Month: February

On
hearing Ram’s cries of help, Sita insisted that Lakshman go to his rescue.
Lakshman hesitated. If he went out to help Ram, who would protect Sita? He came
up with a solution: he drew a line around their grass hut. ‘Stay within!’ he
told his sister-in-law, ‘Within is culture, where you are safe. Without is the
forest, where no one is safe.’

This
story of Lakshman Rekha, the line drawn by Lakshman around Sita’s hut, comes to
us from regional Ramayanas like the Bengali Krittivasa Ramayana and the Telugu
Ranganatha Ramayana, written about seven hundred years ago. It is not found in
the old Sanskrit Ramayana of Valmiki, written two thousand years ago, or even
the oldest regional Ramayana, written in Tamil by Kamban, a thousand years ago.

How
do we view the Lakshman Rekha? A symbol of love, created by a young man to
protect his sister-in-law? Or as a symbol of oppression, created by a man to
control the movements of a woman. In the 21^st century, much of
feminist literature has conditioned us to see it as the latter. Lakshman, at
best, comes across as patronising patriarch. So it is in business.

Rules
are created to protect organisations. Some rules create efficiency while others
de-risk the company. Together they contribute to the prosperity and security of
the company. Together they ensure the organisation becomes controllable,
predictable, and manageable. Various technologies are created to ensure people
follow the rules. There are technologies to communicate the rules: the various
protocols, guidelines, regulations, procedures, and policies. There are
technologies to measure if the rules are being followed or violated. There are
technologies to flag repeat violations and escalate issues. Essentially, rules
help us domesticate and organise ourselves.

Then
come the auditors: the internal and external, who check if we have complied.
They go through our documents and our spending patterns and check if investor
wealth is safe, and if implementation aligns with agreed upon strategies and
tactics, and if the organisation fulfills its obligations of society by paying
taxes on time, and explaining all its costs and expenses that erode into
profit. The auditor is the Lakshman of the organisation, protecting the
institution for the Board of Directors and Investors.

The
analogy can upset many people for it equates Sita to the institution, and makes
her the property of Ram. It endorses patriarchy. Yet the relationship between
the Board of Directors and the institution is the same as Ram and Sita. Without
the institution (Sita), the Board of Directors (Ram) have no value or purpose,
or even meaning. Their entire existence depends on nourishing and protecting
the institution, and the institution in exchange makes them valuable, and
glamorous, worthy of respect, even worship.

It
is the auditor (Lakshman) who ensures that institution is safe. He ensures
rules are followed and even creates rules to ensure other rules are followed.
To the people in the organisation, he can seem like an oppressor. For his
actions limit movement. His demands take away freedom and agility. The larger
the company, the larger the investments, the more the rules, the more important
the auditor, the less nimble is the organisation. It takes away quick
decisions, and puts obstacles on the entrepreneurial spirit.

It is the auditor who is hauled up
when it turns out that the promoter has been misusing investor wealth to
increase personal wealth at the cost of the institution. In other words, when
the one who is supposed to be Ram turns into Ravana and gets the institution to
break rules for his own benefit. It is the auditor who has to prove his
honesty, and diligence, when there is a takeover. We often mock the auditor, or
the company secretary, as the oppressor who forces us to comply with rules we
don’t want to, who retards us, makes us inflexible and not very nimble,
especially when we are a large organisation. But he is Ram’s younger brother,
loyal and determined to protect all that his brother stands for. 

(Source:
Devdutt.com, reproduced with permission)

shailesh.kwebmaker

When I qualified as a Chartered Accountant way back in 1961, the words
‘International Taxation’ were not known to Chartered Accountants. The reason is
not difficult to find.

Our country had an acute shortage of foreign exchange. Hence the British
Government, who ruled our country before 1947, imposed exchange control
regulations as a temporary measure at the time of the Second World War through
the Defence of India Rules in 1939. Though it was meant to be a temporary
measure to fight the War, its continued need was felt and hence it was made
permanent by legislating the Foreign Exchange Regulation Act, 1947. It was a
very loose piece of legislation, not precise, leaving a lot to interpretations.

After the experience gained over 26 years, the 1947 Act was replaced by
the Foreign Exchange Regulation Act, 1973 (FERA) which came into force from 1^st
January, 1974.

Because of acute foreign exchange resources of the country, there were
very few inward foreign investments and hardly any outbound foreign investments
and that too, confined to a few high and mighty, the rich and the famous.

When I passed my final CA examination of November, 1960, the subject of
foreign exchange and/or international taxation was not on the CA curriculum.
Hence, there were hardly any tax professionals, aware of and practising
international taxation and foreign exchange regulations.

FERA, 1973 was a draconian, criminal law in which mens rea,
meaning guilty mind, was presumed. One was presumed to be guilty until one
proved oneself to be innocent – completely contrary to the established
principles of jurisprudence. For every need of foreign exchange, including for
legitimate foreign travel, one had to approach the Reserve Bank of India (RBI)
for release of foreign exchange. If one asked for release of foreign exchange
for five days, RBI would give sanction for three days. There were instances
when during a week of foreign travel, there was Saturday and Sunday in between;
in such cases RBI would rather want one to come back on Saturday morning and go
back on Monday morning and sanction foreign exchange accordingly! Coupled with
shortage of foreign exchange, there was what was known as requirement of ‘P’
form; meaning to get approval for booking your passage or ticket for going
abroad; and chances of getting that were better if one preferred to fly Air
India. Later, the foreign exchange quota was relaxed by allowing first a lump
sum of USD 100, later increased to USD 500 for a foreign trip, irrespective of
its duration. People used to book an excursion ticket by Air India, which was
valid for four months, avail of the sumptuous allowance of USD 500 and go
abroad. This was nothing but official invitation to contravene FERA as such
people used to make other arrangements for their requirement of foreign
exchange. The law was so impractical that the then Prime Minister had gone on
public record saying  that offering a cup
of tea to a Non-Resident by a Resident would amount to contravention  of FERA. Since then, we have come a long way.
Now, not only a cup of tea but complete hospitality to a non-resident is
permitted.

The real breakthrough came in July of 1991 when our foreign exchange
reserves were as low as approximately USD 1.1 million, hardly enough for
fifteen days’ imports. The country would have literally gone bankrupt but for
the timely action by the then Finance Minister, Dr. Manmohan Singh, who pledged
the country’s gold with IMF, announced sweeping reforms and saved the country
from international shame.

As a result of such reforms, foreign exchange reserves gradually
increased and both inbound and outbound foreign investments increased
gradually. This started the awareness about foreign exchange regulations,
double taxation avoidance agreements and international taxation amongst the tax
professionals. One saw a gradual increase in seminars and conferences with FERA
and International Taxation as subjects for discussions.

As per the experience gained over another 26 years, the Foreign Exchange
Regulations Act, 1973 (FERA) was completely replaced by the Foreign Exchange
Management Act, 1999 (FEMA) which came into force on 1^st June, 2000.
FEMA has been a civil law, which is more precise and comparatively easy to
understand and implement. Under FERA, all transactions in foreign exchange and
dealings with Non-Residents were prohibited unless permitted by RBI. Under
FEMA, all Current Account transactions are freely permitted under the automatic
route except for a very few requiring RBI permission but all Capital Account
transactions are prohibited unless permitted by RBI.

This opened up the floodgates of professional opportunities for tax
professionals and Foreign Direct Investments into India and India’s investments
overseas have considerably

increased, resulting in the present foreign exchange reserves of the
country in excess of USD 390 billion. Now the tax professionals have understood
the importance of  International Taxation
and its potential for professional practice. The need is further strengthened
with the introduction of Transfer Pricing Regulations in our tax laws from
2001.

Since June, 2000, the law in force is Foreign Exchange Management Act,
1999 (FEMA). Hence the emphasis is more on management of foreign exchange
rather than regulation of foreign exchange. Hence, RBI has, since February,
2004, introduced the Liberalised Remittance Scheme (LRS) permitting residents
to access a certain amount of foreign exchange for their personal needs like
foreign travel, education, medical expenses, etc. The LRS scheme started with a
small quota of USD 25,000 to each resident to invest abroad, open a bank
account overseas etc. which gradually increased to USD 50,000, USD 100,000, USD
1,25,000 reduced to USD 75,000 for a short period and  increased to USD 2,50,000 at which it has now
stabilised. Of course, the LRS scheme has brought in its wake new problems but
it is more or less successful.

Now the tax professionals have come to know the role of OECD in the realm
of International  Taxation  and 
now  we  find 
many  such  professionals 
practising International Taxation and FEMA and also sharing their
knowledge at conferences and seminars. Study of international taxation, FEMA
and DTAA have opened up certain limited opportunities for international tax
planning but one has to do so very cautiously due to concepts and regulations
like GAAR, POEM, BEPS, MLI, TP, Permanent Establishment, etc. The matter has
become more complicated with the coming into play of FATCA and CRS which have
set into action, automatic exchange of information globally.

Over and above the Article for Exchange of Information contained in the
Double Taxation Avoidance Agreements (DTAA) that our country has entered into
with several countries, since many so-called tax haven countries were excluded
or were not inclined to enter into such agreements, now our Government has
proactively entered into Tax Information Exchange  Agreements (TIEA) and also Multilateral
Convention on Mutual Administrative 
Assistance in the matter of Taxation with many other countries.           

These have resulted in our country being able to obtain tax information
from all these countries. Moreover, because of the Foreign Account Tax
Compliance Act (FATCA) of USA and the Common Reporting Standard (CRS) adopted
by many other countries resulting in automatic exchange of information, a lot
of information relating to beneficial owners of overseas assets and income has
started flowing in, resulting in Tax Department and Enforcement Directorate
initiating investigation against persons concerned. As a result of all these
steps, more and more persons have been adversely affected by the crackdown on
offshore tax havens.

All these, coupled with Black Money (Undisclosed Foreign Income and
Assets) And Imposition of Tax Act, 2015 (BMA), have opened up immense professional
opportunities    and challenges for tax professionals provided
they have sharpened their skills in the fields 
of international taxation and exchange control regulations. This may
also have implications of taxation in multiple countries requiring filing of
tax returns in other countries and paying taxes there. This will necessitate
the need to claim foreign tax credit in the country of residence in respect of
taxes paid in the source country. Many tax professionals must have already
experienced the impact of automatic exchange of information in respect of their
clients.

One important facility in International Taxation is the permission to
Chartered Accountants by CBDT and RBI to issue withholding tax certificate in
Form 15CB for making overseas remittances. This is very much appreciated by all
concerned as  it, being prompt and
professional, saves time in making remittances.

However, one negative in the matter of International Taxation is the
attitude of Authorised Dealer Banks. RBI has delegated many powers to banks and
everything has to be routed through banks only. But their lack of knowledge hampers
and delays the process. Today, a professional who is able to advise clients in
the matter of International Taxation is much more respected than one who
confines to auditing and domestic taxation because of the opportunities thrown
open to corporates and entrepreneurs. Now it is no more confined to the high
and mighty, the rich and famous. The tax professionals are experiencing many
inquiries from common businessmen for advice on overseas structures and
regulations concerning the same.

The term, Base Erosion and Profit Shifting (BEPS) has now become an
important topic for discussions and consideration amongst tax professionals
globally and has made inroads into India also. The general tendency amongst
businessmen and industrialists is to look for low tax or no tax countries to
shift their activities. Hence, the existence of tax havens became very relevant
in the last few decades. The profits are artificially shifted to such low-tax
or no-tax jurisdictions. This brings out the issue of form over substance as
such activities do not have much substance. This, in short, is known as BEPS.

In recent times the world has become
more transparent in terms of commercial and economic activities. The tax havens
which had no Double Taxation Avoidance Agreement with any country have now
given up because of the fear of extinction and have signed tax information
treaties with all major countries. Frankly, tax haven has now become a dirty
word, as it immediately smells of tax evasion. Treaty abuse had become rampant
and to control the same, OECD formulated Multilateral Instruments (MLI) with a
view to modify bilateral tax treaties and arrest
treaty abuse.

Another avenue of international tax planning which had become very
popular was cross-border offshore Trusts for tax saving and estate planning. It
is always a fact that businessmen and entrepreneurs are very quick in
understanding and implementing such measures while the laws and tax authorities
are very slow in understanding such loopholes and catching up with legislation
to counter them. This leads to changes in domestic laws to make such
tax-planning measures very expensive and even useless. There was a time when
offshore Discretionary Trusts settled by Non-Resident relatives for the benefit
of their Resident relatives in India were very popular because any capital
distribution by such Trusts was exempt in the hands of such beneficiaries.
Moreover, the banking secrecy laws of jurisdictions like Switzerland, the
Channel Islands etc., helped proliferation of such Trusts. But now, with global
awareness about their abuse for tax planning, coupled with the KYC requirement
regarding the ultimate beneficial owner (UBO), has led to amendments in
domestic laws making such Trusts almost redundant.

Now that we Indians are allowed to own assets worldwide, the importance
of International Taxation has gained considerable importance. The issue of
Cross-Border Wills or Wills for overseas assets also opens up avenues for
international tax practice. One lesser known area is the GST impact on
cross-border transactions. Its impact on import and export of goods and
services, stock transfers, international trading, projects outside India etc.,
needs careful consideration as a part of International Taxation.

One important issue that seems to have escaped attention of the tax
professionals and the authorities concerned needs to be resolved.  It is about the fact that when the
Enforcement Directorate (ED) concludes an investigation, even after
adjudicating process, no order is issued when it is in favour of the person
concerned but invariably an order is issued when the same is against the person
and a penalty is levied. It is well-known that under FEMA, there is no
limitation period prescribed but even then, there should be a regulation to
provide for a discipline of time limit within which an order, whether adverse
or favourable, must be issued by ED after completion of the hearing.  We find this very common under all other laws
that an order is invariably issued, whether in favour or against, within a
reasonable time after the hearing is over. Even taking an example under FEMA,
the law provides that the hearing of a compounding application must be
completed within 180 days and thereafter an order is invariably issued within a
maximum of one month. Why shouldn’t the same be made applicable to the ED?

All these developments in the arena of International Taxation and FEMA
would mean that specialisation is the only way for tax professionals to
survive, succeed and prosper.  The days
of Jack of All and Master of None are now over. 
Now we have not only to look to the present but to think of the future
and equip ourselves to understand events happening globally in the fields of
economic activities, reforms and international taxation. However, the future
lies in complete removal of exchange control regulations. We have the examples
of England and Singapore and how they have progressed and flourished as
financial centres after abolishing exchange control regulations.

shailesh.kwebmaker

In a brilliant introduction to his book, The
Law Book – 250 Milestones in the History of Law, Michael H. Roffer begins
with the statement: “The Law surrounds us. It affects the food we eat, the
water we drink, and the air we breathe. It travels with us. It defines our
relationships with the people with whom we live, work, and share space. It
affects our homes and schools, our offices and stores. The law touches every
aspect of our lives and even our deaths.” I am inclined to think, in a
lighter vein, that the author had the tax law in his mind more than any other
law, for the tax law (direct & indirect) touches every aspect of life which
he has listed! That is perhaps why Oliver Wendell Holmes Jr., made the famous
statement that “Taxes are the price we pay for civilization. I like to pay
my taxes”. But the question as to how the taxes are imposed and collected,
and upon whom they are levied, and in what manner and how  they are quantified – these questions seem to
have always troubled the tax administrator, the tax payer, the tax lawyer and
ultimately the government.   

Taxes have been looked upon, traditionally, as the government’s share in
the prosperity of the breadwinner. That is one of the main reasons why
income-tax paid is not allowed as a deductible expense; it has been held to be
the “Crown’s share in the profits”, there being other reasons, too. It would appear
that before the development of “money” as representing the purchasing power of
a person, the taxes were collected in kind, through commodities, even hard
work. Customs duty and taxes on owning of lands are said to be two of the
earliest taxes netting huge revenues for the countries. Only in the year 1798,
William Pitt the Younger, who was the Prime Minister of Great Britain those
days, first proposed a legislation to tax the citizens “upon all the leading
branches of income”. This law is generally believed to be the first formal
income-tax in history. This tax is believed to have been imposed to replenish
the treasury of that country which had been drained because of its war with
Napoleon Bonaparte. The tax was known as “The Triple Assessment” because
its measure was three times the expenditure which a person had incurred in the
preceding year. There is good reason to believe that the levy succeeded,
because it was followed up by a proposal that a general income-tax be charged
on all leading branches of income. This resulted in a tax legislated for the
first time in history in January, 1799, and it called for a progressive rate of
tax on annual income above 60 pounds; the rate began with 1% and went up to 10%
on incomes above 200 pounds. But it was a disaster, and the public protested
strongly and resisted payment. It was criticised as a “monstrous law” and “an
indiscriminate rapine”; experts claimed that the public received it with
nothing but “disdain and distrust”. Eventually the tax was repealed in 1802,
after a short life of just three years, but the trend had set in, and the law
had caught the eye of governments all over. In the very next year, England
enacted a new income-tax law and this law became the basis for all subsequent
enactments in that country and became the bedrock of that country’s fiscal
policy. Soon, Germany and America adapted the law, resulting in the passing of
several enactments for the levy and collection of income-tax.

In America, several short-lived attempts had been made in this behalf
and in the law passed in 1894, a tax of 2% was imposed on annual income over
4,000 dollars the object stated being “to address economic inequalities”. But
what happened was that in a decision of the Supreme Court of America, Pollock
vs. Farmers’ Loan & Trust Co., this levy was struck down as
unconstitutional; it was held that the taxes on real and personal property were
direct taxes and in the absence of apportionment among the states they were
unconstitutional. Chastened by this judgment, Howard Taft, the President of
America, wanted to levy income-tax in 1908 after an amendment to the
Constitution to expressly permit the levy. It was the sixteenth amendment and
after being passed by the Senate and the House of Representatives and the
required number of states, it became law in 1913. It was called the Revenue
Act, 1913 and it imposed tax on net income at rates ranging from 1% to 6%.

Beginning with William Pitt’s levy in 1798, taxes have been imposed to
recover monies lost on account of warfare, impliedly as a fee for protecting
the citizens against external aggression. In India, the Sepoy Mutiny in 1857
saw the British rulers imposing a tax in 1860 as a temporary measure for 5
years. In 1867, a licence tax on all trades and professions was imposed. In
1868, it became a ‘certificate tax’ and in both licence tax and certificate
tax, agricultural income was excluded. From 1869 to 1873, for a period of 4
years, there was an income-tax including agricultural income. The tax got
revived due to famine and other reasons in 1877, but it was the Act of 1886
which saw the first landmark of income-tax law of India. It remained in force
till 1918, in which year a comprehensive recasting of the income-tax law was
attempted with a measure of success. Inequalities and inconsistencies in the
earlier law were sought to be redressed. The heads of income such as property,
salaries, business earnings and professional income, other sources of income
were introduced in this law. It applied to income under these heads which arose
in British India.

The recommendations of the All India Tax Committee formed the basis of
the Indian Income-Tax Act, 1922 which tax lawyers of repute commend as a
well-drafted, precise legislation with about 60 sections. In this law, the tax
rates were not prescribed in a schedule as was done previously, and the rates
were left to be prescribed by the annual Finance Acts. This has endured till
now. Notable features of the Act were the adjustment of past losses and
inter-head and intra-head losses, liability of the successor to the business to
pay taxes of the predecessor, etc. The Act received wholesale amendments by the
1939 Amendment Act. Notable features of this amending Act were: introduction of
a category of “resident, but not ordinarily resident”, taxation of income
accruing outside British India even if it is not brought into British India,
introduction of provisions to prevent avoidance of tax by creating trusts,
transferring property to relatives (spouse, minor children),
dividend-stripping, bond-washing, introduction of closely-held companies to
avoid dividend income, etc.

The working of the 1922 Act led to certain situations which were thought
by the government to be not in the interests of the growth and development of
income-tax law in India, and a series of recommendations were sought with a
view to bringing about a legislation with more teeth and which was more
comprehensive. Substantial changes were made in the 1947 Taxation of Income
(Investigation Commission) Act,  in 1952,
1953 and 1955 (Dr. John Mathai Committee). More importantly, the Act was
referred to the Law Commission in 1956 in order to make it “on logical lines
and to make it intelligible and simple, without at the same time affecting the
basic structure”. The recommendations of the Law Commission and the committee
headed by Mahavir Tyagi set up in the meantime formed the basis of the present
1961 Act.

The Income Tax Act, 1961 today is a maze no doubt, but to call it “a
national disgrace” (Nani Palkhivala, preface to the 8^th edition
of his treatise on income-tax law) would be unfair, in my humble opinion.
Government has the right to set right distortions practised by the tax payers
to “evade” (not avoid or mitigate or plan) income-tax, and it is also well
established that this can be done even retrospectively. This is particularly so
in modern days when multi-national enterprises indulge in multi-layering and
multi-structuring of the corporate entity, and locate them in different places
around the world and in different tax jurisdictions. The government of the day
must be conceded the right to combat such moves if it feels due taxes are not
being paid and the right to plug the loopholes, if necessary, by making the
amendments retrospective. It cannot be lost sight of that it is always a
running battle between the government and the tax payers, particularly the
multi-national juggernauts, and each side tries its best to outdo the other!
But to be fair to the tax payers, it must also be said that some of the
amendments in the recent past, say in about 10-12 years, have been startling,
upsetting the traditional and well-accepted notions of what is “income”. A
different concept of “taxation of benefits” has come to stay, where the
notional difference between the market value of an asset, movable or immovable,
and the price paid is roped in as income.

It is hard to believe that a provision in the Act which was read down to
make it workable, equitable and fair to both the citizen and the government, by
the Supreme Court in K.P. Varghese (131 ITR 597) (SC) has been
introduced through “the back door”, giving a go-by to the acclaimed principles
of taxation vis-à-vis the power under the Constitution of India explained
lucidly and forcefully, if I may say so with respect, in the judgment. There
are also recent instances of what is not income or even a receipt, being taxed
under some pretext or the other. We have all so far understood the pay-out of
dividend by a company as its expense (though not tax-deductible in the
company’s hands, being appropriation of profits), but we are now told that it
will be taxed as the income of the company, a proposition which is baffling.
The constitutional validity of this tax has undoubtedly been upheld by the
Supreme Court in the recent Tata Tea case and therefore the levy has come to
stay. But one shudders to think of the consequences that may follow in the
coming days. A citizen can be mulcted with taxes both on his income and his
expense, to put it crudely, taking umbrage under the ever-elastic Entry 82 of List
I (Union List) which permits the central government to levy “taxes on income
other than agricultural income”.

The power to tax income, and the general power to levy taxes, is
traceable to Article 246 of the Constitution of India which says that Parliament
has exclusive power to make laws with respect to any of the matters specified
in List I of the 7^th Schedule to the Constitution. It is also
necessary to note Article 248 which reiterates that Parliament has exclusive
power to make any law with respect to any matter not enumerated in the State
List or the Concurrent List and such power shall include the power to legislate
for the levy of tax not mentioned in either of these Lists. It is in this
background that we need to now look at Article 265, which occurs in the Chapter
titled “Finance, Property, Contracts and Suits”. It is a single-liner, and one
of the most powerful one-liners; one cannot also help noticing that the
marginal head of the article consists of 10 words, and the article itself
contains 12 words, only 2 more than the marginal head!

“ARTICLE 265. Taxes not to be imposed save by authority of law.—No tax
shall be levied or collected except by authority of law”.

The government therefore requires the authority of law not only to
“levy” taxes but also to “collect” them. The consequence is that a collection
machinery which is tyrannical or arbitrary or out of proportion with the
gravity of the situation or circumstances can also be held to be
unconstitutional, being in violation of the article. Since an entry includes
all subsidiary and ancillary matters, the power to tax would include the power
to enact law for the effective implementation and collection/recovery of the
tax levied. It can determine the procedure to collect the tax and provide for a
machinery and also make provision for evasion of taxation: Orient Paper
Mills Ltd. vs. State of Orissa (AIR 1961 SC 1438). It was, however, held
that the power to seize and confiscate the goods moving from one state to
another, which were not meant for sale, and also levy penalty was not
incidental to the power to levy tax under Article 265 (C.P. Officer vs. K.P.
Abdulla, (1970) 3 SCC 355).

In a federal set-up like ours, the inter-relationship between the
government at the centre and the state governments is very critical. According
to M.P. Jain, the author, inter-governmental financial relationship “touches
the very heart of modern federalism, as the way in which this relationship
functions affects the whole content and working of a federal polity”. Since
taxation is part – a very substantial and significant part – of the finances,
the allocation of the taxing powers is considered important in Constitutions.
The scheme of allocation of taxing powers is broadly based on the principle
that the taxes which are of a local nature are legislated upon by the states
and taxes which have a tax-base extending over more than one state, or which
should be taxed uniformly throughout India, or which can be more conveniently
collected by the centre, are allocated to the centre. The drawing up of a
Union List, State List and Concurrent List has by and large said to have
prevented the problem arising out of overlapping taxes being levied causing
hardship to citizens, though the Concurrent List has now and then caused some
problem or the other. There are some other federations in the world where this
problem (of overlapping taxes) has manifested itself more acutely.

I had earlier referred to the entries in the three Lists in the 7^th
Schedule to the Constitution being “elastic” and being the subject of a wide
interpretation. Here, there is a clear distinction between a tax entry and a
non-tax entry. A tax entry, it has been held in several judgments of the
Supreme Court, has to be construed or interpreted broadly and liberally. In Tata
Iron & Steel Co. vs. St. of Bihar (AIR 1958 SC 452), this principle of
broad and liberal interpretation of the tax-entries was extended to include the
power to tax retrospectively. An important principle in this context is the
doctrine of “pith and substance” which means this: the true character of the
legislation in question has to be ascertained by having regard to it as a
whole, to its objects and to the scope and effect of its provisions, and if
according to its “true nature and character” the law substantially relates to a
topic assigned to the legislature, which enacted it, then it is not invalid
merely because it incidentally trenches or encroaches on matters assigned to
another legislature. The fact of incidental encroachment does not affect the vires
of the law even as regards the area of encroachment; incidental encroachments
are not forbidden. The law in question has to be read as an organic whole and
not as a mere collection of sections; it should not be disintegrated into
pieces and each piece examined whether it fits into the Constitutional scheme
or division of legislative powers. The classic observations of the Supreme
Court in State of Bombay vs. Balsara (AIR 1951 SC 318) are these:

“It is well-settled that the validity of an Act is not affected if it
incidentally trenches on matters outside the authorised field and, therefore,
it is necessary to enquire in each case what is the pith and substance of the
Act impugned. If the Act, when so viewed, substantially falls within the powers
expressly conferred upon the legislature which enacted it, then it cannot be
held to be invalid merely because it incidentally encroaches on matters which
have been assigned to another legislature”.

Another aspect of Article 265 is that it is open to the legislature to
pass a validating Act to remove the infirmity in the law pointed out by the
judgment, and make the law effective from the date of its enactment and retain
the collections of the taxes under the law invalidated by the court. The
important condition, however, is that the government must have the power to
levy the tax, for in the absence of the power the tax must ever remain invalid:
M.P. Cement Manufacturers Association vs. State of M.P. (2004) 2 SCC 249.
The validation by a validating Act can however be done only by removing the
grounds of illegality (Rai Ramkrishna vs. State of Bihar) (AIR 1963
SC 1967), or by removing the basis of the decision and not merely by
disregarding or disobeying or “reversing” the judgment: Ahmedabad
Municipality vs. New Shorrock Spg. & Wvg. Co: (1970) 2 SCC 280.

Legislative competence (in addition to Constitutional validity) is the
deciding factor in examining the validity of a tax. In judging the legislative
competence – which has to be adjudicated at the threshold before any other
challenge is examined – the nature and character of the tax constitute a
significant element. The following aspects are irrelevant: (a) motive in imposing
the tax; (b) wrong reasons given in the statement of objects and reasons; (c)
the form and manner in which the power is exercised; (d) nomenclature of the
tax. In Jullundur Rubber Goods Manufacturers Association vs. UoI (1969) 2
SCC 280, it was held that so long as the doctrine of “pith and substance”
is satisfied and the “real nature and character of the levy” test is answered
in the affirmative, with reference to the taxable event and the incidence of
the levy, the law imposing tax cannot be invalidated. It cannot also be argued
that the tax under a particular entry shall be levied in a particular manner;
it is open to the legislature to adopt such method of levy as it chooses so
long as the character of the levy falls within the four corners of the particular
entry: Twyford Tea Co. vs. State of Kerala (1970) 1 SCC 189. The pithy
observations of the Supreme Court in Rai Ramkrishna (supra) are
noteworthy:

“The objects to be taxed, so long as they happen to be within the
legislative competence of the legislature can be taxed by the legislature
according to the exigencies of its needs. ……..the quantum of the tax levied by
the taxing statute, the condition subject to which it is levied, the manner in
which it is sought to be recovered are all matters within the competence of the
legislature”.

In Jain Bros. vs. UoI (1969) 3 SCC 311 and Avinder Singh vs.
State of Punjab (1979) 1 SCC 137, it was held that Art. 265 does not
prohibit double taxation of the same person twice over if the legislature
evinces a clear intention to do so and that the vice of double-taxation cannot
be spun out of the said article. But without an express provision in the law to
impose tax twice over on the same subject, there can be no double-taxation by
implication.

The question of sharing the revenues between the centre and the states
is crucial, not the least due to political reasons. In the USA, there is no
provision in their Constitution for sharing revenues between the centre and the
states, but in actual practice a system of conditional grants has come to be
under which the centre financially supports the states. Moreover, in that
country the power of the states to impose taxes is vast. The situation in
Australia and Canada is more or less the same, and there is a system of
tax-sharing. The Constitution of India also contains provisions to ensure
financial equilibrium in the distribution of collection by way of taxes. It may
be noted that most of the lucrative tax levies, such as corporation tax,
income-tax, goods and services tax, customs duty are within the domain of the
centre. On the other hand, the states require plenty of money for their welfare
and development schemes and they are mostly left with taxes by way of octroi,
entry tax, land revenues, etc. There are, however, political compulsions in
imposing land revenues, as well as considerations such as hardships to the
agriculturists to be taken note of. The makers of the Constitution did
recognise that the revenues of the states were thus inadequate to fulfill their
needs. In the Report of the Expert Committee on Financial Provisions, this was
highlighted. The Constitution therefore provided for sharing of the finances
between the centre and the states. 

There are two major methods by which the finances are shared:
Tax-sharing and Grants-in-aid.There are detailed provisions in our Constitution
in Article 268 onwards and it is beyond the scope of this article to dive deep
into them. The most important aspect of tax-sharing is the establishment of a
Finance Commission which can devise its own formula for the splitting of the
revenues between the centre and the states in a flexible manner and without
being rigid. The Commission is a non-political body and consists of a president
and four members appointed by the President of India. Article 280 makes
elaborate provisions for the powers and functions of the Commission. The
functions include (a) the distribution between the Union and the States of the
taxes can be divided; (b) to lay down the principles to govern the
grants-in-aid of the revenues of the States out of the Consolidated Fund of
India; (c) to lay down the measures to augment the Consolidated Fund of the
States in order to supplement the resources of the panchayats on the basis of
the recommendations of the State Finance Commission; and (d) to lay down
measures to augment the State Consolidated Fund to supplement the resources of
the municipalities on the basis of the recommendations of the State Finance
Commission.

A burning question which has exercised the minds of tax experts,
economists, jurists, tax lawyers and persons of eminence is whether there
should be justice in taxation. N.T. Wright, an author who wrote several
books on religion, remarked: “A sense of justice comes with the kit of being
human. We know about it, as we say, in our bones”. John Rawls, in his book A
Theory of Justice says that the ultimate purpose of a State is justice.
James Madison, the celebrated President of the USA, said “Justice is the end
of government. It is the end of civil society. It ever has been and ever will
be pursued until it be obtained”. It is believed that taxation and economic
or fiscal policy, which are subsidiary features of a government, do aim to do
justice first and foremost. Thomas Piketty, in his book The Economics of
Inequality says that a primary factor for the persistence of economic
injustice in this world is tax and fiscal policy, though there may be other
reasons, too. Injustice in taxation has many facets, the main facet being
complexity due to lack of systematic theories which provide general guidance as
to how taxation does function in society, and the difficulty in reasoning it
out; according to David F. Bradford who wrote Untangling the Income Tax,
taxation “can be understood (if at all) by only a tiny priesthood of lawyers
and accountants”! Judge Learned Hand scathingly described tax law as a
“meaningless procession of cross-reference to cross-reference, exception upon
exception – couched in abstract terms that offer no handle to seize hold of….”.
Moreover, taxation or tax law takes note of and incorporates other disciplines
in it, such as economics, philosophy, at times even politics. In India, if one
has to understand the Income-Tax Act, one has to have more than a working
knowledge of other branches of law – Civil and Criminal Law, Partnership Law,
Hindu Law or Mohammedan Law, Company Law, Intellectual Property Law and so on.
This certainly makes the tax law more interesting, but also complex. In
contemporary tax jurisprudence, we often hear of horizontal and vertical
equity. Horizontal equity requires two persons similarly situated to be treated
similarly. Vertical equity requires two persons differently situated to be
treated differentially to a degree. These are probably different names given to
what is basically understood as fairness. Fairness in tax law, as presently
advised, seems to be a distant goal. Adam Smith must be turning in his grave!

Is there morality in taxation? This question has troubled many tax
jurists and lawyers over the years. We have a fascinating jurisprudence in
India on the subject. The debate will go on forever and jurists will keep on
saying that the two are poles apart, and that everything is fair in war, love
and taxation. The morality aspect is relevant not only in the means which the tax
payer adopts in “arranging his affairs in such a manner that he pays the least
amount of tax”, but it also applies to governments, particularly in the matter
of retrospective taxation. How moral is it to tax the results of a transaction
which, when it was put through, did not attract taxation but which has been
made subject to tax at a future point of time with back-effect? People may have
arranged their monetary affairs on the basis of the earlier law, and if they
are told after ten years that the earlier law is being withdrawn
retrospectively, it does cause enormous financial strain, mental agony and
leads to distrust or mistrust on the government of the day. Today’s world of
globalisation of business and inter-country commerce and investment suffers most
because of retrospective taxation, as we have seen recently in our country. The
debate will go on, and ways and means will be found to tide over such difficult
situations.

A stable tax policy may be a dream, but that should not prevent
governments from adopting a rational and informed view of taxation principles
to be adopted to serve the needs of the country. For a long time we did not
have a “tax policy unit” in the administration of the Income-Tax Act, and if
tax pundits are to be believed, this has resulted in several skewed situations
which benefit neither the government nor the tax payer. Fortunately, we now
have a Tax Policy Unit which carries out a lot of research, both of local and
overseas conditions, and keeps advising the government which can input the
advice to shape its fiscal policy.

The Indian government came out with proposals in 2016 to make use of
e-assessment procedures with the objective of transparency and speed, in
consonance with the “digital India” initiative. Measures are being taken to
showcase the Indian tax administration as an intelligent, sensitive and
non-combative system which will deal with overseas investors in India fairly
and honestly. The recent amendment to introduce a pilot-scheme where
assessments will be made without any interface between the tax officer and the
assessee is a step taken with the right intention and its success will drive
future amendments with a similar purpose. At the same time, the concern of the
tax payers about the unnecessarily aggressive and at times vengeful attitude of
the tax authorities cannot be said to be without basis and must be addressed.
It is very easy to make a deliberately excessive and high-pitched assessment,
create a demand and harass the assessees who will be forced to run from pillar
to post, spend huge amounts as legal expenses, suffer mental agony, run the
risk of assets and bank accounts being attached with consequent stoppage of
business, and so on and so forth. Tax compliance cannot be expected without
showing tax-sensitivity; to tax and to please is impossible, hence the need
today for a friendly and polite and at the same time objective approach, with
only the requirements of the law in mind. Collection of targeted amounts of tax
cannot be the sole objective and setting of targets must also be realistic;
assessments must be rooted to the law and should be in conformity with the
judicial precedents and not merely target-oriented. A target-oriented approach
tends to result in aggression and a flouting of the rule of law. Judicial
review of the assessments and decisions of the tax authorities should be viewed
as a corrective and not as  criticism.
What is required from the tax administration is a broad-minded, professional
and impersonal approach. Computerisation has its place in the procedural
aspects of administering the law, but computers cannot be allowed to make
assessments!

Protracted and interminable tax disputes serve no purpose. The Act
provides for an excellent system of appellate and revisional remedies but of
late murmurs are being heard whether the appellate tiers, both the first and
the second, are discharging their duties impartially and without being
influenced by “oblique” considerations. There was a time when the Appellate
Assistant Commissioners used to write orders which were, quality and learning
wise, no less than those of judgments of High Courts or even the Supreme Court.
It is unfortunate that one does not get to see such orders these days. The tax
tribunal has always done an excellent job but of late one wonders if it can be
said to be immune to the “winds of change” sweeping the country and the mindset
of its people. Innovation and improvisation in the decision-making process is
welcome, but it should be within the framework of the judicial norms and discipline.
The decisions should be informed by objectivity and absence of bias – against
the Department of Income-Tax, against the tax payer and also against the
counsel! – and care should be taken to ensure that judicial adventurism does
not masquerade as judicial innovation or judicial creativity. I will say no
more.

A word about the emerging trends and issues in international taxation,
which has turned out to be a fascinating branch of the income-tax law. These
are mostly issues arising out of interpretation of tax treaties and
transfer-pricing issues. In both, the stakes are mind-boggling. The
jurisprudence is marvellous and provides excellent fodder for intellectual
acrobatics. The IRS has mastered these two branches of tax law; the tax
lawyers, with some unmatched original thinking, have made a huge contribution
to the growth of this branch of the tax law, supplemented by the learning
exhibited by the Tribunal in dealing with those issues. It is a matter of pride
for the profession that the highest number of decisions in this branch has
emerged from our country and it is believed that they are treated with great
respect in judicial forums across the world. This is a very good augury for the
tax administration of the country. It is further believed that this branch of
tax jurisprudence will govern the future tax litigation in our country.

To conclude, I can do no better than quote the learned author,
Padamchand Khincha, from his preface to the book Emerging issues in
International taxation: “Rightful tax is the price of social order. Tax
is that portion of a citizen’s property which he/she yields to the Government
in return for the benefits enjoyed from the society. Citizens feel that taxes
are (un)wantonly levied, that the pervasiveness of taxes is stifling.
Governments feel that the tax payers are short in discharging their
obligations……………..In this interaction of granting the benefits and demanding
the exaction, the equation is hardly ever balanced.” Well, very pithily
put. The goal of every tax administration is to find that ever-elusive balance!

JAI HIND!!!

shailesh.kwebmaker

Elections are fundamental to democracy. Elections in India are in dire
need for reforms. In this article, the author, a professor at IIM, Bangalore
and Chairman of the Association of Democratic Reforms (ADR) shares his views.
The electoral system has many shortcomings and urgent reforms are the need of
the hour. To commemorate our 70^th Republic Day, BCAJ requested him
to write for the Journal so that professionals can be better aware citizens.    

ABSTRACT

We discuss as far as
possible the root causes of various problems in elections and democracy. The
different objectives of voters and parties is one such reason. Competitive
politics and the increasing role of money and crime is another. One section of voters
seems to vote on “identity” – caste, religion, language and so on. This makes
campaigns divisive. Some implications of the system beyond elections into the
financial sector are also discussed, and a small link established between
various economic and financial crises and the kind of elections and parties we
have. We propose a solution. The key is not the solution itself, but the
objective: reduce competition among parties, make things transparent, create a
system that unites the country, its citizens and politicians. After all, we all
belong to the same country.

        In true democracy every man and woman is taught to think for himself
or herself.

                                                     –  Mahatma Gandhi

The need for electoral reforms is felt by everyone. This includes
citizens, the Supreme Court, the Election Commission, government, media and
many well-meaning politicians. There is a long list of features that are good
about our democracy and an equally long list of things that need improvement.
Once in a while, it is important to step back and look at some basic issues and
discuss how these can be sorted out. What are the root causes of what we see in
elections and politics? We try to show that these basic issues lead to the
myriad problems we see during elections, the scams, problems in governance and
so on.

At the outset, we
need to recognise that we need elections and political parties. Without them,
democracy cannot function. In the Indian context, there are a few significant
stakeholders. First and foremost are the citizens or voters themselves. Second,
we have the politicians and political parties. To regulate them and conduct
elections, we have the Election Commission. Once in a while, the courts also
step in. They are required to see that the laws of the country are upheld. As a
check and balance, we have the media. Most important, to finance the elections
we have various funders.

We need to accept
and recognise two basic issues. One is that political parties and candidates
are committed to winning elections. That is a legitimate pursuit. The second
fact that we ignore is that elections cost money. We are not talking of the
money spent by the Election Commission. Candidates and political parties need
funds to contest elections. Merely pointing out scams and irregularities is not
enough. We need to ask a basic question: what is the root cause of these
problems?

One fundamental
issue is the basic divergence in the goals and expectations of two stakeholders
– the citizens and the political system. Citizens ultimately want good
governance. They want that the money they pay as taxes is properly utilised and
develops the country and the people. This includes a long list like education,
health, roads, water, garbage disposal, rural development, poverty eradication
and so on. ADR’s periodic national surveys reinforce this. One of the top
priorities of the people of India, for instance, is employment.

Political parties,
on the other hand, have one basic motivation – to win elections and be in
power. This is not the same as wanting to develop the country. There are no
doubt well-meaning politicians who want to do that. But the critical question
is: if development requires long-term work, but the next election is round the
corner, what would they do? Invariably, they choose “winnability” over all other
factors. For instance, creating employment for hundreds of millions is not easy
and would take a long time. It is easier to make promises and give various
subsidies and loan waivers.

Let us also look at
it from the politician’s point of view. An honest politician feels overwhelmed
by the competition. There is a huge amount of spending during elections by
other candidates, and all sorts of promises are made. He feels compelled to
compete with others on the same lines. It is said “spending money does not ensure
victory, but not spending any money ensures defeat”.

Of late the role of
money in elections has risen dramatically. This is similar to other democracies
around the world. There are some rules and regulations regarding this – limit
on the amount being spent is the principal rule under the law. But as everyone
knows, this is not followed. For instance, two former Chief Election
Commissioners have gone on record during their term in office to say that over
Rs.10,000 crores of cash was pumped into one State election alone.

No doubt voters have
become aware and take funds from many candidates and vote for the candidate of
their choice. But we miss the key question: whoever wins, has spent a lot of
money. So will he work for good governance or for recovering the funds spent?
Where will he recover it from?

In summary, the
political system is beholden to big money. We have had a series of corporate
scams recently. Not all are linked to political funding, but some are.

Let us look at the
other side – the voters. They have to choose between parties and candidates
presented to them. What do they do if they don’t like anyone? Recently, one
Trump appointee was embarrassed by a statement he had made attacking the
candidate Trump. He now says he had to choose him because he thought the
alternative was worse. This is often the predicament of the ordinary voters in
India. They have to vote for someone. Election after election shows that voters
vote out one party and in the next election vote out another party. Rarely do
we see the same party getting re-elected either at the State or even the
national level. In many States, they always change the party in power in every
election.

There are other
issues with “mass” voters as well. There are endless discussions on the caste
and religious factor in elections. In short, the identity-based voting and
politics. This has nothing to with India or the developing countries.
Identity-based voting happens all over the world, especially when there are
problems like joblessness, immigration and so on. The recent elections in the
US and the Brexit vote are more or less an outcome of lack of jobs and
immigration. The groups that feel they have lost out are usually based on one
race or language or social class even in the US and the UK. We do not comment
on whether this is right or not. Given the identity-based politics, it is but
natural that political parties will use it during campaigns. In India
particularly, the rhetoric on identity-based politics has steadily increased,
and the level of political debate gone down. The media channels and social
media are having a great time highlighting what one politician said about
another. Rarely do we see a seasoned discussion on the development of a
constituency, State or country. Why does this happen? Politicians feel that to
win they don’t have to do a great job – they simply have to defeat the other
candidates. If voters are moved by identity-based politics, so be it, they seem
to say. Another issue with voters is the accusation that they are also
short-term thinkers like the politicians. Some civil society voter awareness
campaigns say: A buffalo costs Rs. 35,000. Why do you sell your vote for Rs.
5,000? To be fair to voters, they choose between the lesser of many evils (not
to say that politicians are evil). They are also somewhat cynical because they
don’t see the kind of development they expect and feel that no matter who wins,
things will remain more or less the same. So why bother?

On the other hand,
there are a large number of well-to-do educated voters. In India as in other
countries, the voting percentage here is very low. India perhaps still does
better than other so-called advanced countries in terms of voting percentage.
The principal reason is that their own life is hardly affected no matter who
wins the elections. So why bother to vote? Also the feeling that my one vote
hardly makes a difference.

To summarise this
aspect: the fundamental difference in motivation and expectation between voters
and politicians has over time led to an increasing “distance” or cynicism. One
wants power, the other wants good governance. Power needs money and money has
its own logic. Those who fund elections expect returns from the winner, and
politicians who spend money expect to recover the funds they have spent.

A closely related
issue is transparency in funding. Till 2008, Income tax returns of political
parties were not publicly available. It took several years of struggle by ADR
to get these in the public domain. Next, the source of funding is still not
known. The accounting systems of political parties are not up to the standard
of a professionally-run company. Many in fact use the single entry cash-based
system – not a double entry accrual system. The accounts are not properly
audited. Once some degree of transparency was coming in, the doors were shut by
the Electoral Bond system. Now no one can find out who gave how much money to
which candidate or party. In other countries, this is public information. The
flaws of the Electoral Bond system require a separate lengthy discussion. It
has been challenged in the Supreme Court.

Along with money
power, there is the issue of crime in politics. Various Supreme Court judgments
and media coverage is ignored. Parties continue to field people with criminal
records. The Table below for the current Lok Sabha elected in 2014 shows that a
combination of crime and money increases the chances of getting elected. The
columns represent the politicians with a serious criminal record, those with
serious criminal record and assets of between Rs. 1 crore and Rs. 5 crore and
so on.

As shown, the percentage of candidates who win increases steadily as the
crime and money combination increases. There are three key questions: can we
expect good governance when we have such MPs in Parliament? They belong to all
the various major political parties and their leadership knowingly gives
tickets to them. The second question is why do they give tickets to them? The
third question is why do voters elect them? This requires a lot of research.
Preliminary data show that parties field such candidates because of their
“winnability”. Voters are either unaware of the facts or have to choose between
the lesser of evils. Since political parties continue to indulge in the game of
money and muscle power without transparency, there is a need for political
party reforms. A citizen’s initiative led by a former Chief Justice of India
drafted such a Bill but no party is interested in passing it as of now.

Before we come to
possible solutions, let us look at the system that we have. No doubt it is a
democracy. But there are broadly four types of democracies with many variations
and permutations and combinations. One is the first-past-the-post system like
we have in India with a British Parliamentary way of electing a Chief Minister
or Prime Minister. The party or coalition with a majority elects their leader.
Second, we have the US Presidential system where the President and the Governor
of each State is directly elected by the voters. In India, we vote for the
local candidate, not for the CM or PM. The elected MLAs and MPs, in turn, elect
them. Third, we have the list or proportional representation system. Here each
voter in effect has two votes – one for a candidate and another for a party.
While candidates are directly elected as in other countries, the votes obtained
by a political party nationwide are then converted by a formula into additional
seats. For instance, in India, we increasingly see that the vote difference
between two parties is very small, but the seat difference is huge. In a few
cases, a party with more votes has even lost a State election (in Karnataka it
happened twice). The proportional representation system tries to correct this.
Fourth, we have the French system of run-off elections. They say anyone with
less than 50% of the votes cast is not a people’s representative. So the top
two candidates have a run-off election in the second round.

Each system has its
pros and cons. The Indian-British system is easy to understand for the ordinary
voter. But it has many negatives. The CM in almost every State has to placate
various interests within his or her own party (unless the CM is a mega
politician who single-handedly brings in all the votes). So we see Cabinet
reshuffles and many disgruntled MLAs. It has also contributed to the large
number of political parties that we have. Over 34 parties have at least one MP
in Parliament. While this can be taken positively as celebrating diversity,
winning elections at a local level means getting far less than 50% of the votes
cast. Over 200 MPs have less than 40% of the votes cast and many have won with
less than 30% votes. That is because there are so many parties and candidates
in each constituency. Even at the level of political parties, the winning party
usually gets between 25% and 32% of the national vote in Parliament. The votes
are greatly split, but power is not shared – it is with the ruling party or
coalition. This raises a fundamental question: whom does the Government
represent?

The US system of
direct elections is attractive to many groups. However, many others, including
the Constitutional Review Committee headed by a former Chief Justice of India,
and one former President and another Vice President have cautioned against it.
While it brings stability, it gives unbridled power to one individual with no
doubt some checks, and balances like between the Congress, the Senate and the
President in the US. The problem in India is that we are the most diverse
nation in the world. Dozens of languages, hundreds of dialects, hundreds of
castes, all the major religions in the world and so on. Each group wants some
representation. A via media may be to have this at the State level rather than
at the national level. But a lot more foresight about all the implications is
required before we change our system.

Many other groups
recommend the proportional representation (PR) system. In particular, the
Dalits, Muslims and the urban educated want this. For instance, BSP got nearly
15% votes in the 2014 national election but got 0 seats. With the PR system,
they would get between 30 and 70 seats depending on the formula used.
Similarly, the Muslim representation will go up and so on. Given our
heterogeneous country, each group will form a pan-India political party over
time and claim seats in Parliament and the State Assemblies.

The French system
was endorsed by a minority of commissions and thinkers. Some former CEC’s have
also said that it is easy to implement. The main argument in favour of it is
that no one can buy 50% of the votes and that too twice. The nature of
campaigns and politics has to become more inclusive as a result. The divisive
politics that we see today will come down. The downside according to some is
that it achieves nothing as the winner in the first round usually wins in the
second round as well. That may be true in France, but it remains to be seen how
it works out here.

Before we propose
any solution, one important aspect needs to be re-emphasised. We have nearly
2,000 registered political parties, and most States are governed by a regional
party. The voter is often faced with over a dozen candidates in the polling
booth, many of whom are Independents. The political calculation is then simple.
The candidate knows how many are on his side (committed) and how many are never
going to vote for him. He can concentrate on the swing voters. They can be
bought over, or promises made to win them over with freebies, subsidies,
distribution of mobiles, free rations, loan waivers and so on. He can attack
other candidates in increasingly vulgar terms. He can raise communal and caste
issues openly. But we need to understand that he is not really abusing others,
he is really appealing to his own voter base. Thankfully, the role of muscle
power and booth capturing is no longer there thanks to the Election Commission.
But there are other tricks routinely used. Voter lists are tampered with
wherever possible. In one case, over 10,000 voter IDs were found of a
particular religious group in one flat. You can also buy people’s voter IDs to
ensure they do not vote. In some areas, there is a threat of post-poll violence
and people are told to simply not vote. Since the margins of victory in many
constituencies are very low, these tactics can make the difference between
victory and defeat. We have perhaps the youngest voters in the world. To what
extent they are interested in thinking through various issues before voting is
not known. But we cannot blame the youth – the elders also sometimes vote based
on identity or various other factors.

While voters are
increasingly giving clear mandates, the era of coalition Governments is not
over. This may be good in some ways as it acts as a check to excesses by a
ruling party. But it also leads to instability, and behind-the-scenes
bargaining for the fishes and loaves of office. Many times a minor party gets
into power within a coalition. At other times the minor parties have a lot of
bargaining power.

What is the
collateral damage? To what extent do those in power work for the people and to
what extent do they work for those who fund them? One bare-bones method of
fundraising is something like this. A bold entrepreneur or business house goes
to someone in power and says, give me so much land or other public resources.
He says he will set up a plant and create so many jobs. If he is able to
persuade those in power, he then uses the public resources or land to leverage
large loans, preferably from public sector banks. Naturally, those in power
need some consideration to help them fight elections. Meanwhile, bad loans keep
rising. There are many clever ways of making money and helping those in power.
A book can perhaps be written on that. Politics of the type we have can affect
the financial sector in the long run.

On the social front,
we have State after State with huge deficit financing. This is growing and
sometimes seems irreversible. The politics of buying votes from the public
exchequer by giving freebies has led to this.

So where are we? We
have a highly competitive political system with over 2,000 parties, of which at
least 50 if not more are serious contenders for winning seats either at the
national or State level. We have a very diverse and heterogeneous population
divided on caste, religion, language and so on. We have an increasing role of
money power. (There are all sorts of interesting stories about how this is used
and practically every Indian has one story to tell). There are all sorts of
tricks being used to win elections – from campaign strategies to media management,
social media, fake news, paid news and what not. This is bound to happen given
the structure we operate in. We have a lot of collateral damage to the banking
sector and the State finances.

What can we do? We
propose one possible solution. It may or may not be workable but it addresses
the problems outlined earlier. We need to solve some basic problems – reduce
the role of money power and crime, reduce divisive politics and the politics of
hatred and appeasement. One way is to reduce the competition in politics. The
Japanese have an interesting multi-member constituency. Each is a large domain
and several members can be elected from the same constituency. This was true in
a few constituencies in India also for one or two elections after Independence.

What do we then
propose? We need to balance between what is practical and what is ideal. If at
most two candidates can be elected from each constituency, it would mean for
instance that anyone with say 35% or more votes is elected. We can then have at
most two candidates. How does this help? If a popular candidate knows he or she
is very likely to get past 35% of the votes polled, he need not spend so much
money, he need not abuse the other candidates and political parties. It is also
in line perhaps with the Indian ethos where co-operation and consensus is the
social norm, not competition. The winner takes all democracy that we have seen
is largely in the Western framework of competition and individualism. Our joint
family system, the notion of biradri, is more about living together
without animosity to others. Another thing we need to fix is transparency in
funding. Thirdly, we need ordinary people to fund their favourite candidate and
party with small amounts. Instead of selling their votes people need to support
politics. If they want a good government, they should pay for it, even if it is
a small amount.

There are many other
issues like which of the four systems of government we need. Or whether we need
an intelligent combination of some of those systems. The media needs to be
regulated. The Election Commission has a long list of recommendations that the
government is not acting on. There have been at least half a dozen major
Commissions that have gone into the issues of Electoral Reforms. Again, the government
has not acted – it is a long-term issue and elections are short-term. The hope
is that as more and more people think about these issues and become active
citizens, change will eventually come.

Finally, what about
the coming elections? The idea of active citizens who campaign not for a
candidate or for a party, but for good governance is needed. Social media in
various languages has increased the reach. ADR itself carries out a campaign
saying no votes for crime and for bribes. Voters need to understand that
selling their vote is not only demeaning but also harmful in the long run. The
more such non-partisan groups who carry out such campaigns, especially in
regional languages, the better.

shailesh.kwebmaker