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The Hindu Notes for 30th October 2018

From uncertainty to crisis

Whatever turn developments may now take, Sri Lanka’s fragile process of democratic recovery is in peril

Last Friday, Sri Lanka’s President Maithripala Sirisena (right in picture) sacked Prime Minister Ranil Wickremeinghe and appointed Mahinda Rajapaksa (left in picture), his political rival until the day before, as the new Prime Minister — a surprising move that Mr. Sirisena made in order to resolve a deepening political dispute between himself and Mr. Wickremesinghe. But this act has only pushed Sri Lanka into an unprecedented constitutional crisis, beginning a potentially dangerous phase of an on-going three-cornered power struggle among three leaders.

  • At the centre of the crisis is the lack of clarity as the new Prime Minister seems to have been appointed without a constitutionally valid vacancy for the position.

    • Crux of the issue

  • The constitutional provision that Mr. Sirisena has cited in the official letter to Mr. Wickremesinghe does not grant the President authority to remove a Prime Minister from office. Section 42(4) of the Constitution merely enables the President to appoint a PM. The President has taken the position that since he is the appointing authority, he also has the implicit power to sack the PM. The PM is not a public servant who can be sacked by the appointing authority at his will. It is a constitutional office with protection from the executive. This is the crux of the constitutional dispute.
  • The entire operation of altering the composition of the government seems to have been executed in a great hurry and in secrecy. There is also lack of clarity whether Mr. Sirisena’s letter (removing Mr. Wickremesinghe) had actually reached him by the time Mr. Rajapaksa was sworn in. This has led some commentators to call it a ‘constitutional coup’.
  • The position by Mr. Wickremesinghe aggravates the seriousness of this constitutional dispute. Dismissing the constitutional validity of the presidential action, he has argued that he still commands a majority in Parliament. His line of argument is that only Parliament has the constitutionally sanctioned authority to decide whether he could continue in office as PM or not. It also suggests that as long as there is no no-confidence motion passed in Parliament against him and the cabinet, his position as PM cannot be invalidated by the President at his will.
  • Mr. Wickremesinghe has also cited the fact of having defeated a no-trust motion brought against him a few months ago, and that situation, of Parliament’s majority expressing faith in him, remaining unaltered.
  • The argument seems to have derived its salience in the context of the 19th Amendment to Sri Lanka’s Constitution, passed in 2015 under the joint political leadership of both Mr. Sirisena and Mr. Wickremesinghe. It curtailed powers of the President under the 1978 Constitution (the original) as well as the 18th Amendment passed in 2010. Among the presidential powers taken away by the 19th Amendment, which is valid, is the one pertaining to the President’s powers over the PM.
  • The 19th Amendment, which created a dual executive, made the PM’s position secure from the arbitrary actions of the President. Thus, the office of the PM falls vacant only under limited circumstances. Death, voluntary resignation, loss of support in Parliament, rejection by Parliament of the budget, and ceasing to be an MP are these circumstances. Sacking by the President is certainly not in this list.
  • By this change, the 19th Amendment has also restored the Westminster framework of relationship between the head of state, the PM, and Parliament.
  • All these make the constitutionality as well as democratic legitimacy of the actions of Mr. Sirisena less than clear.
  • An argument put forward on behalf of the President is that when the United People’s Freedom Alliance, which was a partner in the so-called unity government, informed the Speaker last Friday that it was leaving the ruling coalition, the cabinet automatically stood dissolved, thereby creating a vacancy for the office of the PM. This is not an argument derived from any explicit provision of the Constitution. It is merely a political argument. What it does is no more than confirm that the composition of the coalition government was altered. It does not automatically lead to the loss of constitutional validity of the cabinet and the position of the person holding the office of the PM.

    • No clarification

  • Mr. Sirisena’s address to the nation on Sunday did not clarify the constitutional issue at hand. He cited political and personal reasons why he could not partner with Mr. Wickremesinghe as the PM. But his assertion that he acted fully in accordance with the Constitution is only a claim. It awaits clarification. What is in dispute is not the total breakdown of relationship between the two leaders, leading to a collapse of their coalition. What is in doubt is the constitutionality of a series of actions by Mr. Sirisena on Friday. And if they are valid at all, they set a bad precedence for future constitutional governance in Sri Lanka. Contrary to the letter and spirit of the 19th Amendment, no PM will be secure in his/her position against arbitrary dismissal by the President. These circumstances also warrant judicial intervention to resolve the constitutional doubt.
  • Amidst this, the political dispute between the new coalition (Sirisena-Rajapaksa) and the Wickremesinghe led-United National Party (UNP) has now reached a stage of open confrontation. Mr. Wickremesinghe has refused the leave the office of PM as well as the official residence in Colombo. Speaker Karu Jayasuriya has written to Mr. Sirisena demanding that the rights and privileges of Mr. Wickremesinghe be protected, “until any other person emerged from within Parliament as having secured the confidence of Parliament”. The Speaker has implicitly acknowledged that Mr. Wickremesinghe is still the constitutionally legitimate PM.
  • Obviously, Mr. Wickremesinghe and the UNP want to take the battle to Parliament where the UNP feels that it can secure majority support. Meanwhile, Parliament has been prorogued by the President till November 16. As the numbers stand at present, Mr. Rajapaksa does not enjoy a majority in Parliament. The time left ahead will give Mr. Sirisena and the new PM enough time and space for horse trading. Ranged against this formidable combine that has been consolidating its grip on state power and institutions since Friday, are Mr. Wickremesinghe and the UNP who have only limited options — testing his floor strength, bringing a motion against Mr. Rajapaksa, and political defiance. He can also go to the Supreme Court.
  • If the UNP does so, the Supreme Court, which has been on a path to regaining its institutional independence and autonomy, will be called upon to adjudicate over a very sensitive power struggle among top politicians. The days ahead could be trying time for the judiciary as well.

    • The other side

  • Meanwhile, in planning his next moves for political survival, Mr. Wickremesinghe should also realise that he is partly to blame for the political imbroglio. His inability to establish a stable working relationship with the President to run the coalition government, casual disregard for the popular mandate he and Mr. Sirisena jointly won in 2015 for corruption-free governance and politics, lackadaisical attitude to constitutional reform and reconciliation, and gross neglect of popular demands for better economic governance have severely eroded his popular standing.
  • The biggest political irony is this. The collective failure of Mr. Sirisena and Mr. Wickremesinghe to be faithful to the 2015 mandate has now brought Mr. Rajapaksa back to power on the invitation of one party in a coalition which dislodged him from power.
  • Whatever turn the crisis may take, Sri Lanka’s fragile process of democratic recovery is in peril.

    • The great game in West Asia

    Turkey has used the Khashoggi murder to sharpen the battle lines with Saudi Arabia

  • Saudi dissident journalist Jamal Khashoggi’s murder has clearly exposed the brutal nature of the Saudi Arabian regime. It is ironic that the murder of one journalist has succeeded in doing what the killing and starving of innumerable Yemeni civilians have not been able to achieve. His assassination, in the Saudi Consulate in Istanbul, Turkey, has also exposed the Turkish-Saudi rivalry that was largely hidden from public view. Turkey’s President Recep Tayyip Erdoğan’s recent statement in the Turkish Parliament calling the killing “pre-meditated murder”, a claim now accepted by the Saudis themselves, plainly laid the blame at the door of the Saudi regime.
  • The Turkish press has over the past few weeks made public the goriest details of the murder. It is clear that the Turkish political elite is relishing the embarrassment this case has caused the Saudi regime. Ankara has had an uneasy relationship with Riyadh for several years. But the rise of Saudi Arabia’s reckless Crown Prince, Mohammed bin Salman, who has brazenly flaunted Saudi power, has increased Turkey’s anxiety that the Saudis intend to dominate the Arab world to the exclusion not only of Iran but of Turkey as well.

    • The American factor

  • Turkish apprehension has been amplified by the clear signal sent by U.S. President Donald Trump over the last two years (which included making Riyadh the destination of his first foreign trip) that Saudi Arabia had become the kingpin of America’s policy toward West Asia. Ankara perceived the increasing Saudi importance to the U.S. as downgrading of Turkey’s role in America’s West Asian policy, especially since it coincided with a downturn in Turkish-U.S. relations. Turkey’s relations with the U.S. came under strain because of major differences in their approach to the Syrian Kurds. The U.S. militarily supported the Kurdish YPG militia in the fight against the Islamic State, while Turkey, which considers the YPG an extension of the Kurdistan Workers’ Party (PKK), vehemently opposed such a move. Turkey’s decision to buy the S-400 anti-missile defence systems from Russia has also added to the tensions.
  • The visible U.S. tilt toward Riyadh has further fuelled the existing differences between Saudi Arabia and Turkey. Their disagreements were augmented by the outbreak of the Arab Spring in 2011. Turkey enthusiastically welcomed the overthrow of authoritarian governments while the Saudi regime, feeling vulnerable itself, strongly opposed them. Matters came to a head when a military coup in Egypt in 2013 led to the overthrow of Egypt’s President Morsi, who belonged to the Muslim Brotherhood. Turkey had applauded Mr. Morsi coming to power as a vindication of the moderate and constitutionalist Islamist model that the Justice and Development Party (AKP) represented in Turkey and an indication that the Brotherhood was headed in the same direction.
  • On the other hand, Saudi Arabia was, and is, intensely apprehensive of constitutionalist and moderate Islamism that uses popular political mobilisation as its main strategy to gain power since it directly challenges the Saudis’ absolutist Islamism. This is the basis of the visceral Saudi animosity towards the Brotherhood. It was not surprising that the Saudis embraced Egypt’s General Abdel Fattah el-Sisi, in 2013, and immediately granted $2 billion to the military regime to save it and also Egypt’s tottering economy.

    • The Qatar angle

  • Other differences have also came to the fore in the past couple of years. Saudi Arabia imposed a blockade on Qatar in 2017, principally to punish it for its cordial relationship with Iran, with which it shares the world’s largest natural gas field. Qatar also has close relations with Turkey and hosts a Turkish military base. The Emir of Qatar had sent a contingent of soldiers to provide security to Mr. Erdoğan during the failed military coup in 2016. Consequently, Ankara, alongside Tehran, has supported Qatar — flying in essential supplies to break the blockade and further reinforcing Turkish military presence in Qatar.
  • Turkey’s pro-Qatar stance also reflects the difference in Riyadh’s and Ankara’s policies toward Iran. While wary of Iranian ambitions and at odds with it on the Syrian conflict, Turkey is interested in keeping its relations with Iran on an even keel because Iran is a major supplier of energy. Also, Ankara and Tehran face a common threat from Kurdish separatism. Therefore, while Saudi Arabia is locked in a series of proxy wars with Iran, Turkey has been careful not to take sides in this regional cold war.
  • Until recently Turkey and Iran were on opposite sides in the Syrian conflict, with Iran supporting the Assad regime politically and militarily and Turkey acting as the principal conduit for weapons supplies to the opposition. However, recent moves amounting to a rapprochement among Ankara, Moscow and Tehran indicate that a modus vivendi has been worked out between Iran and Turkey on defining their spheres of influence in Syria. This has upset the Saudis for it relieves the pressure on Iran in the Fertile Crescent and allows it to concentrate its energies on contesting Saudi ambitions in the Persian Gulf and in Yemen (where the Saudis are engaged in a bloody battle with the Iranian-supported Houthis).
  • These pre-existing differences between the two countries as well as genuine anger at the heinous crime in Turkey’s leading city have provided Ankara both the high moral ground as well as the opportunity to discredit the Saudi regime — especially the Crown Prince whom Mr. Erdoğan detests — and to drive a wedge between Saudi Arabia and the U.S.

    • Who pays taxes and who doesn’t

    The number of tax returns filed has gone up but collections have not shown a commensurate increase

  • The Central Board of Direct Taxes has released the latest data on income tax collections. Several interesting facts emerge from the data. The number of taxpayers has increased drastically over the last four years. The number of tax returns filed has surged to 6.85 crore in FY 2017-18, an 80% growth since FY 2013-14. Also, the number of taxpayers reporting income greater than ₹1 crore has reached 1,40,139, an increase of 60% between assessment year (AY) 2014-15 and 2017-18.
  • However, the tax collections have not shown commensurate increase. Collections have grown at a decent compound rate of about 13% per annum. More surprisingly, the average income reported by rich Indians (those in the highest tax slab) has decreased. In fact, over the last five years, the share of the richest top 1% in the total tax collected has decreased by almost four percentage points. The same is the case with the top 5% income earners (graph 1). In contrast, relatively low income groups are paying a larger proportion of the tax collected. How can this be, given that the number of taxpayers has increased across all the tax slabs and more individuals report income in crores than ever before (graph 2)?

    • Under-reporting still a concern

  • While for the low tax slabs, the average reported income has also increased, this is not the case with high income groups. After 2016, the average income reported by those in the highest tax slab is 13% less than their average just before 2016. Apparently, a number of high-income individuals (HIIs) grossly under-report their income. Clearly, the Income Declaration Scheme of 2016 and other official measures announced to stem tax evasion by the rich have failed to achieve the desired results.
  • The Global Wealth Report 2018, by Credit Suisse, provides estimates of wealthy Indians. Even by a rather conservative approach towards the wealth-income ratio, it suggests that at least 3,400 Indians have an annual income of more than ₹50 crore each. But only 179 of them reported this level of income to the taxman in AY 2017-18. Similarly, out of more than 1,500 Indians with an expected annual income of more than ₹100 crore each, only 61 reported to the taxman.
  • Besides, the share of reported non-salary income in the gross income of individuals has declined over the years, to 43% in 2017-18 from 48% in AY 2012-13. This suggests that the tax base has not deepened among professionals such as lawyers, doctors, accountants and those running private educational institutes, who continue to under-report their income.
  • Tax avoidance/ evasion by companies also remains an area of serious concern. In AY 2017-18, a mere 7% of corporates reported profit before tax of more than ₹1 crore. Again, the problem of under-reporting is serious with professional and the other service sector entities, which account for more than one-third of all corporates. As a consequence, the share of direct taxes in the total tax collection has remained low.
  • The tax collection figures for this year look better. Some of the apparent improvements will be due to cooking of the books by companies, facilitated by schemes like the Presumptive Taxation Scheme. This allows an assessee to take full benefit of past evasion and escape without scrutiny, simply by paying a turnover tax. By increasing the threshold from ₹1 crore to ₹2 crore, the government has made the scheme even more attractive. No wonder, the number of filers under the scheme shot up to 1.17 crore on August 31, 2018, from 14.93 lakh on August 31, 2017 — a stupendous growth of 681%!
  • However, things are expected to improve with proper implementation of the Goods and Services Tax (GST). This tax generates trails of transactions across value and income chains. Reports emanating from leading business centres like Surat indicate a significant increase in tax collections, for direct as well as indirect taxes. While implementation of the GST will surely help stem tax evasion by semi-formal and mid-size companies by formalising their transactions, it cannot address the main problem: tax evasion and avoidance by HIIs and big corporates.

    • Reforms in tax law needed

  • Several reforms are needed in the tax law. The extant tax law does not require filing of returns if the income is below the taxable threshold (₹2.5 lakh). This means that many professionals who can easily manipulate their accounts never appear on the radar of the taxman. The law should mandate filing of returns by all professionals and proprietorship businesses regardless of their profit. This will increase compliance by enabling the taxman to scrutinise suspicious cases. There is also a case for the wealth tax. Compared to income, the wealth level is harder to manipulate; therefore, the tax is harder to evade.
  • For companies, the tax law allows offsetting of past losses against future profits. Besides, definition of admissible expenditures are susceptible to easy manipulation. These provisions are widely misused by corporates by claiming bogus expenses, to artificially reduce their profit and hence their tax liability. Unsurprisingly, for AY 2017-18, as much as 46% of corporates reported either losses or nil profit. Another 47% reported profit less than ₹1 crore. These provisions need re-examining. As such, a large number of companies showing negligible or no profit points to a continued prevalence of shell companies and other dubious structures which require systematic investigation.
  • Moreover, the numerous tax exemptions also come in handy for tax avoidance. Big corporates benefit more from these exemptions. Consequently, smaller companies face a higher effective tax rate compared to larger corporates. This makes the tax regime regressive. Going by the Budget papers 2018, the effective tax rate of companies with profit greater than ₹500 crore was only 23.94%, while it was higher at 29.43% for companies with profits less than ₹1 crore.
  • There is also a need to enhance the deterrence power of the law, which depends on the likelihood of punishing tax evaders along with imposing a fine. At present, the Income Tax Department has a very poor win rate before the appellate tribunal and the higher judiciary. As a result, the law does not bite enough to hurt the tax offender. The odds of punishing the offenders can be increased by integrating the GST, the income tax and the Ministry of Corporate Affairs’ databases. These measures will go a long way in deepening the tax base among high-income groups and professionals.

    • The Telangana gamble

    Will the call for early polls and a flurry of welfare schemes be enough for the Telangana Rashtra Samithi?

  • Telangana, India’s youngest State, was to hold Assembly elections next year, but Chief Minister K. Chandrasekhar Rao decided to call for early polls. While Mr. Rao may offer his own explanations to voters, the dominant view is that he advanced it as he wanted to avoid holding polls along with the 2019 Lok Sabha elections, which will largely be contested in the name of Narendra Modi.

    • Delinking from Lok Sabha polls

  • The fear may have been that Mr. Modi’s popularity would impact the voting choices for the Assembly elections and adversely affect the chances of the Telangana Rashtra Samithi (TRS). If the two elections are delinked, voters might make more careful choices for the State and the Lok Sabha. It is difficult to guess whether this will work in Mr. Rao’s favour or backfire. When Atal Bihari Vajpayee called for an early Lok Sabha election in 2004, the BJP lost power, but when Naveen Patnaik did the same in Odisha in 2004, he managed to come back to power in alliance with the BJP and has won successive elections. Congress leader and the then Chief Minister of Haryana, Bhupinder Singh Hooda, also called for an early election in 2009 and managed to return to power, but with a reduced majority. The question is, will this gamble work for Mr. Rao?

    • First voting exercise

  • The people of Telangana will vote for the first time after the new State was formed in 2014. It contested the 2014 Assembly elections in a united Andhra Pradesh, winning 62 of the 119 seats in the region. The Telugu Desam Party (TDP) won 175 seats in the 294-seat Assembly. The TRS had a sizeable support base with 34.3% of the vote share, while the Congress got 22 seats and a vote share of 25.2%, making it the main Opposition party. The TDP and the BJP got 14.7% and 7.1% of the vote share, respectively.
  • Mr. Rao, who led a sustained agitation for the formation of Telangana, was very popular in this region even before the State was formed. A survey conducted by the Centre for the Study of Developing Societies (CSDS) in May this year suggests that both his and his government’s popularity remain intact. It also shows that the approval rating of his government is higher than that of the Central government. While 54% of the voters felt satisfied with the performance of the State government, only 30% were satisfied with the work done by the Central government. It is important to note that one of the reasons for Mr. Rao’s popularity is the launch of 19 welfare schemes over the past four years.

    • Walking a tightrope

  • With Mr. Rao and his government’s high popularity, the coming Assembly elections should witness a comfortable victory for the TRS. A divided Opposition may not be in a position to pose a challenge to the TRS. There are efforts by the Congress, the TDP, the YSR-Congress and the CPI to form a joint alliance against the TRS. If this takes shape, the party may face a challenge. An anti-TRS alliance in the State might result in the formation of a TRS-BJP tie-up in Telangana. Going by media reports, it is clear that Mr. Rao is close to Prime Minister Modi and so the two parties should be able to form an alliance without any difficulty. While the fear of a possible Congress-TDP-YSR Congress-CPI alliance may motivate the TRS to form an alliance with the BJP, it needs to think carefully before taking a final decision as seat-sharing issues remain. Though the BJP would be willing to give a bigger hand to the TRS in the Assembly elections, it would like to contest a sizeable number of seats during the 2019 Lok Sabha elections in alliance with the TRS.
  • We have to wait and watch whether the TRS would be willing to see itself as merely a State party or whether it harbours national ambitions. The party could learn some lessons from the Bihar experiment.

    • Facebook leaks redux

    A regulatory regime such as the General Data Protection Regulation must be in force beyond the EU

  • Barely six months after the Cambridge Analytica-Facebook data theft scandal, the world’s largest social network hit the headlines once again following yet another data breach that affected millions of users.
  • In late September, Facebook announced that it had discovered a security breach that had compromised nearly 50 million accounts. The figure was subsequently revised to 30 million. Hackers had reportedly exploited flaws in the code for the ‘View As’ feature, which lets users see what their own profile looks like to someone else, to steal “access tokens”. By stealing them, the hackers were able to serially take over people’s accounts.
  • While Facebook claims to have fixed the bug and reset the logins of all those affected, the episode has done little to restore people’s confidence in Facebook’s seriousness when it comes to protecting their data. It is also unclear how much personal data have been stolen, and how that data may end up being used in ways that could harm Facebook users.
  • Incidentally, tech commentators have speculated that it was the European Union (EU)’s General Data Protection Regulation (GDPR), which came into force this May, that forced Facebook to go public with the breach so promptly, even before the full extent of the damage could be assessed. The GDPR’s stringent guidelines require companies to make such events known within three days of their discovery.
  • In general, citizen-consumers have had to choose between two equally unsatisfactory options: either resign themselves to a post-privacy world or be perpetually scrambling to reskill themselves in order to be able to safely navigate the complicated and ever-evolving (mine)field of data privacy and safety.
  • Following the latest data breach, there were numerous articles educating users on how to secure their Facebook account and data from hackers. But should the onus of securing data be put primarily on the users, with hardly any criminal liability for the platform? After all, this is not a ‘parking at owner’s risk’ scenario, where, after a break-in, one still had some recourse in the form of the local police. In the case of tech behemoths such as Facebook and Google, the power asymmetry vis-à-vis the ordinary user is so astronomical as to render the very notion of redress laughable.
  • But this could soon change, thanks to the GDPR stick being wielded by the EU. Facebook faces a potential penalty of €20 million or 4% of its global revenue (whichever is higher) if the EU regulator investigating the data breach finds a GDPR violation in connection with the incident. If data security for ordinary users is to become something more than a seminar topic, then an equitable regulatory regime such as the GDPR must become the universal norm, in force beyond the EU jurisdiction as well.