing tax [See Shinde Brothers v. Dy. Commr., Raichur, AIR 1967 SC 1512, para 39, per Hidayatullah, J.]. 

A tax on the other hand is general and could be used by the Government for any purpose within the bounds of legislative and executive capacity. Generally cesses are levied for limited periods and when the target for the specified objective is realised, the levy of cess is stopped. Of course, the ever growing population in India and the poor delivery mechanisms ensure that we fail to provide basic education to all children. As such the education cess has been on the books for a while as I am quite certain would the Swachh Bharat Cess. Of course in the present case it does not help that the government has not marked specific projects and the monies collected in the name of the Swachh Bharat Cess are going into the Consolidated Fund of India to be disbursed later for projects the government wants to promote.

The first issue I have with the Swachh Bharat Cess is the playful terminology and the intended aim. As stated earlier, commonly understood, cess is levied on an existing tax. For example, 3% of your income tax is the amount you have to pay as education cess. To levy cess as an increment of an existing tax is nothing more than simply increasing the rate of an existing tax. It is a round about way of reaching the same place. Some would argue that when a cess is levied as an increment of an existing tax, the increased component is directly earmarked for a particularly initiative and the remaining remains open for general use. While attractive in its simplistic appeal, the argument still does not explain why not a cess of ‘x%’ but an increase of an existing tax by ‘y%’. Loyalty to terminology, especially in areas of taxation, is something I believe is very desirable.

The second issue is the way cesses are being put in place in India. A cess has to be an emergency measure for an unforseen eventuality or administrative expense. Cleanliness in general or building toilets, promoting awareness about hygiene and health, proper waste management etc., in my view are not unforeseen and are in fact part of our Constitution. So I wonder why a cess and not just a standard rate of tax, maybe higher than the present one to include all the cesses. To my mind the answer is that these cesses are political measures. For instance if the tax rate is standard and there is say a 30% tax then the government of the day can do as it pleases with the 30% collected nationally and depending on the mindset of the government, the budget could lean in one of many directions. However, a cess creates an earmark, where certain monies are locked in. Thus, a future government has three options – remove Swachh Bharat Cess and be politically targeted in aiding and abetting uncleanliness or let the cess be in place despite cleanliness probably not being its top priority or just introduce a new cess for its agenda. Most of the times, the government will choose door number 3.

Another problem with the Swachh Bharat Cess has been the hurried notification and that too on the Diwali weekend. Obviously it caused resentment in the industry and amongst tax firms and lawyers who had a very busy Diwali break considering the notification came on November 6, 2015, a Friday, and the tax was to take effect from November 15, 2015. It bothers me a little that the government did not bother about the fact that considering the heavy tilt towards computerization of accounting and complex accounting systems, more time would probably be needed to make systemic changes. The lack of time to transition needless to say leads to hurried migration which often creates grey areas for litigation to spawn in. For a government that claims that it is devising a national litigation strategy and trying to de-clog our courts, providing fodder to the revenue department to take more cases all the way to the Supreme Court seems like one branch of the government not acting in furtherance of another branch’s interests.

Coming back to the hurry, it is becoming a regular habit of the present government to rush to do things, often then having to retract or clarify and in some cases even look publicly foolish. The encryption norms in news a few months earlier is a good example. Then there was the Negotiable Instruments Act/Ordinance fiasco which caused immense trouble to litigants, some of whom eventually gave up their claims.

Lastly, the inflationary cost of increase in taxes is something that again indicates that branches of the government are not communicating. A government that came to power on the manifesto of rejuvenating the economy and helping industry by easing investment and taxation norms, is introducing levies that are frankly not needed. Definitely not additionally. Any tax on services increases the cost of provision of services, especially when you have no input credit or backward integration, which is the case here. So while the marginal increase of service tax from 14% to 14.5% does not seem much, it is still 50 paise less for every Rupees 100 you earn. Thus, from a supply side it makes the services more expensive which eventually leads to the service provider passing on the burden to the customers which is inflationary. On the demand side, increase in taxes reduces the spending power of individuals and deflates demand. Thus, what you have in the end is a situation where at the altar of a “newer” agenda (read Swachh Bharat), the “older” agenda (read economic rejuvenation) is sacrificed, if only marginally.

Of course, the question here is not one which can be answered purely in the realm of law and economics and is definitely larger than that of the need of the levy. It could very well be the government trying to distract from the Bihar debacle with a hark back to its initial days when the people of India were enchanted with Swachh Bharat which then faded out for Beti Padao, Beti Bachao, which then faded out for performance of Yoga for one day at an international scale!

 

Application of Provisions of the Arbitration and Conciliation (Amendment) Ordinance, 2015 to Existing Arbitrations

The promulgation of the Arbitration and Conciliation (Amendment) Ordinance, 2015 [hereinafter “Ordinance”] vide Ordinance No. 9 of 2015 dated 23.10.2015 and the lack of express words clarifying whether the Ordinance is to operate prospectively or retrospectively begs the question of the application of the Ordinance to existing arbitrations.

The Ordinance is largely in line with the recommendations of the Law Commission of India’s 246th Report on Amendments to the Arbitration and Conciliation Act, 1996. However, due to the material omission of Proposed Section 85A from the Ordinance, there is ambiguity as whether unless otherwise provided the provisions of the Ordinance are prospective or retrospective [See Zile Singh v. State of Haryana and Ors., (2004) 8 SCC 1, Para 23].

I believe the Ordinance operates retrospectively insofar it does not impair an existing right or obligation of any party. Thus, as far as is possible, without prejudice to a party’s rights and obligations and without hitting the barrier of impossibility, the Ordinance is to be given retrospective effect. However, it may be noted that an equally convincing case can be made for a prospective application only and I will attempt to make one of those below as well.

Retrospective Application?

In support of the proposition that the Ordinance applies retrospectively, support may be gathered from the settled law that retrospective operation is not to be given to a statute so as to impair an existing right or obligation, other than as regards a matter of procedure [See Rashid Ahmad v. State of U.P. and Anr., (1979) 1 SCC 596, Para 27].

It must be noted that the Arbitration and Conciliation Act, 1996 as well as the Ordinance, while creating substantive rights and obligations, also lays down procedural rules. Accordingly, unless by giving a provision retrospective application, there is impairment caused to a party’s rights and obligations, there is no bar to retrospective application of the Ordinance. It is trite law that no party can claim injury owing to alteration of rules to access substantive rights merely based on the event of alteration and only when the alteration substantively impairs the rights being accessed itself is when the procedure is vulnerable to challenge [See Anant Gopal Sheorey v. State of Bombay, AIR 1958 SC 915, Para 4].

To make the aforesaid clear, an example may be taken of the Second Proviso to Section 12(5) wherein is specifically stated that the sub-section shall not apply to cases where an arbitrator has already been appointed on or before commencement of the Ordinance. Such a provision becomes necessary in that in a contract wherein a right had been bestowed on say party A to unilaterally choose an arbitrator and such party chose a former employee of its own as the arbitrator, giving retrospective operation to Section 12(5) would have impaired what is arguably a right of party A. However, in case of a provision like Section 17, no impairment is caused to the rights and obligations of the parties by enhancement of the arbitrator’s or the arbitral tribunal’s powers.

It must also be noted that in certain cases retrospective application is an impossibility. For instance in Section 29A it is provided that an arbitral tribunal passes the award within 12 months of entering reference with such time period extendable up to 18 months if the parties consent to such extension. However, a situation where an arbitration is ongoing for even a day over 18 months as on 23.10.2015 is not dealt with by the provision.

In fact it cannot be dealt with by the provision nor is it in the interest of policy to attempt to do so. Interpreted literally and retrospectively, an arbitration ongoing for 18 months and 1 day on 23.10.2015 automatically stands stalled owing to termination of the mandate of the arbitral tribunal until the Court grants further time to the arbitral tribunal. The consequence of a such a situation is that in case of interim measures, the parties would have to rush to Court under Section 9 while the Court hears the application under Section 29A(5). Thereafter, assuming the arbitral tribunal is granted further time, the Section 9 automatically becomes infructuous due to the effect of Section 9(3). In the event the arbitral tribunal is not granted further time, the Court then is burdened with hearing the matter and protecting the parties interests until another arbitral tribunal is constituted. Such a situation cannot be desirable as the aim and logic of arbitral laws across the world is to reduce the burdens on the courts and prevent frequent “trips” to courts.

The above observations apply not only in regard to arbitrations that are ongoing for 18 months and 1 day but also to say one that is ongoing for say 17 months and is at the stage of rejoinder for whatever reasons. Does that imply that the arbitral tribunal now has only 1 month to complete evidence, hear the parties, and pass the award? It would be seem not [See National Agricultural Cooperative Marketing Federation of India Ltd. and Anr. v. Union of India, (2003) 5 SCC 23, Para 15].

Moreover a situation like the one described above in regard of Section 29A of the Ordinance is likely to cause a massive upheaval and confusion and as such is unlikely to have been enacted with a retrospective effect. Of course the argument of confusion can be extended to the whole Ordinance to argue for its prospective application. [See Bharat Aluminium Company v. Kaiser Aluminium Technical Services Inc., (2012) 9 SCC 552, Para 197].

Another argument in favour of retrospectivity is that despite there being a general presumption of prospectivity [See Keshavan Madhava Menon v. State of Bombay, AIR 1951 SC 128, ¶ 15 (7-Judge Bench)], the Second Proviso to Section 12(5) of the specifically uses language against retrospectivity. A logical implication being that in fact the entire Ordinance is to be construed retrospectively, unless specific language is expressed against such retrospectivity. A flip of the ‘unless stated as retrospective, deemed to be prospective’ argument.

Moreover, even the choice of an instrument, i.e. Ordinance, would suggest an urgency to effect change and to my mind supports retrospectivity insofar as possible. It could also as easily mean lack of coherent governance as we all saw with the repeated turn arounds with Section 138 of the Negotiable Instruments Act, 1881. For the sake of this piece, lets go with the former.

Lastly, the argument in favour of retrospectivity, even if only where it is possible, is that relating to the objects and purposes of the Ordinance [See Sree Bank Ltd. (In Liquidation) v. Sarkar Dut Roy and Co., AIR 1966 SC 1953, Paras 5-6; Vatan Mal v. Kailash Nath, (1989) 3 SCC 79, Para 12]. The Ordinance has been necessitated by the conversion of the arbitral process into court process, in that judicial interventionism, delays, and lack of finality due to broad grounds of challenge to awards, defeated the purposes of arbitration [See Paras 3-4 of Chapter II of the 246th Report of the Law Commission of India]. If the objects and purposes are indeed to shorten the time taken to get justice and to take a certain class of disputes outside the court system, then retrospective application is a welcome possibility.

Prospective Application?

Turning to the argument in favour of prospective application only, the argument that instantaneously appeals arises from the principles of lex prospicit, non respecit (the law looks forward, not backward) and nova constitutio futuris forman imponere debet non praeteritis (a new law ought to be construed to interfere as little as possible with vested rights), both of which have found their place in the foundational rules of statutory interpretation as a general presumption of prospectivity in absence of express words or necessary implications to the contrary [See Keshavan Madhava Menon v. State of Bombay, AIR 1951 SC 128, ¶ 15 (7-Judge Bench)].

Express words regarding retrospectivity are not found in the Ordinance, and therefore that is a job half done insofar as the above argument is concerned. However, necessary implications remain to be analyzed and are likely to be eventually settled judicially. That said, it can be argued, with some force, that considering the operation of the Arbitration and Conciliation Act, 1996 for almost 20 years, there is no special reason found within or without the Ordinance to retrospectively apply the same [See Zile Singh v. State of Haryana and Ors., (2004) 8 SCC 1, Para 15].

The above is an argument of thresholds wherein the bedrock of the argument is that unless the words are express, minor insinuations or benefits of retrospective application would not lead the courts to apply a legislation retrospectively. The necessary implication must also attempt to rise, even if it may fall short ultimately, to the level of express words. The legislation should be so drafted that any other interpretation but that of retrospectivity would render the legislation a nullity or in the very least significantly less useful.

Conclusion

The entirety of the above piece is a brief glimpse of the arguments possible on the opposite sides of the spectrum and the issue on whether the Ordinance is to be applied prospectively or retrospectively very much remains open until it is settled by the Hon’ble Supreme Court of India eventually, as is the trend in our country. Until then it is a matter of picking a side and arguing for it. However, the best interests of arbitration, in my opinion, are served by reading the Ordinance retrospectively as far as is possible.

*Comments, especially contrarian views, are welcome.