Source: IDEAS AND INSTITUTIONS | ISSUE #35
Analysis
Amending an Act of Parliament Through a Press Release
Through the Finance Act, 2023, which was passed by the Lok Sabha on March 24 this year, certain amendments were made to the Income Tax Act, 1961. These amendments, inter alia, changed the mandate on Tax Collected at Source (TCS) under the Liberalised Remittance Scheme (LRS) of the Reserve Bank of India (RBI). The LRS is a framework under the Foreign Exchange Management Act (FEMA), 1999, that lays down the guidelines for outward remittance from India by resident individuals. It allows all resident individuals to freely remit up to $250,000 per financial year. The purpose may be any permissible current account or capital account transaction.
Before the amendment, sub-section (1G) of Section 206C of the law required every authorized dealer under FEMA who received any amount, or an aggregate of amounts, of Rs. 7,00,000 or more in a financial year for outward remittance under the LRS to collect from the buyer 5 percent of such an amount as income tax. Further, every seller of an overseas tour program package in receipt of any amount upon the purchase of such a package was also obliged to collect from the buyer 5 percent of such an amount as income tax. If the remittance was for education financed by a loan, the rate of collection was 0.5 percent.
Through the Finance Act, 2023, this provision was amended to increase the rate of collection to 20 percent for purposes other than education and medical treatment without any threshold as such. No change was made to the TCS for remittances under the LRS for education and medical treatment.
Another related change announced after the budget was that credit card payments would be brought under the LRS. Through an e-gazette notification on May 16, the government notified Foreign Exchange Management (Current Account Transactions) (Amendment) Rules, 2023, to remove the differential treatment for credit cards vis-à-vis other modes under LRS.
The Finance Act stated clearly that these amendments would take effect from July 1, 2023. But on June 28, the union government issued a press release to make certain changes to the TCS mandate and to extend the date from which the new rates and thresholds would apply.
In the press release, it was announced that there would be no change in the rate of TCS for all purposes under LRS and for overseas travel tour packages, regardless of the mode of payment, for amounts up to Rs. 7,00,000 per individual per annum. So, no TCS would apply on remittances under LRS up to Rs. 7,00,000, and a 5 percent rate would apply for remittances for overseas tour packages up to Rs. 7,00,000. The press release also announced that the government is providing more time for the implementation of revised TCS rates and for the inclusion of credit card payments under LRS. While it is not clear when the differential treatment of credit cards will end, as of now, the e-gazette notification has been superseded. Further, the new rates and thresholds will apply from October 1, 2023.
Following the press release, on June 30, the union government issued a circular reiterating the changes conveyed in the press release issued two days earlier. The circular stated that the changes are being made to “remove difficulty in implementation of changes.” This power to remove difficulties comes from sub-section 1-I of Section 206C, which says, “If any difficulty arises in giving effect to the provisions of sub-section (1G) or sub-section (1H), the Board may, with the approval of the Central Government, issue guidelines for the purpose of removing the difficulty.” On the same day, the government also issued a notification whereby a new Rule 7 was inserted into the FEM (CAT) Rules, 2000, to exclude credit card spends outside India from LRS.
This sequence of events raises three sets of questions about the process of making and implementing laws and rules.
First, it appears that a press release was used to amend an Act of Parliament. The Finance Act stated clearly that the amendments would come into effect from July 1 of this year. The June 28 press release has changed this date to October 1. More importantly, the press release is seeking to amend the substance of the law itself. The Income Tax Act, as amended by the Finance Act, 2023, clearly states that no threshold would be considered for the application of the 20 percent TCS on remittance under LRS for purposes other than education and medical treatment. The press release states that this is now being changed—5 percent TCS would apply on remittances of up to Rs. 7,00,000 under LRS for overseas tour packages, and no TCS would apply for other purposes below that threshold. Although a circular was issued on June 30, the first instrument to be used was the press release. Further, the circular stated that the changes are being made to “remove difficulty in implementation.” That can only justify the change in date and not the change in the threshold itself. Can thresholds and tax rates be changed in the name of removing difficulty in implementation?
At the end of the press release, there is a statement: “Legislative amendment in this regard shall be proposed in due course.” This means that the Parliament will be given a fait accompli to accept the amendment.
Second, the final law and rules are being treated as though they were drafts circulated for comments. In addition to the extension of the date, there are important changes made to the income tax law and the rules made under FEMA. The press release states, “Numerous comments and suggestions were received which have been carefully considered. In response to the comments and suggestions it has been decided to make suitable changes.” Such comments and suggestions are usually sought on a draft of a law or rule. If a law or rule that has already been notified is revised based on public criticism, it reflects a responsive government, but it also shows a failure of process in the government. Had the government first released drafts for public comments and given the public adequate time to submit their comments and suggestions, the version of the announcement made in the budget speech, the income tax amendment placed in the Parliament, and the rules made under the FEMA Act would all have been better informed and also more in accordance with the realities of India’s political economy.
Third, the sequence of events does not stand to reason. The circular should have been issued prior to the press release, because the change in the law is supposedly coming from the circular. Usually, a press release is only meant to communicate the change made through another instrument. But in this case, the press release was issued two days before the circular. Further, the circular being issued hours before the date of application sends a signal that the government is acting in haste and under pressure. All those who had updated their systems to comply with the amendments from July 1 were, in a way, punished for their actions—they would have had to reverse to the old rules at the last moment.
While it is obvious that any instrument of state power should be used within its scope—a press release cannot be used to amend an Act of Parliament—and that a press release should be issued after the relevant circular, it is equally important to consider the deeper failure due to which things came to this point. There is a way of policymaking that involves putting out drafts of laws, regulations, and rules for public comments, seeking inputs from the public at large, considering those comments, and conducting a thorough assessment of the expected impact of the proposed law, rule, or regulation. The rationale for this is not just to strengthen accountability and the legitimacy of the decisions but also to mitigate the problem of lack of information with public authorities. Since information is distributed across the economy and is ever-changing, an open, consultative process makes it easier to avoid mistakes. While some of the public authorities in India sometimes practice good principles of policymaking, they remain exceptions to the rule. Often, laws, regulations, and rules are issued without proper public consultations or analysis of their impact. In the case of an Act of Parliament, there is at least some opportunity for the members of Parliament to discuss the proposed law before it is finalized. For regulations and rules, even this step is usually missing. In the ongoing saga of tax collection at source, we can see the problems with this way of policymaking.
Interestingly, since those affected by this move are mostly the upper middle class and the rich, they were able to force the government to make these concessions. But should not this make one wonder: how many such laws are made that mostly affect those who are not able to get such concessions?
Note: The author would like to thank Pratik Datta for a useful discussion on this topic.
Review
State-Led City Building in India
City building in India has often been approximated to nation building. Towns in newly independent India were planned and built not just to provide housing and administrative capitals but also to reflect India’s capability to modernize and develop. The new cities of Bhubaneswar, Chandigarh, and others exemplify this attitude. More than seven decades after India’s independence, the Indian state, at various levels, continues to plan and build new towns and cities. Major fiscal initiatives focus on greenfield urban or city-building projects outside the existing jurisdictions of key cities.
According to one review of urban studies literature in India, scholarship on this phenomenon has been “statist” on the one hand. On the other hand, such literature has focused attention on the “unregulated, deregulated, unplanned and unintended city” created by these processes. Ashima Sood and Loraine Kennedy’s recent book, India’s Greenfield Urban Future: The Politics of Land, Planning and Infrastructure (2022), continues this trend. According to its authors, this edited volume focuses on the renewed interest in “new” or “greenfield” city building in the states’ effort to “instrumentalise the urban in pursuit of economic growth.” In doing so, this edited collection of case studies on new city-building projects continues an older theme of examining the states’ interest in building new towns after independence.
The book investigates new city-building projects across India. Examples include urbanization along highways in Karnataka and Maharashtra, town building along the Delhi-Mumbai Industrial Corridor (DMIC), peri-urban developments in West Bengal and Telangana, and a private township in Bengaluru. Through these series of case studies, the volume provides a cartographical exploration of the contextual yet similar impulses that have driven these projects. It also provides insights into the political and economic contestations that enable or frustrate them.
Kennedy and Sood’s opening chapter introduces the renewed interest in city building for economic growth. It explains the ideas that ground this motivation for city building across both the central government and the level of the states. One central idea is that of treating new cities as growth engines. Another common idea is to bypass restrictive regulations and establish more governance regimes believed to be more efficient. New city projects are developed under a provision of the Indian Constitution that exempts the development of “industrial townships” from municipal governance institutions. In turn, and by implication, this points to the third common idea that views constitutionally mandated governance institutions as hindrances to state-led city building.
Next, Sai Balakrishnan’s chapter on highway urbanization reports the results of a field study on city building across the Bengaluru-Mysuru highway and the Pune-Nashik highway. In doing so, the chapter highlights institutional innovation in planning for urbanization. The focus of the study is to highlight the issues local governance institutions face in responding to the pressures of urbanization on a regional scale. Balakrishnan finds that even though the respective state governments of Karnataka and Maharashtra have the requisite legal powers, effective coordination for development in both cases has required the presence of a local politician who intermediates between the interests of urbanization and the incumbent landholders and villagers. These local leaders have been critical in innovating new arrangements to ensure consensus for development, such as returning 40 percent of the land to affected villagers rather than outright acquisition.
Shriya Anand and Neha Sami’s chapter studies city building in Dholera, which lies along the DMIC. Their study reports another distinct institutional arrangement, where the new urban city of Dholera will be planned by regional development authorities, and no provisions exist for conventional representative local governance institutions. In addition, the chapter highlights the similar yet contrasting ideational and developmental roles of the central government and the affected states, Gujarat and Rajasthan. In doing so, the chapter highlights the degree to which the DMIC project is a top-down process. It also highlights the lack of coordination in planning between local authorities and the DMIC’s process.
Sudeshna Mitra’s chapter on the peri-urban development projects in Kolkata and Hyderabad and the chapter by Preeti Sampat, again on Dholera, analyze their respective subjects from the perspective of the reordering of social and economic relations against the backdrop of new town building. Both chapters emphasize common themes of the commodification of land into real estate, and both question the degree of optimism and the degree of local consensus in the planning and developmental process.
Gopa Samanta and Akash Banerjee’s chapter on the proposed Aerotropolis in Andal, West Bengal, highlights how the expectations of the project’s success and the consequent economic boom were flawed from inception. The lack of a viable catchment area has made the airport a nonstarter, and flights have had to be subsidized, leading to the opposite of the expected outcome. Mathew Idiculla’s chapter on the Electronics City in Bengaluru provides a history of how it came into being, the unique private governance institutions that govern the area, and the reasons for its success. Idiculla, however, also problematizes the disconnect between the governance regime within Electronics City and its periphery.
Each of these chapters, as well as others in the book, is an informative exploration of the theme of state-led city building in India. As the editors note, in contrast to many developed countries where urban rescaling is often reactive and defensive, this process is proactive and top-down. It is worth observing, however, that not all chapters point to a story of discontent and dispossession. In many of the cases, local actors are able to negotiate favorably for a share of the pie of the benefits likely to accrue. Some cases, like that of Andal in West Bengal, are also stories of infrastructure investments gone wrong, though the local residents see the benefit of the project.
Another contribution of the book is to portray the degree of institutional innovation and ingenuity involved in planning, developing, and negotiating these projects. While a large part of the urban literature focuses on the problems of urban governance in conventional institutions like municipalities, this volume sheds light on the institutional variations across these new urban areas. For these reasons, this book is a useful contribution to the literature on urbanization in India.
At the same time, the chapters in the book arguably do not adequately represent the economic logic and imperative of city building. For the most part, this form of city building is seen as problematic and contested. Contestations over development, however, are routine. More data and discussion on the stated objectives of city building in each of these cases, the degree to which those objectives have been met against project costs and timelines, and the benefits of the commodification of land would have made the discussions in this volume more insightful. In all, this book is a useful and informative exploration of the phenomenon of state-led city building.