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The Hindu Editorial Analysis | PDF Download

Date: 22 August 2019
  • Was a task force report that recommended a new law to replace the more than 50-year-old Income Tax Act, 1961 suppressed because it inadvertently provided factual evidence for the debilitating impact of demonetization on the formal corporate sector?
  • On September 1-2, 2017, at the Rajaswa Gyan Sangam (an annual conference of senior tax administrators), Prime Minister Narendra Modi had made an observation regarding the need to redraft the Income Tax Act, 1961. The Union Finance Ministry set the ball rolling for making direct taxes (on personal and corporate incomes) simple and in consonance with India’s economic needs. On November 22, 2017, it appointed a six-member ‘Task Force for drafting a New Direct Tax Legislation’.
  • On September 26, 2018, however, an office memorandum was issued “with the approval of the Finance Minister”, requesting the task force’s convenor “not to submit its report to the Government until and unless the Draft prepared by the Convenor of the Task Force is deliberated clause by clause by all Members of the Task Force and has agreement of all Members or at least majority of Members”.
  • The convenor, an Indian Revenue Service officer and the former Central Board of Direct Taxes (CBDT) Member (Legislation) Arbind Modi, who was closely involved earlier with tax reforms by the A.B. Vajpayee and Manmohan Singh governments, was to superannuate on September 30, 2018. No extension was given for complying with the office memorandum.
  • The convenor, nevertheless, submitted “four volumes in sealed cover of the report and draft legislation” to the Finance Minister and the Finance Secretary on September 28, 2018 “for continuity” and “record purposes”.
  • In November 2018, the Finance Ministry appointed Akhilesh Ranjan, the new Member (Legislation), CBDT, to succeed Mr. Modi as the task force convenor. Mr. Ranjan submitted his report to the Finance Minister on August 19, 2019.

Demonetisation’s blow

  • Drawing insights from the tax department’s database of annual tax returns filed by corporate firms and individuals, Mr. Arbind Modi’s report had proposed two alternative approaches along with draft legislations corresponding to each of the models for a new direct taxes law.
  • The chapter on reform proposals for corporate taxes has a table (page 109, Volume I) that makes for a significant piece of evidence for how demonetization may have affected companies. The table shows aggregates of investments corporate firms disclosed in their annual tax return filings.
  • The aggregate of investments disclosed in the assessment year 2017-18, or financial year 2016-17, the demonetization year, plummeted to ₹4,25,051 crore — or a drop of nearly 60% from the previous year.
  • In the seven financial years, from 2010-11 to 2016-17, the aggregates of investments disclosed were ₹11,72,550 crore, ₹9,25,010 crore, ₹10,22,376 crore, ₹11,03,969 crore, ₹9,98,056 crore, ₹10,33,847 crore and ₹4,25,051 crore.
  • The near collapse becomes apparent when the aggregates are seen as a percentage of GDP. The investments by corporate firms that filed annual returns in each of the years from 2010-11 to 2016-17 as a percentage of GDP were 15%, 10.5%, 10.2%, 9.8%, 9%, 7.5% and 2.7%.
  • The aggregate figures are actuals (therefore nominals) sourced from companies’ statutory disclosures, and not the estimates or findings of some survey. This in fact makes the data undeniable evidence of demonetization’s contribution to the deepening economic slowdown that has become a headache for the Modi government early in its second tenure.
  • The report throws up a few more worrying trends. For example, on page 115, Volume I, the report notes: “About 50 percent of the companies registered with the Registrar of Companies filed their income tax returns for the financial year 2016-17 (assessment year 2017-18)”
  • “The share of loss-making companies has increased from 42 percent in AY 2013-14 to 45 percent in AY 2017-18”
  • “There has been a decline in the number of corporate filers from the manufacturing sector over the period AY 2013-14 to AY 2017-18”
  • “The return on equity declined from 16.4 percent in AY 2013-14 to 15.5 percent in AY 2015-16 and thereafter has reversed the trend and increased to 16.5 percent in AY 2017-18”
  • “The efficiency (productivity) of the corporate tax, which shows the policy choices regarding tax concessions and the overall levels of non-compliance, is extremely low at 7.5 percent over the period AY 2013-14 to 2017-18. Compared to other select economies, India’s productivity of corporate income tax is the lowest”.
  • “Given the limited fiscal space available to the Government, economic growth would necessarily have to be driven by private investment…. [but] corporate investments have remained virtually stagnant despite the availability of sufficient retained earnings”.
  • GDP growth estimates
  • In the report, the trend in aggregate corporate investments figures corresponds to the investment slowdown discernible in the official GDP estimates for 2011-12 onwards. However, the investments aggregate figure for 2016-17 brings into question the GDP growth estimate for the demonetization year. In the latest round of scheduled revisions, the government had revised upwards the 2016-17 GDP growth estimate, from 7.1% to 8.2%.
  • As per the revised estimate, the demonetization year, is the best in the Modi government’s first tenure as far as GDP growth is concerned. This when, nearly every industry association reported sharp drops in sales that year on account of the note ban.
  • The revised estimate defies common sense and runs contrary to comparable data generated by non-government agencies and, as it turns out now, also corporate annual returns tax return filings.
  • The Finance Ministry has so far not made public the task force reports (the one submitted on September 28, 2018 and the other on August 19, 2019). It remains to be seen whether it will put out the first one for public discussion. Or, if the second one, likely to be made public in due course, will retain the data from the corporate annual tax returns that threaten to expose the role of demonetization in hurting the economy beyond the informal segment.
  • Earlier, the government had initially held back and even challenged the validity of the National Sample Survey Office’s (NSSO) Periodic labour force survey results even after the National Statistical Commission had duly cleared the findings. The results — that the unemployment rate reached a 45-year high in 2017-18, the demonetization year — were politically inconvenient. The findings were subsequently only released after the completion of the 2019 elections.

 Content management

  • Courts must let government work out a balanced regulatory regime for online content
  • The submissions in the Supreme Court on behalf of the Tamil Nadu government in support of linking social media profiles of registered users with their Aadhaar numbers are not well-founded in the law as it now stands. It is noteworthy that a Division Bench of the Madras High Court, which is hearing two writ petitions on this matter, did not see merit in the idea. The Bench had during the hearings observed that following the Supreme Court’s decision in the Aadhaar case, the unique 12-digit-number can be used only for subsidies and welfare benefits; and pointed out that Section 57 of the Aadhaar Act has been struck down to the extent that it authorised body corporate and individuals to use the number to establish someone’s identity. The petitioners had approached the High Court with such a prayer on the ground that many people got away with inflammatory posts on social media because of the lack of traceability. However, the Bench has since then expanded the writ petitions’ scope to examine the adequacy of the legal framework on cybercrimes and the responsibilities of intermediaries who provide telecommunication and online services. The State government is batting for better assistance from intermediaries and social media companies to trace offending messages.
  • As two other High Courts are also hearing similar matters, Facebook, WhatsApp and Twitter have sought a transfer of all these cases to the apex court so that there are no conflicting judgments.
  • While the Supreme Court will decide the question of transferring these cases to itself, the Madras High Court will continue its hearing. A word of caution. The Union Ministry of Electronics and Information Technology notified new draft rules for intermediaries last year and called for public comments. The proposed rules envisage new obligations for service providers. One of the changes proposed is that intermediaries should help identify originators of offensive content. This has created some understandable misgivings at a time when there is widespread suspicion about online surveillance. Technology companies that use end-to-end encryption have pleaded inability to open a back door for identifying originators. The issue concerns the global policy of these companies as well as the wider public interest of millions of registered users. After the K.S. Puttaswamy decision (2017) in the ‘privacy’ case, any state intervention in the regulation of online content has to pass the test of proportionality laid down by the court. It will be desirable if courts do not impart needless urgency to the process of introducing a balanced regulatory regime to curb content that promotes undesirable activities such as child pornography, sectarian conflict and mob violence, without affecting individual privacy. The balance must be right between protecting privacy and allowing the state leeway to curb crime.

Crisis in Rome

  •  Italy’s political centre is crumbling as the far-right steps into an ideological vacuum
  • The resignation speech of Italian Prime Minister Giuseppe Conte, with his estranged Interior Minister Matteo Salvini beside him, was an acknowledgement of all that could go wrong with an opportunistic alliance between a far-right nativist party and a professed ideology-less anti-establishment group. When the 5-Star Movement led by comedian Beppe Grillo and Mr. Salvini’s League joined hands after last year’s elections in which no party got majority, the plan was to keep establishment parties away and offer a populist alternative. But for Mr. Conte, the technocrat Prime Minister who is not a member of any party, governance was not easy with contradictions within the coalition often coming to the fore. While the 5-Star Movement lacked any ideological alternative to offer other than its anger towards Italy’s centre-left and conservative establishment parties, Mr. Salvini pushed for his party’s “Italy-first”, anti-immigrant, anti-EU agenda. As Interior Minister, he banned migrant ships. He also challenged the EU fiscal orthodoxy by calling for tax cuts and spending rises, which appealed to the electorate still reeling under the effects of the debt crisis. The League party, a junior member in the coalition, came first in Italy in the election to the EU Parliament with 34% vote.
  • The current crisis was triggered by Mr. Salvini’s decision to withdraw from the coalition. With opinion polls suggesting that the League could get up to 38% of the popular vote if polls are held soon, Mr. Salvini is on course to become Prime Minister. But may be not immediately. The 5-Star Movement has indicated that it is open for talks with the centrist Democratic Party. If they stitch up an alliance, the League will be out of power for at least three years.
  • But the problem is that even if another coalition is formed, it would not be the answer to the country’s problems. An alliance between the 5-Star Movement and the Democrats would be another odd marriage, like the populist coalition that collapsed just now. It would also allow Mr. Salvini to pursue his hard-line nationalist politics freely from the opposition, preparing himself for the next election.
  • In fact Mr. Salvini’s rise, from a regional leader in northern Italy to a popular nationalist political figure now, is also the story of Italy’s political and economic crisis. When establishment parties shy away from addressing structural economic issues, the crisis opens avenues for anti-establishment forces. Italy’s political centre is crumbling. The Left is weak. The 5-Star Movement doesn’t have an ideological programme. Mr. Salvini, whose hard nationalist views echo the far-right politics on the ascent in Europe, seems determined to exploit the Italian crisis.
  • There is a growing movement in the West to legalise cannabis, with rumblings of the same in India. Having conducted medical research on cannabis at Yale University for several decades, we urge India to carefully weigh the risks and benefits of cannabis before blindly following suit with the West.
  • In India, cannabis, also known as bhang, ganja, charas or hashish, is typically eaten (bhang golis, thandai, pakoras, lassi, etc.) or smoked (chillum or cigarette). Its potency depends on the content of its principal active constituent, tetrahydrocannabinol, though cannabis contains more than 500 other chemicals.
  • In India, there is a tradition of using cannabis in many religious contexts. But although Ayurvedic texts refer to cannabis as a treatment for several maladies, what is often overlooked is that it is categorized as Upavisha Varga (sub poisonous), and its recreational use has been described as toxic.
  • Busting myths
  • There are many misconceptions about cannabis. First, it is not accurate that cannabis is harmless. Its immediate effects include impairments in memory and in mental processes, including ones that are critical for driving. Long-term use of cannabis may lead to the development of addiction of the substance, persistent cognitive deficits, and of mental health problems like schizophrenia, depression and anxiety. Exposure to cannabis in adolescence can alter brain development.
  • A second myth is that if cannabis is legalized and regulated, its harms can be minimized. With legalization comes commercialization. This comes at a cost which we have seen with tobacco and alcohol over the last century. The morbidity and mortality associated with tobacco and alcohol rank amongst the top 10 in terms of the global disease burden. Tobacco, too, was initially touted as a natural and harmless plant that had been “safely” used in South American religious ceremonies for centuries. The tobacco industry invented cigarettes for ease of use, altered the acidity of tobacco to make it less harsh, added other chemicals to improve its taste, mass-produced cigarettes, and sold them using sophisticated advertising. It manipulated knowledge about the adverse effects of tobacco despite being aware of these effects, and successfully staved off legal battles for decades. No amount of taxation of the tobacco industry can compensate for the health toll on billions of tobacco users over the last century. Despite knowledge of the risks of smoking, cigarettes remain legal and the tobacco industry continues to thrive. This also highlights the point that once out, the genie cannot be put back into the bottle.
  • It’s important to make a distinction between legalization, decriminalization and commercialization. While legalization and decriminalization are mostly used in a legal context, commercialization relates to the business side of things.
  • The goal of commercialization is to sell as much of the product, and the cannabis industry is steadily growing in the U.S. In fact, as the sale of tobacco products have shown signs of a decline in the West, some tobacco companies have entered the cannabis market. Altria, the maker of Marlboro cigarettes, has invested $1.8 billion (₹12,400 crore) in the cannabis grower Cronos Group. These commercial entities will bring their wealth of experience navigating the law, their successful marketing, their well-oiled lobbying, and deep pockets to influence the government to maximize profit and minimize risk to their commercial enterprise.
  • In the U.S., cannabis is being incorrectly advertised as being “natural” and “healthier than alcohol and tobacco”. Commercial entities also understand that targeting the young assures them lifelong customers. A new array of cannabis products in the form of ice creams, sweets, and even soft-drinks are becoming available. The West also says that legalizing and regulating cannabis will “undermine criminal markets”. Congress MP Shashi Tharoor echoed this view last year. Yet, as we have seen in Colorado, the black market has only increased.
  • Considering alternatives
  • In 1961, driven by Western nations, the UN sponsored an international treaty to prohibit the production and supply of drugs including cannabis. India resisted and negotiated exceptions, loopholes, and deferrals.
  • It is ironic that the West is now legalising cannabis and other drugs. Given that some in India are clamouring for the same, the country should carefully consider all the risks, and consider alternatives.
  • One, it could decriminalize cannabis but forbid commercialization.
  • Two, if India were to liberalise its policy on cannabis, it should ensure that there are enough protections for children, the young, and those with severe mental illnesses, who are most vulnerable to its effects. Finally, treatments for those who become addicted to cannabis should be offered.

The ‘Kerala Model’ is unsustainable

  • Over the years, parties have responded to commercial interests over the welfare of people • In 2018 Kerala was overwhelmed by an unprecedented natural event. Flooding combined with landslides caused many deaths. Floods were not new to Kerala, which receives high rainfall. What was new compared to the times of equally high rainfall in the early part of the last century was the flooding due to inept dam management and the vulnerability of the terrain induced by the pattern of land use. In 2019 we have seen some of this repeated. This year it is the landslides that have caused most deaths. They are a relatively recent phenomenon, pointing to the role of uncontrolled economic expansion.
  • Man-made factors leading to devastation point to the unsustainability of the socalled ‘Kerala Model’, a term used to describe the economic policy underpinning the State’s recent growth and development history. Lauded for the high human development indicators it is believed to have bestowed upon the State, this construct contributed to a self-congratulatory discourse within the power elite. Based on the pertinent observation of Amartya Sen that the State seemed to have attained high social development at a relatively low level of income by comparison to the rest of India, it was soon appropriated by the political class including artists and intellectuals who collaborate with state power. Any lack of enthusiasm was greeted with intolerance, similar to what ultra-nationalists display today when challenged on their claims about India.

Many failures

  • Criticism of the Kerala Model has been based on its several failures. The foremost is the inability to meet the employment aspirations of the people, pushing them to live under authoritarian regimes overseas. Second, the laudable public provision of health and education has been financed by borrowing. Kerala has the highest per capita public debt among States, implying that we are passing on the bill for our own maintenance to future generations. Finally, Kerala has not done so well when viewed through the lens of gender justice. High levels of female education have not led to an equally high participation of women in the labour force or in governance, even though they participate equally in elections.
  • Two consecutive years of a natural calamity exacerbated by human action are a revelation that the Kerala Model has run its course. The extraordinary events that we have witnessed this year range from fountains sprouting out of the earth due to the hitherto unknown ‘water piping’ to constructed structures shifting, physical phenomena not yet widely understood. There has been overbuilding in Kerala, with absentee owners having invested in luxury houses they do not always occupy. As a result poorer households are crowded out of safe locations on the plains to precarious ones on the hills.

 Relaxing rules

  • Public policy has failed miserably to regulate land use including rampant quarrying, which destabilises the earth’s surface, with political patronage. Truth is that public policy is part of the problem. The floodgates were opened in 2015 when the Congress party did away with environmental clearance for quarries in existence for three years. Then in 2017 the Pinarayi Vijayan government relaxed the rules for quarrying further. It also weakened the provisions of the legislation governing conversion of agricultural land into construction sites. The rice paddies had both produced food and served as gargantuan sinks for rainwater.
  • Kerala’s principal political parties, irrespective of their ideologies, have responded to commercial interests over the welfare of ordinary people.
  • To come out of this morass the people of Kerala would have to rely on themselves. They need to acknowledge that their consumption pattern must change as it has adversely impacted the natural environment, the consequences of which have begun to hurt them. In this task they are unlikely to be guided by the State’s politicians and intellectuals who led them into this cul-de-sac in the first place.