The Centre has wielded its Article 123 ordinance power to scrap FII capital-gains and bond withholding tax under the Income Tax Act 2025, even as the RBI MPC trimmed FY27 GDP growth to 6.6% — a twin macro-fiscal signal CLAT aspirants must decode.
On June 5, 2026, the Union Government promulgated an ordinance amending the Income Tax Act 2025 to abolish capital-gains tax on Foreign Institutional Investors (FIIs) and withholding tax on sovereign and corporate bonds purchased under the Fully Accessible Route (FAR). Simultaneously, the RBI’s Monetary Policy Committee (MPC), constituted under Section 45ZB of the RBI Act, cut FY27 real GDP forecast from 6.8% to 6.6% and raised CPI inflation projection to 5.1%. The twin moves aim to widen India’s Balance of Payments (BoP) capital account and cushion a slowing growth-inflation mix as global tariff risks rise.
📜 Constitutional / Statutory Anchor
Article 123: empowers the President to promulgate ordinances when Parliament is not in session — must be laid before both Houses and ceases six weeks after re-assembly. RBI Act Sec 45ZB: constitutes the six-member Monetary Policy Committee that sets the policy repo rate by majority vote. Income Tax Act 2025: the consolidated direct-tax code replacing the 1961 Act. Article 112: annual financial statement / Finance Bill route — distinguished from ordinance route. FAR: RBI route for unrestricted non-resident investment in specified G-Secs.
Why this matters doctrinally: ordinance use for tax law is constitutionally permissible but politically sensitive — the Supreme Court in D.C. Wadhwa v State of Bihar (1987) condemned ordinance “re-promulgation” as a fraud on the Constitution, and Krishna Kumar Singh v State of Bihar (2017) held that rights accrued under a lapsed ordinance survive only if “irreversible”. Tax ordinances also bypass the Article 110 Money Bill route and the Finance Bill scrutiny. The MPC’s downgrade signals stagflationary stress — slower growth with stickier prices — testing the inflation-targeting framework’s flexibility band of 4% ± 2%.
🎯 Key Facts at a Glance
- Ordinance date: June 5, 2026; amends Income Tax Act 2025
- Scrapped: FII capital-gains tax + bond withholding tax (FAR route)
- RBI MPC: FY27 GDP cut 6.8% → 6.6%; CPI raised to 5.1%
- Article 123: presidential ordinance; lapses 6 weeks post re-assembly
- Inflation target band: 4% ± 2% (flexible inflation targeting since 2016)
- D.C. Wadhwa (1987) + Krishna Kumar Singh (2017): leading ordinance cases
Comparatively, the US Fed sets policy via the FOMC without an inflation-target statute, while the ECB targets 2% symmetrically. India’s MPC framework — created by the Finance Act 2016 amending the RBI Act — was a structural reform credited to the Urjit Patel Committee (2014). The FII tax scrap follows a global pattern: Singapore and the UAE levy zero capital-gains on portfolio investors, and the move is intended to make India competitive on the JPMorgan and Bloomberg bond-index inclusion glide path that began in 2024.
⚖️ CLAT Angle
This is prime Current Affairs + Legal Reasoning material. Expect a 450-word passage on ordinance jurisprudence with questions on Article 123 conditions, the D.C. Wadhwa ratio on re-promulgation, and distinction between ordinance and Money Bill. Polity questions may pair Article 123 with Article 213 (Governor’s ordinance). Economy MCQs will likely test MPC composition (3 RBI + 3 Govt nominees), the inflation band, and FAR mechanics.
Watch next: the ordinance must be laid before Parliament within six weeks of the next session — likely the Monsoon Session in July 2026. Opposition parties have indicated a constitutional challenge alleging colourable exercise of legislative power. The MPC’s August 2026 meeting will reveal whether the repo rate is cut to support growth; bond yields have already softened by 12 bps on the withholding-tax news. Watch JPMorgan’s index-inclusion weight review and the H1 FY27 BoP data due September for capital-flow validation.
💡 Why This Matters for CLAT 2027 Aspirants
Revise Articles 123 vs 213 vs 110 together — they recur every cycle. Pair this with CLAT 2024’s Krishna Kumar Singh passage and the MPC repo-rate question pattern. Memorise the MPC’s 6-member composition and 4% ± 2% inflation band.
📝 Test Yourself — 10-Question Quiz
Take the interactive quiz below to reinforce these concepts:
Practice Quiz — 10 CLAT-Style Questions
Click an option to reveal the answer and explanation.
