Shivakantjha.org - Triplet 19 - India promotes tax haven: this honking to Hong Kong
Triplet 19
India promotes tax haven: this honking to Hong Kong
By Shiva Kant Jha
July 24, 2009
BEFORE I write something about our ‘Taj Mahal Economy', and the Government's studied indifference to the Article 265 of our Constitution, I would tell you something about the amendment to Section 90 of the I-T Act, 1961, proposed to be made by the Finance Bill 2009. The sinister effect of the proposed amendment has gone unnoticed in media (except Online Media), and I would not be surprised if this becomes the law without even being deliberated in Parliament. Our Income-tax Act, 1961, does not 'permit an agreement with territories which are not sovereign governments per se . But now the Sec 90 has been recast to allow Government to enter into agreement with non-sovereign territories.' Now our Government can enter into a tax treaty with Hong Kong, which is an administrative region of China.
In the Legal Potpourri 12, I had written about the G-20 summit meeting held in London onthe April 2, 2009. The Summit deliberated over the noxious economic effects of the opaque system set up in the tax havens; and also devised, certain ways to deal with the evil. The Summit witnessed wrangles bred by geo-politics, and by an ambivalence in the approaches for selfish and esoteric reasons. China defended combatively the regime in Hong Kong to ensure it escaped the measures forged for other tax havens. Dr. Manmohan Singh of India maintained his suggestive silence on the issues pertaining to the misuse of the routes from the tax havens and the off-shore finance centres. This was in tune with our Government's compulsions to promote the interests of such dark regions and their beneficiaries. One such a region is Mauritius . In the aforesaid G-20 Summit China had her way. It was not surprising at all. China is now no longer socialist, not to say communist. It is now fashionable to call her ‘one country with two systems': one of the masses and the other wherefrom the trickle-down effect can be generated. This sort of segregation amidst people recalls the compartmentalization in our country between Bharat and India . It is easy to see that India 's silence in the G-20 Summit on such issues was clearly promotive of some secret agenda unworthy of our democracy.
This context brings to mind something that had happened in 2003. I had argued before the Supreme Court that the Indo-Mauritius Double Taxation Avoidance Convention breached Section 90 of the Income-tax Act which did not permit a tax treaty to promote trade and investment with Mauritius . This argument could not be answered by the Attorney General. Even the Mauritius company, which was a co-appellant with our Government and was represented by someone who had been India 's Solicitor-General earlier defending the government in the same cause, was at his wit's end. But the lobbyists acted fast, as they always do. Our Executive was made to act against itself, a wonderful death-wish! The Finance Act, 2003, brought about an amendment to remove this vulnerability from which the said Convention suffered. I have mentioned merely to illustrate how our government is made to dance to the tune of the hidden operators. What Pandit Nehru had written in his Glimpses of World History comes to mind to enlighten and to assuage. He wrote:
“Two very able Greeks happened to be friends of Lloyd George, who was then Prime Minister in England and very powerful in the Allied councils. One of these was Venizelos, Prime Minister of Greece. The other is a very mysterious person, known as Sir Basil Zaharoff, although his original name was Basileios Zacharias. As a young man, as early as 1877, he became the agent in the Balkans for a British armament firm. When the World War ended, he was the richest man in Europe and perhaps in the world, and great statesmen and governments delighted to honour him. He was given high English titles as well as French titles; he owned many newspapers; and he seemed to influence governments considerably from behind the scenes. The public knew little about him and he kept away from the limelight. He was, indeed, the typical modern international financer who feels at home in many countries and influences and, to some extent, even controls governments of various democratic countries. People have a sensation of governing themselves in such countries, but behind them, unseen, stands the real power, international finance.”
Hong Kong is a non-sovereign territory, not an international person with which a treaty should be done. In 1997 Britain transferred sovereignty over it to the People's Republic of China . The Basic Law of Hong Kong declares it an inalienable part of the People's Republic of China . The ultimate authority to interpret the Basic Law is with the PRC. It is the finest example of a wholly capitalist country believing wholly in the neo-liberal paradigm. It is the most successful financial centre, and constitutes the most widely used theatres of finance operations through an opaque system. Its Stock Exchange is the 6 th largest in the world. The Administration of the Region follows what is called ‘positive non-interventionism', which means, shorn of embellishments, the government exists as the protector and the facilitator of free-market which is the veritable matrix the growth of capitalism. Its currency is wedded to the US dollars.
It would be interesting to see our Sovereign Secular Socialist Republic entering into a Double Tax Avoidance Convention with a non-sovereign region whose Constitution ( the Basic Law) rejects ‘socialism' outright. Art. 5 of the Basic Law declares:
“The socialist system and policies shall not be practised in the Hong Kong Special Administrative Region, and the previous capitalist system and way of life shall remain unchanged for 50 years” [Art. 5].
But we have seen much more shocking situations taking place unnoticed by the press and media. How gruesome it was for our government to sail with a tax haven company in the Azadi Bachao litigation in which our government went to the extent of even pleading against the Constitution Bench decision in McDowell which had been decided in favour of our government. To me it seems that our government could not have acted that way without a death-wish.
The syndrome, to which I have referred, manifests again in the 2009 Finance Bill. But it need not surprise us. Long back Sigmund Freud had made an insightful comment in these words:
“There is something to be said, however, in criticism of his disappointment. Strictly speaking it is not justified, for it consists in the destruction of an illusion. We welcome illusions because they spare us unpleasurable feelings, and enable us to enjoy satisfaction instead. We must not complain, then, if now and again they come into collusion with some portion of reality, and are shattered against it”.
“In reality our fellow-citizens have not sunk so low as we feared, because they had never risen so high as we believed”.
We do not know much how our Zaharoffs work through our opaque system. We all know that the most misused Indo-Mauritius Double Taxation Avoidance Convention was done in 1983 when Shri Pranab Mukherjee, our present Finance Minister, had been the F.M. And Dr Manmohan Singh, the present Prime Minister, had been the Governor of the Reserve Bank. Even in those early years of the onset of the so-called liberalization scandalous receipts had intruded in our country through craft and collusion. The so-called “round tripping” was on, and the conditions for “treaty shopping” had been assiduously created. Who knows more than they how through foggy routes from abroad tax-evaders and fraudsters keep on coming first in trickles, then in waves! Hence: ‘after such knowledge, what forgiveness?'(T.S. Eliot, Gerontion).
But, I ask myself: why such things keep on happening in our country for which none is bothered? A little bird bids me to reflect on the model of the economic growth we have set in our country. It is bound to produce a political society grossly split into two worlds. Ours is a strange schizophrenic society where the haves are narcissist, and where the middle class is most corrupt, and without moorings in our traditional values. This brings to mind a work an artist who portrayed the plight of people in an imaginary land. This is one more illustration to prove that fiction often express reality better than the plethora of facts most often doctored and manipulated. It goes thus:
“The Cloud Minders, episode 74 of the popular science fiction television series Star Trk, took place on the planet Ardan. First aired on Feb. 28, 1969, it depicted a planet whose rulers devoted their lives to the arts in a beautiful and peaceful city, Stratos, suspended high above the panet's desolate surface. Down below, the inhabitants of the planet's surface, the Troglytes, worked in misery and violence in the planet's mines to earn the interplanetary exchange credits used to import from other planets the luxuries the rulers enjoyed on Stratos.”
The interest of the Stratos-dwellers are promoted by captive media, hired intellectuals, indifferent and corrupt politicians, and the countless go-getters ruling the roost all around. They seem to have set up a joint venture to promote their ends. True scums and bones are thrown out so that the dogs do not bark or bite, but must remain alive to serve. This is what happened on the planet Arden. And to achieve such ends they have a plenty of successful image-builders, persuaders, pressurizers, besides numerous plastic surgeons who can provide even monsters with human face! Please bring to your mind that leaf of the triplet whereon I wrote about Dr. Manmohan Singh's mohan mantra .
II
Article 265 of Constitution: constitutional dimension of taxation
What I have written on the first leaf of this triplet makes me reflect on Article 265 of our great Constitution. In very plain words it expresses a profound constitutional principle which was forged, after much struggle and suffering, to control the absolute power of the kings, and then the no less brute power claimed by the executive government whatever be the form of polity.
The history of the constitutional law is at its core the history of the efforts to tame the executive. As power is most delicious, the executive, whether the absolute monarchy of the dead past, or of a democratic polity of our days, has shown itself mad after power. The greatest, and perhaps the most efficacious effort was done in the U.K. when the Bill of Rights was framed primarily to tame the executive, It provided that “TAXATION in England must be authorized by statute.” Hood Phillips showed better insight into the British constitutional history when he wrote:
“It was supposed to have been settled by Magna Carta and by legislation in the reigns of Edward I and Edward III that taxation beyond the levying of customary feudal aids required the consent of Parliament.” [O.Hood Phillips' Constitutional and Administrative Law (7 th Edition Pg.45)
The New Encyclopedia Britannica ( Vol.28 p.402) made an insightful observation highlighting the importance of the democratic control of the executive through the provisions pertaining to taxation: it said --
“ The limits to the right of the public authority to impose taxes are set by the power that is qualified to do so under constitutional law. ….. The historical origins of this principle are identical with those of political liberty and representative government – the right of the citizens.”
The constitutional position was crisply and roundly stated by Hood Phillips (in Constitutional and Administrative Law 7 th ed at p.45) thus:
“One of the central themes of English constitutional history was the gaining of control of taxation and national finance in general by Parliament, and in particular the Commons; for this control meant that the King was not able to govern for more than short periods without summoning Parliament, and Parliament could insist on grievances being remedied before it granted the King supply. This applied at least to direct taxation.”
Art 265 of our Constitution is an identical effort to tame the executive which is merely a constitutional creature with constitutionally granted powers. This Article states: “No tax shall be levied or collected except by authority of law.” Law refers to a valid law. In the context of Article 265 of the Constitution it means an Act of the Legislature
Under our Constitution even grant of exemption is a legislative act. It is a constitutional principle of highest importance that neither we can be taxed through an executive fiat, nor untaxed through an executive concession. To tax or grant exemption form the two facets of the same thing. It was aptly stated by the Rajasthan High Court in H.R.& G. Industries v. State of Rajasthan ( A I R 1964 Raj. 205 at 213) :
“It is well established that the power to exempt from tax is a sovereign power and no State can fetter its own much less the future legislative authority of its successor. See Associated Stone Industries Kotah v. Union of India ILR (1958) 8 Raj 700 and Maharaja Shree Umed Mills Ltd v. Union of India ILR (1959) 9 Raj. 984”
Taxation provisions keep on coming up for judicial review for the violation of our fundamental rights and other constitutional limitations. But our courts are still to examine some tax provisions exclusively from the point of view of our law as erected in Art. 265 of our Constitution. I wish some day our superior court would examine, from this observation-post, the provisions substituted and inserted by the Finance Act 2003, and those inserted in Section 90A by the Finance Act 2006 into the Income-tax Act, 1961. The proposed amendment to Section 90 of the Income-tax Act, 1961, is clearly conceived in the breach of that great constitutional principle. Section 90 was framed, as are framed all other sections in the Act, in pursuance to Article 265 of the Constitution. But see how these powers have been used by the Executive Government through the Double Taxation Avoidance Agreements (‘tax treaties' for short). Through the terms of tax treaties exemptions are granted, and taxes are mitigated, for the benefit of the foreigners and the outsiders who can, even at best, be just our fair-weather friends. ‘Double taxation avoidance' is made to mean ‘no taxation agreement' provision. Provisions have been inserted in the law enabling the Executive to interpret the terms of the statute and the treaty terms in the light of its wish, of course to favour the operators mostly from the foggy land out to cause wrong gains to themselves and wrongful loss to our country. In many situations it can make them do whatever it likes. Again we have that Alice in the Wonderland situation: who is the master? Words must mean what the masters want. The tax treaties are done under wholly opaque system. Neither our Parliament nor our citizenry are ever aware of these when being framed or implemented. The tax treaties, bereft of all cover-ups and embellishments, are to the heart's content of the evaders and fraudsters. It was never conceived that through delegated power the Executive Government can drain Article 265 of at its precious content. And our Parliament? When not busy in trivialities, enjoys looking the other way. The great principle of constitutional liberty and the Parliamentary control of the executive get ignored or overlooked. Never after the days of the Stuarts any Government, except of Bismarck in Germany , made an assertion that the incidence of taxation could be manipulated through executive power. It is hoped someday these issues would be judicially examined in the light of our constitutional fundamentals. Allen aptly said:
“…The fact, is, however, that nobody on earth can be trusted with power without restraint. It is ‘of an encroaching nature', and its encroachments, more often than not, are for the sake of what are sincerely believed to be good, and indeed necessary, objects.” (Allen, Law and Orders 3 rd ed. p. 297).
On July 6, 2009, when the Finance Minister was presenting his Budget in Parliament, I had an occasion to participate in a discussion on the Total TV. I had an occasion to reflect on the raison d'etre of the Finance Bill. I hold that the presentation of the budget it in Parliament is not a device to hog limelight, or to provide grist to some mill, or for supplying fodder for non-thinking souls, or to please or displease the power-welders or power-pretenders, or the stock-exchanges. It originated in England . It was designed to compel the king to come every year before Parliament to render accounts and to get resources on Parliament's terms. It is true that political realities got so engineered over these two hundred years that Parliamentary form of government first turned into the cabinet form of government, then into the Prime Ministerial form of government, and then in some counties into what I would call the Shikhandi (you know how Shikhandi was used as a front by Arjuna to attack Bhishma who would not strike one who had been a woman before his present life) form of government, or into other variants cocking snook at democracy! It is said that none ever learns from history. But Bismarck learnt from history, and also made history which can never be forgotten or forgiven. He felt that the system of annual accountability to Parliament (the Diet) was inconvenient to his autocratic pursuits. He cajoled, pressurized and befooled Diet to grant him perpetual power of taxation. And then the Parliament was driven to the margin and then consigned into the history's bottomless dustbin!
III
Our 'Taj Mahal Economy'
I have called the present-day economic management “Taj Mahal Economy”. This heading may appeal to the amour proper of the economists of Yale, Chicago or Cambridge till they catch its suggested import. They may discover in the romantic epithet a confirmation of their wisdom in providing a model of economic management to the market-ruled economic globalization. But the referent of the title of this leaf is something much different. But if this discovery shocks, so be that. They have grown accustomed to work with blinkers, and think with concealed references for an exploitative and secretive system.
First I would tell you how this expression ‘Taj Mahal Economy' came to mind. It came to my mind while studying the economic management of Emperor Shah Jahan who got constructed a mausoleum the Taj Mahal at Agra to commemorate his love for his deceased wife Mumtaz Mahal. It is considered world-famous as "the jewel of Muslim art in India and one of the universally admired masterpieces of the world's heritage." Thousands of artisans and craftsmen sweated over more than two decades turning stones into an expanding metaphor of love or exploitation (depending on how you look at it). The tomb was described by a poetic genius as "one tear-drop...upon the cheek of time". This Taj was built when the Mughal prosperity was at its best. The Great Mughals had reached its cultural acme, and had acquired renown world over which our historians tend to describe with passionate intensity, and ever waxing pride. The feudal lords and the denizens of the privileged classes rolled in luxury pretending a cultivated taste and aesthetic sensibility. It was again Shah Jahan who had built his Diwan-i-Khas with precious stones studded ceiling exhibiting the glitter of gold, and the shine of the chicest marble believing, as the inscription engraved on it says, he was in the Eden of Bliss on the Earth:
Agar firdaus bar ru-yi zamin ast
Hamin ast, u hamin ast, u hamin ast.
But the best of times was also the worst of times. The commoners of the great Mughal Empire could eke out their living by becoming beasts of burden, or at best mere serfs. It would have been enough even if they could exist that way with bearable distress. But their plight was worse. Didn't the Emperor and his advisors believe in something like the ‘trickle-down effect' theory of our present-day economists? Assuming that the imperial expenditure was warranted as a response to the terrible famine which broke out in 1556-1557 in the neighborhood of Agra and Biyana, and Badauni, yet the remedy was outright foolish. Spending the State's resources over the Taj Mahal or the Diwan-i-Khas might have brought joy for the Emperor, and those chosen-people of his realm who needed some glamourous rendezvous, but for the rest of people these were cruel jokes cut with macabre taste. Whatever the artisans, craftsmen and the labourers earned as daily wages were lost in the expenditure on luxuries peddled out by the swarming sellers of drink and lascivious mujras . The great poet Sumitranandan Pant wrote a poem on the Taj Mahal from which certain ideas are thus borrowed and rendered into English:
What an amazing and celestial worship of Death,
Whilst the people remained despondent under gloom.
He was rightly shocked by this arrogant extravaganza mocking the poor of those days. Shah Jahan knew their plight, but, like our present-day wielders of power, indulged in crystal gazing. He must have known that in 1556-1557 (and even thereafter) in the neighborhood of Agra and Biyana, and Badauni “men ate their own kind and the appearance of the famished sufferers was so hideous that one could scarcely look upon them…. The whole country was a desert, and no husband-man remained to till the ground”. ‘The horrors of this calamity were so great that, as ‘Abdul Hamid Lahori, the official historian of the reign of Shah Jahan, writes, “men began to devour each other, and the flesh of a son was preferred to his love” [Majumdar, Raychaudhuri & Datta, An Advanced History of India p.564].. A Dutch merchant, who witnessed the calamity, notes that “men lying in the street, not yet dead, were cut up by others, and men fed on living men, so that even in the streets, and still more on road journeys, men ran great danger of being murdered or eaten”. Shah Jahan “opened a few soup-kitchens”, distributed 1˝ lacs of rupees in charity and remitted one-eleventh of the land-revenue assessment; but this could not suffice to mitigate the sufferings of the starving people.' How close is this strategic response to what our government has done to alleviate the suffering of the starving farmers in our country!
Our days are not much different. We cannot hope to have a present-day counter part of ‘Abdul Hamid Lahori to tell us what is what. The vision of our constitutional socialism has gone with the wind. To call the free-market anything else than a farce or melodrama of vested interests is atrocious and crafty. Wealth is siphoned off to tax havens and other dark regions on this terra firma till still better options become feasible and realist. Ill-gotten gains are secretly parked and layered dexterously to change their colours, and to move from lands to lands under stealth. It is said that money is dead, but the computer generated money is now the crooks' plenty which enhances the wealth of the high net worth people and the corporations, but certainly reduces the value even of the petty coins in the beggar's bowl! Our general hospitals go without nurses and doctors. Even at best only generic medicines are available off and on. We may have some centers of technical experience, our schools and colleges are sub-standard and inadequate. We are following a model most suited to produce work-force for the neo-capitalist dispensation. As they went wrong in treating the sound of ghungroos as the very index of people's welfare in Shah Jahan's or Wazid Ali Shah's time, we are wrong again in measuring the conditions of our people by GDP or per capita this or that. Patriotism is yielding to commercial imperialism, our cultural diversity, having multiple colour bands, is fast engineered to become monochromatic and materialistic. The makers of public opinion have become captive to vested interest. The propagandists have over-refined and fine-tuned the technique once adopted by Paul Joseph Goebbels of the Nazi Germany.
Two very recent illustrations of the ‘Taj Mahal Economy' in our days are the following (never think that there is any dearth of illustration worse than these: these are mentioned not because these are the best illustrations but because these are contextually relevant):
(a) The avoidable extravaganzas to show-off what is shining in India , or to deceive and delude the aam aadmi with dreams of which they are supposed to be the largest buyers. Examples of this Mephistophelian industry are so many and so staggering that they need not be graphically described or plentifully elaborated. The latest illustration of this style of economic management is the resources we are frittering on hosting the 2010 Commonwealth Games likely to be the ‘as the most expensive Commonwealth Games ever'. In this etherized environment who has time or inclination, to measure the involved externalities and other costs, overt or covert, patent or hidden?
(b) Another illustration can be noticed in the first leaf of this triplet. Earlier we had the sovereign tiny-tots which transformed themselves as tax havens and other secret destinations. Not only double taxation was avoided, tax mitigation and tax exemptions have also been obtained in breach of Article 265 of the Constitution. By the Finance Act 2006 even associations in foreign lands were permitted to enter into treaties with their Indian counterparts. Now under the proposed amendment sought to be made by the Finance Bill 2009, even non-sovereign creatures can arrange their affairs to effect tax mitigation, or tax exemption. But what is most worrisome is that we shall be facilitating choreographing of situations for the benefit of tax evaders, money-launderers, and fraudsters of all styles. We are facilitating privatization of sovereignty whose sinister effects would come in torrents in time not far-off. Such provisions are often made without understanding implications as did Emperor Shah Alam II who was no better than a moron while signing the Treaty of Allahabad in 1765 which through twists and turns of circumstances led to India 's British servitude for about 200 years. .
It is for our citizenry to consider that conditions be created under which the ideals set forth by our Constitution are not defeated by creating two Indias, one of the growing breed of high net-worth persons, and the greedy India Inc.; and the other of the ill-fed, ill-clad, ill-educated, and starving millions. This growing discrimination defeats social justice and inequality. This sort of discrimination emanates from the policies, legislative and executive, being implemented by our government in gross forgetfulness of its constitutional commitments. Such policies, mandated under the WTO-IMF directives, lead to the shocking delight for a few, and sorrow for many calling to mind what Blake said:
Some are born to Sweet delight,
Some are Born to Endless Night.
But what I have said above are the minor pathological manifestations, deeper crisis is yet to erupt full blown. It was well said by Dinkarji that what erupted as the Mahabharat was being created and configured over long. No society has ever escaped the consequences of its deeds done, suffered, or even tolerated tongue-tied. Lull is not peace. Often peace is craved by those who want the exploited to remain supine, suppliant, and silent allowing them to sip blood from their heart without protest. The ‘Taj Mahal Economy' had destroyed in the past civilizations much more advanced than ours: I mean the civilizations that had once developed in Egypt , Greece , Rome, and the Byzantine flowering. There is an increasing dread that we may become victims of polarized wealth. This syndrome turned the medieval India imbecile where certain persons played chess whilst the nation declined, degenerated and lost independence. It becomes most gruesome when cerebral limitations of our leaders get compounded with blindness begotten of hubris. There is a real dread that the present ‘Taj Mahal Economy' may produce a generation of citizenry totally bereft of cultural moorings, wholly commercial, consumerist; and without scruple in bartering national honour for a slice of pizza, or a piece of burger! I end this leaf with the resonating clairvoyant words of W. B. Yeats in his “the Second Coming”:
‘The best lack all conviction, while the worst
Are full of passionate intensity.'
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