Explained: Centre's Defence Of Rs 8 Lakh Income Cap For EWS Quota Before Supreme Court

When groups of protesting resident doctors at the government-run Safdarjung hospital came to a violent face off with the police authorities on 27 December, Swarajya published an article explaining the whole background behind the issue of months-long delay in post-NEET exam counselling to fill the seats particularly in Post Graduate courses under All India Quota because the process has been delayed by more than six months.

The National Eligibility cum Entrance Tests for admissions into medical colleges to undergraduate (NEET-UG) and postgraduate courses (NEET-PG) were held in September this year and result was also declared in the same month. In 2020, the PG exam was conducted in January and counselling got over by April. But this time, the exam was scheduled for April which got postponed due to the second Covid-19 wave.

The counselling for allotment of seats for NEET-PG successful candidates was to happen on 25 October but the Supreme Court ordered the Union government to halt the process and not resume it until the apex court decides on the legality of centre’s decision to give 27 per cent reservation for OBCs and 10 per cent reservation for Economically Weaker Section (EWS) in All India Quota (AIQ) Scheme for undergraduate and postgraduate medical/dental courses (MBBS/MD/MS/Diploma/BDS/MDS) from current 2021-22 academic year onwards.

The court’s order came during the course of hearing the Neil Aurelio Nunes Vs Union of India case which challenged the EWS reservation and on 21 October, the apex court sought clarifications from the Union government on seven issues:

1. Whether the Union government undertook an exercise before arriving at the criteria for the determination of the EWS category;

2. If the answer to (i) above is in the affirmative, whether the criteria are based on the report submitted by Major General Sinho (2010). If the criteria are based on Major General Sinho’s report, a copy of the report should be placed on the record of these proceedings;

3. Whether the EWS category is over inclusive;

4. The income limit in the criteria for the determination of the creamy layer of the OBC category and the EWS category is the same, namely, Rs 8 lakhs. While the creamy layer in the OBC category is identified for excluding a section of the community that has ‘economically progressed’ to such an extent that the WP(C) 961/2021 for social backwardness of the community diminishes, the EWS category is identified to include the segment which is ‘poorer’ when compared to the rest of the community. Therefore (a) the income criterion in respect of the OBC category is aimed at exclusion from a class while in the case of the EWS category, it is aimed at inclusion; and (b) the OBC category is socially and educationally backward and, therefore, has additional impediments to overcome as compared to those belonging to the general category. In these circumstances, would it be arbitrary to provide the same income limit both for the OBC and EWS categories;

5. Whether the differences in the GDP per capita income of different States have been accounted for while arriving at Rs 8 lakhs income limit;

6. Whether the differences in the purchasing power between rural and urban areas have been accounted for while fixing the income limit; and

7. According to the notification of Union government (OM No. 36039/1/2019), families which have an income lower than Rs 8 lakhs would be excluded from the EWS category if the family holds assets of (a) five acres of agricultural land and above; (b) a residential plot of 100 square yards and above in notified municipalities and 200 square yards and above in areas other than notified municipalities; and (c) a residential flat of 1000 square feet and above.

In this context, a disclosure may be made on the following aspects: (i) On what basis has the asset exception been arrived at and was any exercise undertaken for that purpose; (ii) Whether municipalities as required under the exception have been notified; (iii) The reason why the residential flat criterion does not differentiate between metropolitan and nonmetropolitan areas.

In light of this, in November, the government informed the court that it has decided to revisit the criteria for determining EWS in giving reservation.

For this, on 30 November, a three-member committee was formed constituting former finance secretary Dr Ajay Bhushan Pandey, ICSSR member secretary Professor V.K. Malhotra and Principal Economic Advisor Sanjeev Sanyal. The committee submitted its report on 31 December and dealt all the issues raised by the court in depth. The centre filed an affidavit along with the committee’s report on 1 January. The court will hear the matter tomorrow (5 January).

Principles for identifying EWS

The committee has zeroed in on using family income as the chief criterion in deciding the limit of exclusion i.e. creamy layer. Though, it recognises that poverty and economic deprivation is a multidimensional problem which can’t be easily defined by any single variable including its recommended indicator of family income because it can differ based on location, family size, volatility of income, inclusion/exclusion of farm income, etc.

However, that may be the least problematic criterion because a more detailed set of indicators may not be very practical or necessarily better. Hence, it has suggested a simple set of indicators that not only leads to simplicity but also minimises the probability of including the undeserving ones or excluding the deserving ones. This is the reason why the principle of having an income cut-off is thought as the best method for EWS identification.

The report cites a slew of cases such as Ashoka Kumar Thakur Vs Union of India, Kumari KS Jayasree Vs State of Kerala, KC Vasanth Kumar Vs State of Karnataka, State of Uttar Pradesh Vs Pradip Tandon, Indira Swahney Vs Union of India, Kerala Swathanthra Malaya Thozhilali Federation Vs Kerala Trawlnet Boat Operators' Association, M/S. Shantistar Builders Vs Narayan Khimalal Totame, etc where the Supreme Court has opined that economic backwardness (and various indicators that can determine economic backwardness) can be an indicator of educational or social backwardness even though economic factor alone was not considered a valid reason to give reservation before the 103rd constitutional amendment of 2019.

This was the amendment that gave EWS quota for the first time and whose validity is yet to be decided by the apex court.

The reasoning behind fixing Rs 8 lakh for creamy layer in EWS

Having zeroed in on ’family income’ as the best possible method to classify EWS, the committee dealt with the question of fixing exact annual income figure. It states that the present Rs 8 lakh figure is not arbitrary and is in fact reasonable.

The committee states that Income Tax exemption limit is an important factor which is based on Adam Smith’s ‘ability to pay principle’ that is used world-wide to levy income tax. In India too, the tax exemption limit takes into account factors such as ability-to-pay, sustenance level, etc. So, it’s logical to use this limit to determine the EWS threshold.

Currently, individual taxpayers having taxable annual income up to Rs 5 lakhs are not required to pay any income tax. Plus, if the individual is investing Rs 1.5 lakhs in provident funds, specified savings, insurance etc, the effective tax is nil for income up to Rs 7 lakhs per annum given there is standard deduction of Rs 50,000 too. Moreover, with additional deductions such as standard deduction interest on a home loan up to Rs 2 lakh, interest on education loans, National Pension Scheme contributions, medical insurance, medical expenditure on senior citizens etc, even people earning Rs 8 lakh can effectively remain exempt from paying any tax.

Additionally, the committee reasons, and it’s a pertinent point to note, that this income tax exemption limit is for an individual while EWS criteria of Rs 8 lakh is being determined based on income of three generations of a family - parents, candidate, minor siblings, children and even spouse. Also, while agriculture income is not factored in the income tax, it’s considered while deciding the family income for EWS. So, the committee feels that Rs 8 lakh criteria is much more demanding, just and fair. It will neither exclude deserving candidates nor include undeserving ones.

How can Rs 8 lakh limit be same for EWS and OBCs?

The committee argues that these two limits appear same only on the surface but the way in which the income criterion is defined is quite different for both categories.

First, for OBCs, to qualify as ‘creamy layer’, gross family annual income should be above Rs 8 lakh for three consecutive years. On the other hand, for EWS, family income has to be below Rs 8 lakh only in the preceding financial year.

Given that poorer sections are likely to be more involved in volatile non-salary incomes (shopkeepers, artists, farmers, micro entrepreneurs, etc), even one year of windfall income earned by the household can exclude them from the quota and setting lower income threshold can greatly increase risk of excluding many deserving candidates. Imagine a poor family being debarred based on one season of good harvest or a contract job of a family member which is available for only a limited window. This risk will be far greater with less threshold.

Second, OBCs which are artisans or engaged in hereditary occupations are excluded from the ’creamy layer’ criterion. This cushion was to shield those with volatile incomes. But no such exemption is there for EWS quota.

Third, for OBCs, income from salaries or agriculture income is exempted. But that’s not the case with EWS.

Fourth, for OBCs, definition of family includes candidate, parents and minor children only while for EWS, family means candidate, parents, spouse, minor siblings and minor children.

All this shows that merely mentioning Rs 8 lakh figure to equate the two is misleading when the EWS criteria is much more strict and demanding.

Why uniform income EWS criteria for whole country?

This issue was also raised by the Supreme Court (See question number 5 in italicised paragraphs): Whether the differences in the GDP per capita income of different States have been accounted for while arriving at Rs 8 lakhs income limit.

One wonders how this can even be objected to. If there can be uniform criteria for identification of creamy layer in OBCs despite differences in the GDP per capita income of different states, why not for EWS?

Anyway, the committee clearly states that ’having different income limits for different areas will be an implementation nightmare both for government authorities and applicants.‘

’The different members of the household of the applicant may reside at different places at different times and applying differential geographical income criteria in such cases may become extremely complex.…We must understand that any system or criterion we adopt should be simple and easy to implement,’ the report says.

The report also highlights the possibility of misuse of different income thresholds for different states as it may create perverse incentive to migrate to take benefit of reservation.

The report resorts to common sense and points out how income tax is also uniform irrespective of state GDPs or per capita income of people residing in different regions.

Is Rs 8 lakh criteria over-inclusive, meaning, does it favour the rich?

This was question number 3 by the Supreme Court to the government. Using the data of successful EWS candidates (and their family income) in India’s top three national exams - National Eligibility Entrance Test (NEET), Joint Entrance Examination (JEE) Advanced And UPSC - the committee proves conclusively that the quota is clearly not favouring more privileged among the EWS. Data shows that household income of 91 per cent of qualified EWS candidates in NEET (UG) 2020, 91.2 per cent candidates in JEE Mains Advanced 2021 and 72.1 per cent candidates in UPSC 2020 was less than Rs 5 lakh.

Classification based on assets owned?

The 2019 notification by the Centre for EWS had barred those from availing the quota in this category whose family held ‘assets of (a) five acres of agricultural land and above; (b) a residential plot of 100 square yards and above in notified municipalities and 200 square yards and above in areas other than notified municipalities; and (c) a residential flat of 1000 square feet and above.’

The latest committee report has recommended that while the agricultural land indicator should be retained, it would be prudent to drop the residential asset ownership as an indicator for deciding the creamy layer.

“Current residential asset criteria based on measurement area is anomalous because residential houses of same square ft or yards can have vastly different values depending upon where they are located. Residential real estate values vary widely even within the same city. Even if we replace the area thresholds in EWS criteria with residential house or plot values, still it would not solve the problem because it would then require lakhs of candidates every year to get the valuation done of their houses and plots from the notified authorities,’ the report reasons. (emphasis ours)

Further, the committee notes that the residential house may be ancestral and used only as a dwelling unit and may not be sold for generating income (which should be expected in Indian family setting as selling ancestral property is done only in exceptional cases). So, it would be unfair to use that criterion to exclude someone from EWS.

However, the committee has recommended that these new suggestions should only be applied from next admission/recruitment cycle and not the ongoing processes as changing goal posts in the middle will be highly prejudicial and create all sorts of legal and other problems.

As is clear from the committee’s report, all the objections raised by the Supreme Court have been answered in detail. It’s now up to the court to pronounce its verdict on the soundness of these recommendations and justifications.