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12 May 2016 Editorial


12 MAY 2016

Lessons from Uttarakhand

Former Uttarakhand Chief Minister Harish Rawat’s victory in the floor test was a foregone conclusion after the Supreme Court barred nine dissident Congress legislators from participating in the confidence vote. The votes of 27 remaining loyalists and a six-member bloc have seen him through. The result, which has been confirmed by the Supreme Court, brings an end to the Bharatiya Janata Party’s political misadventure in exploiting the dissidence within the Congress and attempting to install a government either run or backed by defectors. Ever since the government led by it hastily imposed President’s Rule on the eve of a floor test scheduled in March, it has been unable to convince the judiciary of the justification for doing so. Two legal principles stood in the way of its plan: the bar on defection and the primacy of the floor test in determining a government’s majority. Whatever be the right of legislators to disagree with their leadership, it is limited by the rule against defection, as the law stands at present. In Uttarakhand, of course, the situation was complicated by the fact that a clear majority in the State Assembly — made up of BJP and rebel Congress MLAs — had pressed for a division of votes in writing in advance of the Appropriation Bill being taken up. While there is no escaping the fact that Mr. Rawat had lost his majority in the House, one lesson from the development is that one piece of impropriety (remaining in office by the use of the Speaker’s disqualification powers) does not justify another piece of possible illegality (the imposition of President’s Rule after attempts at toppling a government were stalled).

As for Mr. Rawat, he will still have to face possible prosecution if the CBI decides to press ahead with its probe into a ‘sting operation’ that showed him offering bribes to some MLAs for their support. The legal challenge to his reinstatement is also by no means over, with the Supreme Court still to take a view on whether the disqualification of the rebel Congress MLAs was valid. At a larger level, the Uttarakhand crisis raises important questions that are relevant to the functioning of democracy: should Chief Ministers who have lost their majority take recourse to the anti-defection law to stay in power? Is disqualifying inconvenient MLAs an acceptable way of managing the majority of a government? On the flip side, should a few lawmakers, who constitute a fraction of a party’s strength in the legislature, be allowed to topple a regime at the behest of the opposition? While the floor test rule to prove majority laid down by the Bommai judgment must remain, the time may have come to rethink the provisions that give Speakers untrammelled power to adjudicate on the issue of defection, particularly when such rulings can have a direct bearing on a trust vote. Bommai insured State governments to a large extent against the Centre’s machinations, as the BJP has just rediscovered to its embarrassment. But the growing misuse of the anti-defection law by ruling parties across the political spectrum suggests that Assemblies need some insurance against scheming State governments as well.

Closing the tax bolthole

More than three decades and several billions of dollars of lost revenue after India entered into a bilateral Double Taxation Avoidance Agreement with Mauritius, the two countries have finally renegotiated the terms of their agreement. The signing, this week, of the protocol for amending the treaty means that with effect from April 1, 2017, companies and investors resident in Mauritius will have to pay capital gains tax on the sale of shares purchased, on or after that date, in a company based in India. The amendment to the convention has been some time coming. In 2011, the UPA government had informed Parliament that a joint working group was in place since 2006 to ensure adequate safeguards to prevent misuse of the DTAA — and that work was in progress to strengthen the agreement and improve the exchange of information on tax matters. However, nothing concrete emerged. The present NDA government too, in its first full Budget, presented in 2015, acceded to opposition from overseas investors and postponed the implementation of the General Anti-Avoidance Rules (GAAR) to 2017. It is against this backdrop that the amendment to the DTAA with Mauritius comes as a very welcome development that could help plug a significant loophole for tax avoidance. The practice of setting up companies in Mauritius merely to take advantage of the DTAA and the prevailing low tax rates there will now be rendered pointless. There is to be a mandatory check of the main purpose and bona fides of a business — a firm based in Mauritius will be deemed to be a shell or conduit company if its total operational expenses in that country are less than Rs.27 lakh. It will not be eligible for the 50 per cent reduction in tax rate on capital gains to be applicable to investments made under the amended DTAA during a transitional two-year period between April 1, 2017 and March 31, 2019. From April 1, 2019, all transactions attracting capital gains tax for investments made out of Mauritius will be taxed at the full applicable rate prevailing at the time in India.

The DTAA amendment will also ensure India’s conformity to the Organisation for Economic Cooperation and Development and G20-led guidelines on combating base erosion and profit shifting. In 2015, the OECD had spelt out a series of measures countries needed to take to curb abusive tax avoidance by multinational enterprises — including steps to tighten double taxation avoidance treaties. For a country keen to play a greater role in global decision-making, the move to seal a key route for the round-tripping of capital generated out of tax-dodging enterprises will help boost both revenue and confidence in the rule of law in India. It is beyond doubt that ensuring a level playing field for all international investors, irrespective of domicile, can only serve to enhance India’s attractiveness as an investment destination in the long run.


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