Daily Current Affairs 29.07.2021 (A judgment that must be taken in the right spirit, Oxygen for fiscal federalism)

Daily Current Affairs 29.07.2021 (A judgment that must be taken in the right spirit, Oxygen for fiscal federalism)


1.A judgment that must be taken in the right spirit

The striking down of the 97th Amendment is a reminder that the power to regulate cooperatives must stay with States

A constitutional amendment is a rare event. There have only been 104 such cases of those in the 71 years since the Constitution came into being. Rarer still is when a court strikes down a constitutional amendment, an event which has occurred only seven times before last week.

But such a moment has come to pass once again as Union of India vs Rajendra N. Shah, a judgment delivered by the Supreme Court of India on July 20, 2021. The 97th Constitutional Amendment was struck down, albeit in a limited manner.

The background

The 97th Constitutional Amendment came into effect from February 15 2012, and brought about many changes to the legal regime of cooperative societies. The amendment added “cooperative societies” to the protected forms of association under Article 19(1)(c), elevating it to a fundamental right. It also inserted Part IXB in the Constitution which laid down the terms by which cooperative societies would be governed, in more granular detail than was palatable.

The Constitution can be amended only by the procedure provided in Article 368. The amendment procedure requires a majority of the total strength of each of the Houses of Parliament and two-thirds majority of those present and voting. A proviso to the Article lists out some articles and chapters of the Constitution, which can be amended only by a special procedure. The special procedure requires that the amendment will also have to be ratified by the legislatures of half of the States. It is precisely on the grounds of violation of this additional requirement that the 97th Constitutional Amendment was challenged.

It is important to locate this amendment in context. The idea that the cooperative sector ought to be controlled at the State level and not at the central or Union level goes back all the way to the Government of India Act, 1919 which placed cooperatives in the provincial list. This scheme carried forward into the Constitution with Entry 32 of the State List in the Seventh Schedule of the Constitution conferring power on the State legislatures to make laws pertaining to incorporation, regulation and the winding up of cooperative societies.

Central control

But the Union government has been acquiring incrementally greater control of cooperative societies over the years. Cooperative banks have been brought under the purview of the Reserve Bank of India. The political intent of the Union Government for more active involvement in the cooperative sector is also apparent from the recently established Union Ministry for Cooperation.

The statement of objects and reasons of the amendment Bill, which resulted in the amendment in question, cites the need for greater independence and transparency in the functioning of the cooperatives and inserted a number of provisions which provided for the regulation of cooperative societies.

The Gujarat High Court struck down the amendment in 2013 on the grounds that it had failed to comply with the requirements under Article 368(2) by virtue of not having been ratified by the States and had also given an additional finding that the 97th Amendment violated the basic structure of the Constitution.

The Union Government challenged the Gujarat High Court judgment before the Supreme Court, arguing that the amendment neither directly nor effectively changed the scheme of distribution of powers between the Centre and the States.

The parties which had challenged the amendment in the High Court argued that Part IXB, inserted by the 97th Amendment impinged upon the legislative power of the States by casting mandatory obligations upon the State legislatures to legislate in a particular way in areas in which they ought to have had freedom. Some clauses of the newly inserted part of the Constitution would also override some existing State legislations.

The court took the example of the 73rd and 74th Amendments which introduced the chapters on panchayats and municipalities, respectively. Those amendments, similar in impact on the legislative power of the States, had been passed by the special procedure involving ratification by State legislatures. The court noted that the procedure had not been followed in this case but clarified that the judgment is confined to the procedural lacuna and does not go into the question of the amendment being violative of the basic structure of the Constitution.

Making a distinction

Having found this lapse in procedure, the judgment makes a distinction between cooperative societies operating in one State and multi-State cooperative societies and holds that while a ratification by half the State legislatures would have been necessary insofar as it applies to cooperative societies in one State, they chose not to go deeper into the question of whether the amendment also required ratification in respect of application to multi-State cooperative societies. The minority opinion considered that the provisions of the newly added part which pertain to multi-State cooperative societies could not exist independently of the parts which pertain to cooperative societies, and hence the whole amendment should be struck down.

This now brings us to the question – can the Government get over this decision? In theory it would seem simple enough. The amendment has only been struck down on account of the right procedure not having been followed and another amendment can be brought, but this time, going through the rigour of ratification by State legislatures. The National Democratic Alliance has a majority in 18 out of 28 State legislatures. The amendment which has now been struck down was an amendment of the United Progressive Alliance era, so it is not clear as to whether there will be any significant political opposition to the amendment if it is brought again.

A sector best left alone

Which brings us to the next question – should they? The cooperative sector has always been in the domain of the States or provinces. The organising principles and mechanism of these cooperatives differ from area to area and depend on the industry or crop which forms the fulcrum of the cooperative. Homogeneity in this area would only result in the creation of round holes in which square pegs no longer fit. They also would not really serve to break the control some political interests have taken over cooperatives. It is best that the Government takes this judgment in the right spirit and stays away from further meddling in the cooperative sector, notwithstanding the creation of the new Ministry.


Procedure for Amendment of Constitution

  • Article 368 in Part XX of the Constitution deals with the power of parliament to amend the constitution and its procedures.
  • Article 368 provides for two types of amendments, that is, by a special majority of Parliament and the special majority of parliament along with the ratification of half of the states legislatures by a simple majority.
  • Amendment of certain provisions of the constitution requires amendment by a simple majority of each house present and voting. These amendments are not deemed to be amendments under Article 368.

Simple Majority

  • A number of provisions in the Constitution can be amended by a simple majority of the two Houses of Parliament outside the scope of Article 368.
  • These provisions include
    • formation of new states and alteration of areas, boundaries or names of existing states,
    • abolition or creation of legislative councils in states,
    • use of official language,
    • citizenship – acquisition, and termination,
    • elections to Parliament and state legislatures,
    • fifth Schedule – administration of scheduled areas and scheduled tribes,
    • sixth Schedule – administration of tribal areas.

Special Majority

  • Under Article 368(2), Parliament can amend the Constitution by passing a Bill with a special majority.
  • Fundamental Rights and Directive Principles are the two most important provisions that can be amended by the special majority. All provisions that do not require ratification by states, and those that come directly under the purview of Article 368, can be amended by the special majority.

Special Majority with the consent of half of States

  • Those provisions of the Constitution which are related to the federal structure of the polity can be amended by a special majority of the Parliament and also with the consent of half of the state legislatures by a simple majority.
  • Provisions related to the federal structure enshrined in the Constitution can be amended only by a special majority and with the consent of the states.
  • Other important provisions that require ratification by the states include the election of President; Supreme Court and High Courts; representation of states in Parliament; distribution of legislative powers between the Union and the states; and the extent of executive power of the Union and the states.
  • Most importantly, an amendment to Article 368 itself, requires ratification by the states.

Basic Structure Doctrine

  • In Kesavananda Bharati case 1973, the supreme court has ruled that parliament has the power to amend any part of the constitution but it cannot alter the “basic structure of the constitution”.
  • The constituents of basic structure are not clearly defined by the court. However, it has been interpreted to provisions like values enshrined in preamble like secularism, equality etc., federalism, separation of power, independence judiciary, rule of law etc.

2.Oxygen for fiscal federalism

A special rate could be levied to the States to enable them to raise more resources during the pandemic

James Madison, who created the basic framework for the U.S. Constitution, once said, “The powers delegated by the proposed Constitution to the federal government are few and defined. Those which are to remain in the State governments are numerous and indefinite.”

But Indian federalism is very different. The British lawyer and academic, Sir Ivor Jennings, was of the view that India has a federation with a strong centralising policy. Nonetheless, India maintained its limited federal characteristics for a fairly long time. Those characteristics are now disappearing in the Modi era.

Disregarding an obligation

At the time of introducing the new indirect tax regime, the Goods and Services Tax (GST) law assured States a 14% increase in their annual revenue for five years (up to July 1, 2020). But the Union government has deviated from the statutory promise and has been insisting that States avail themselves of loans. Kerala is entitled to a GST compensation of ₹4,041 crore for the financial year 2020-21. But the Union government has been disregarding this obligation. The future interest liability of these loans should not be placed on the shoulders of the States. Moreover, the borrowing limit of States, as per the Fiscal Responsibility and Budget Management Act, should not be built into these loans. This policy needs clarity.

Last year, the Union government increased the borrowing ceiling of the States from 3% to 5% for FY 2020-21. But conditions are attached to 1.5% of the 2% of increased ceiling. It is the States which have to bear the burden of welfare and relief measures during the pandemic. Attaching conditions for expenditure out of the borrowed amount would clip the wings of the States and goes against the principle of cooperative federalism.

The Fifteenth Finance Commission had recommended ₹2,412 crore as a sector-specific grant and ₹1,100 crore as a State-specific grant for Kerala. But the Union government has not taken any steps to release these amounts. The expenditure rules attached to the Disaster Management Fund are unviable. The rules could be amended to ease expenditure. The Corporate Social Responsibility Fund could be remitted to the Chief Minister’s Relief Fund.

As per the Constitution (One Hundred and First Amendment) Act, compensation on account of the implementation of GST will be available for a period of five years. Compensation beyond five years requires a constitutional amendment. The GST Act says it is a law to provide for compensation to the States for the loss of revenue arising on account of the implementation of the GST for a period of five years or for such period as may be prescribed on the recommendation of the GST Council.

Urgent measures

The present compensation period will end in 2021-22. Beyond this period, it is going to be very difficult to convince the Union government to provide compensation as there is no constitutional obligation to do so to the States. This will create serious financial stress to the States, especially to those which require higher compensation.

As per Section 4(f) of Article 279A, the Union government can consider introducing any special rate to raise additional resources during the pandemic (any natural calamity or disaster). Section 4(f) says: “The Goods and Services Tax Council shall make recommendations to the Union and the States on — Any special rate or rates for a specified period, to raise additional resources during any natural calamity or disaster”. Article 279A was inserted through the Constitution (One Hundred and First Amendment) Act.

Hence, a special rate could be levied for a specified period in order to raise additional resources to meet the challenges posed by COVID-19 with the approval of the GST Council. These are some urgent necessary measures that are to be taken for pumping oxygen to fiscal federalism in India.


GST Council

  • It is a constitutional body under Article 279A. It makes recommendations to the Union and State Government on issues related to Goods and Service Tax and was introduced by the Constitution (One Hundred and First Amendment) Act, 2016.
  • The GST Council is chaired by the Union Finance Minister and other members are the Union State Minister of Revenue or Finance and Ministers in-charge of Finance or Taxation of all the States.
  • It is considered as a federal body where both the centre and the states get due representation.
  • Every decision of the Goods and Services Tax Council shall be taken at a meeting by a majority of not less than three-fourths of the weighted votes of the members present and voting, in accordance with the following principles, namely:
    • the vote of the Central Government shall have a weightage of one third of the total votes cast, and
    • the votes of all the State Governments taken together shall have a weightage of two-thirds of the total votes cast, in that meeting.
  • Economic Survey 2017-18 also hailed the GST Council for its cooperative federalism technology which brings together the Center and States and can be applied to many other policy reforms.
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