📰 The perils of state overreach
If the government is serious about wooing foreign investment, it should comply with the Vodafone ruling
•The Vodafone Group has just won one of the most high-stakes legal battles involving a foreign investor and the Indian state under international law. An Investor-State Dispute Settlement (ISDS) tribunal, constituted under the India-Netherlands bilateral investment treaty (BIT), has ruled that India’s imposition of tax liability amounting to Rs. 22,000 crore on Vodafone is in breach of India’s BIT obligations.
Shaking the faith of foreign investors
•This case arose after the Indian Parliament in 2012 amended the Income Tax Act declaring that income deemed to be accruing to non-residents, directly or indirectly, through the transfer of a capital asset situated in India is taxable retrospectively with effect from April 1, 1962. Obnoxiously, this amendment was carried out to override the Supreme Court ruling in favour of Vodafone. The Court held that Vodafone didn’t owe any tax to the Indian state on account of acquiring a 67% stake in Hutchison Essar through an offshore transaction. At that time, the likes of Montek Singh Ahluwalia, Deputy Chairperson of the Planning Commission, counselled against amending the law retrospectively, but the then Finance Minister Pranab Mukherjee, the architect of this law, ignored this sane advice. This amendment dented India’s reputation as a country governed by the rule of law, and shook the faith of foreign investors.
•The BJP, which was in the opposition, vehemently criticised the retrospective amendment calling it “tax terrorism”. Thus, when the Modi government assumed office in 2014, many believed that the law would be amended and made prospective. Given the Modi government’s enormous political capital, this was attainable. But the government did nothing to change the law. Like the United Progressive Alliance government, it strenuously pursued the act of fiscal plundering hoping to mobilise sizeable revenue.
Key lessons
•While a detailed legal analysis of the case will have to wait until the arbitral award is available, there are several points worth noting. First, the tribunal has ordered India to reimburse legal costs to the tune of more than Rs. 40 crore incurred by Vodafone in fighting this case. In other words, the taxpayer’s money will be used to pay Vodafone. So, the important lesson is that all the three organs of the Indian state — Parliament, executive, and the judiciary — need to internalise India’s BIT and other international law obligations. These organs need to ensure that they exercise their public powers in a manner consistent with international law, or else their actions could prove costly to the nation.
•Second, India should learn that being a country that values the rule of law is an important quality to win over the confidence of foreign investors and international goodwill. Unleashing tax inspectors to extract money out of foreign investors by constantly changing the rules of the game is not an attribute that a liberal democracy should be proud of.
Honouring international law
•Third, it is likely that the government might challenge the award at the seat of arbitration or resist the enforceability of this award in Indian courts alleging that it violates public policy. If the government indeed follows these options, there’s a long, gruelling road ahead for Vodafone. The government would be ill-advised to go down this road because it would mean that India does not honour its international law obligation. It would send a deleterious signal to foreign investors reaffirming the sentiment that doing business in India is indeed excruciating. Fourth, this ruling might have an impact on the two other ISDS claims that India is involved in with Cairn Energy and Vedanta on the imposition of taxes retrospectively. Fifth, it is quite possible that India might use this award to further harden its antagonistic stand against ISDS and BITs. As is well known, India unilaterally terminated almost all its BITs after foreign investors started suing India for breaching BITs. The belief in the Indian establishment is that the ISDS regime unduly intrudes into India’s sovereignty. Thus, this decision might be used to strengthen this populist narrative, oblivious of the fact that this case and several others are a result of bad state regulation.
•Finally, this decision shows the significance of the ISDS regime to hold states accountable under international law when in case of undue expansion of state power. The case is a reminder that the ISDS regime, notwithstanding its weaknesses, can play an important role in fostering international rule of law. If the Modi government is serious about wooing foreign investment, India should immediately comply with the decision.
The Code on Wages (yet to be notified) has not succeeded in a consolidation of laws and is a case of tall official claims
•In the brief monsoon session of Parliament, three new labour codes (The Industrial Relations Code, the Social Security Code and the Occupational Safety, Health and Working Conditions Code, 2020) were bulldozed into passing and now await the President’s assent. Labour Minister Santosh Gangwar told the media that four new labour codes will become operational before the year ends.
•Prime Minister Narendra Modi, on his part, has said the Code on Wages, 2019 would expand the coverage of workers in all industries in the unorganised sector as the old Minimum Wages Act covered only 30% of the total workforce. He also said that while there were 10,000 slabs of minimum wages that existed, they would now be reduced to 200 slabs.
•The Code on Wages, 2019 seeks to consolidate and simplify four pieces of legislation — Payment of Wages Act, 1936, Minimum Wages Act, 1948, Payment of Bonus Act, 1965 and Equal Remuneration Act, 1976 — into a single code. Its object and reasons stated that even the Second National Commission on Labour (Ravindra Varma, 2002) suggested consolidating all labour laws into four codes.
•While the previous four pieces of legislation had a total of 119 sections, the new Code has 69 sections. Considering that the repealed legislations each had a definition section, inspectors, penalties, a competent authority, an appellate authority, and rule-making powers, any consolidation will impact their length.
•Further, all requirements for enforcing the Act, have been relegated to the Rules. Section 67 had authorised the framing of rules relating to as many as 38 provisions of the Act. As a result, the delegated pieces of legislation (Rules) will be bigger than the Code; this is no way to condense prior pieces of legislation.
New problems will arise
•All the four repealed pieces of legislation were enacted historically at different points in time and to deal with different situations. The combining of asymmetrical laws into a single code is not an easy task and will only create its own set of new problems.
•Barring a few new concepts, the new Code retains almost all provisions. These are features such as the procedure for fixing minimum wage, limit for fines and deductions in wages, minimum and maximum bonus, calculation of allocable and available surplus, as well as gender neutral consideration in fixing wages.
•The Code will have the same definition of the term “worker”; but, a person employed in a supervisory capacity drawing up to Rs. 15,000 will also be considered a worker. In the (erstwhile) Minimum Wages Act, to fix minimum wage in an employment which has more than 1,000 workers to be first included in the Schedule, and, thereafter, minimum wages will be fixed as per law. The new Code has dispensed with the necessity of having a minimum number of workers and the inclusion of such employment into the schedule.
•The central government will have the power to fix a “floor wage”. Once it is fixed, State governments cannot fix any minimum wage less than the “floor wage”. It is unwarranted since many States always fix minimum wages higher than the existing rates, depending upon the employment and workforce involved. The concept should be for a binding minimum wage and not have dual wage rates — a binding floor wage and a non-binding minimum wage.
On MGNREGA
•Hitherto, there was a conflict between the minimum wages fixed by the State governments for agriculture workers. There were cases as to whether the Minimum Wages Act would have an over-riding effect over the provisions of the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA), 2005. Several High Courts have placed the Minimum Wages Act to override MGNREGA. That has been set to rest by excluding MGNREGA from the purview of the Code on Wages.
•However, foremost in the labour code will be its enforcement provisions and the sanctions behind it. The Code has created an omnibus inspector-cum-facilitator who will act as per the inspection scheme framed by the government. He will advise employers and workers to comply with the provisions of the code and may carry out inspections as may be assigned by the government (Section 51).
•As for the claim mechanism, Section 45 stipulates that they will be heard and determined by an authority who is not below the rank of a “Gazetted Officer”. A government official without legal and administrative background can hear such claims. However, any dispute regarding bonus will continue to go before the Industrial Tribunal (the new Industrial Relations Code Bill contemplates a two-member Tribunal). As against the decision of the Gazetted Officer, one can prefer an appeal to an appellate authority who must be one rank higher than the competent authority (Section 49).
•Neither the Code nor the Rules (presently, draft Rules) prescribe the qualifications and experience required for appointment of competent authority. Complicated questions of law and facts arising out of claims will henceforth be decided first by a Gazetted Officer, and thereafter by an Appellate Authority who must hold one rank above him.
Provisions on penalty
•The penal provisions found hitherto in any pieces of labour legislation never had an impact on employers. In People’s Union For Democratic Rights and Others vs. Union Of India & Others , 1982 (Asiad case), the Supreme Court of India observed: “If violations of labour laws are going to be punished only by meagre fines, it would be impossible to ensure observance of the labour laws and the labour laws would be reduced to nullity. They would remain merely paper tigers without any teeth or claws.”
•But, curiously, a new provision (Section 52) has been introduced where an officer (not below the rank of an under secretary to the government will be notified with power to impose a penalty in the place of a judicial magistrate. An essential judicial function is now sought to be vested with the executive in contravention of Article 50 of the Constitution, where the State has been mandated to separate the judiciary from the executive in public services.
•A similar provision (Section 21 of the Bonded Labour System (Abolition) Act, 1976) which empowered revenue officers designated as executive magistrates to try offences under the Act was struck down by the Division Bench of the Madras High Court (Gajendran, 2014). A review filed by the central government was dismissed (2018). The Division Bench had observed: “On enforcement of the Code (Criminal Procedure), there has been complete separation of Judiciary from the Executive to implement the mandate under Article 50 of the Constitution which requires that State shall take steps to separate the Judiciary from Executive. By merging the judicial function in the executive, the basic structure of the Constitution is affected; justice and fair trial cannot be ensured by the Executive Magistrates in as much as they are not required to be legally qualified and trained persons and in actual practice are required to perform various other functions... In fact the functions of the Judiciary and Executive are quite different. In other words it is clear that the Executive Magistrate has no role to play in conducting judicial trial and recording judicial decisions.”
•Apart from providing for a compounding of offences (Section 56), the Code also exempts employers from penal provisions if they were able “to prove that they had used due diligence in enforcing the execution of the code and it was the other person who had committed the offence without his knowledge, consent or connivance”.
•Though the Prime Minister had claimed that the erstwhile provisions covered only 30% of the workers, there is nothing particular in this Code that it will have wider coverage. Similarly, as minimum wages mostly help the unorganised worker, the 200-slab categorisation may not have much of an impact.
•The Code on Wages (yet to be notified) has neither succeeded in a consolidation of laws nor will it ever achieve the claims made by the Prime Minister.
📰 A demarcation in the interest of public order
The role of the District Magistrate needs to be clearly differentiated from the role of the Police Commissioner
•The reiteration by the Supreme Court in the Shaheen Bagh case of the right to protest, within reasonable restrictions, helps in understanding the breakdown of public order in Delhi over a three-month period. There are two perspectives explaining the 16,000 calls to the police, 3,500 on one day, registration of 751 cases, 53 deaths, and destruction of property of over Rs. 20 crore and the initial charge sheet running into 17,000 pages against 15 people.
•The Police Commissioner, responding to criticism of partisanship, rightly pointed out that the criminal justice system, with its inherent checks and balances, be allowed to work. The other perspective is that community-wide protest is not itself a crime and Delhi Police, having magisterial powers under the Criminal Procedure Code to take preventive action, failed to maintain public order. The public policy issue, as the alleged Shopian encounter underlines, is that such delegation confuses powers with roles.
•First, distinction between independent actions, for which no political clearance is needed, by the District Magistrate to maintain public order and by the police to investigate crime and make arrests, was ignored.
•Second, maintaining public order requires the District Magistrate to make hard choices between life and property to check violence. Though any death opens the door to an inquiry, there is no justification for lack of effective police action.
•Third, the District Magistrate is expected to consider protest as legitimate, leveraging governmental action to prevent others exploiting the grievance. In Delhi, the police did not distinguish between wider political support and violence caused by a few.
•Riots essentially result from failure to maintain public order. The sequence of related events, spread of ‘chakka jam’ and police action in restricting or ceding space are a case study of how a few public figures intervene to incite violence changing the nature of a peaceful protest; absence of immediate arrests leads to a riot and dithering on ordering firing results in its spread.
Court distinction, concepts
•The Supreme Court has made a distinction between law and order, relating to individual crime, and public order, pertaining to a community at large. The top court has also emphasised that the two terms are not interchangeable.
•The two concepts have different objectives and legal standards. Law and order consists of the analysis made by police of the situation in an area and their commitment to firm action and penalties under criminal law. Public order is a duty imposed on the District Magistrate to assess whether it is necessary to rush to the spot where law and order has been breached to prevent violence spreading and ease tension. The National Security Adviser, substituting for the District Magistrate, did just this after the riots in northeast Delhi and in getting the Tablighi Jamaat headquarters vacated.
•The District Magistrate’s role is important in exceptional situations — for example, to prevent a breach of peace at a particular place as in Gargi College; and also for grievance redress as in Shaheen Bagh. If an official is allotted a dual role, to both keep in place law and order and maintain public order, this could lead to the displacement of one goal in favour of the other, as was witnessed in Jamia Millia Islamia, community implications of the religious gathering in Nizamuddin and preventing violence in northeast Delhi.
•The Supreme Court has formulated certain guidelines and rules when it comes to these distinct duties.
•The first concerns the degree and extent of the reach of an act on society. Some disgruntled and agitated people going on a vandalising spree affect “public order” only when they affect a particular community as a whole. In Ram Manohar Lohia vs. State of Bihar , in 1965, the Supreme Court held that in the case of ‘public order’, the community or the public at large have to be affected by a particular action as it “embraces more of the community than ‘law and order’, which affects only a few individuals”. The Delhi Police did not make this distinction when a mass of unruly outsiders entered colleges, creating panic.
•Second, in the Madhu Limaye case, the Bench reiterated that “the emergency must be sudden and the consequences sufficiently grave” for an imposition of restrictions. Extension of a restriction over a larger territorial area or for a longer duration requires a relatively higher justification and calibrated response.
•Third, in Anuradha Bhasin vs. Union of India , the Supreme Court held that prohibitive orders should not prevent legitimate expression of opinion, or grievance or exercise of democratic rights. Specific restrictions have to be tailored to the goal, nature and stage of the emergency, requiring the adoption of the least restrictive measure.
•In Aldanish Rein vs State of NCT of Delhi , the High Court directed the setting up of an oversight mechanism to periodically review the exercise of magisterial powers by Delhi Police. The Supreme Court, in a PIL, is examining whether police officers can act as magistrates in certain cases.
•The Supreme Court has also specifically recognised the importance of the assessment of the role of the District Magistrate, distinct from that of the police.
Will need policy rethink
•Judicial review of roles and proportionality of decisions for maintaining public order, to check whether they are the least intrusive measure, requires a policy rethink if such duties need to be delegated to the police. Pertinently, the Seventh Schedule of the Constitution distinguishes between ‘police’ and ‘public order’.
•Prevention through grievance redress and reliance on the least blunt instruments are critical for legitimacy, eschewing an adversarial view. The National Police Commission also recognises the coordinating role of the District Magistrate, having more leverage than the police. Kerala has both a District Magistrate responsible for public order and a senior police officer as city Police Commissioner focusing on crime.
