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What is Grandfather Clause provision that the finance minister introduced during Indian Union Budget 2018

Business Standard(1st Feb’ 2018) – In the run-up to Budget 2018, the market was worried about imposition of long term capital gains tax (LTCG) amid other things. However, the grandfathering provision that the finance minister introduced will make the overall impact on the market sentiment quite negligible. This is despite the fact that we are trading near all-time highs. If all the existing capital gains (till January 31, 2018) are grandfathered, then there is nothing much to worry about. That’s because when investors will buy stocks now, they will build in a 10% payout as LTCG in their return expectation. Therefore, I do not think LTCG is a big issue for the markets. The grandfathering clause for LTCG was a masterstroke and a deft move by the government. The market would have collapsed if this clause was missing.

What is Grandfather Clause? 

The Grandfather Clause was a statute enacted by many American southern states in the wake of Reconstruction (1865-1877) that allowed potential white voters to circumvent literacy tests, poll taxes, and other tactics designed to disenfranchise southern blacks. Following the American Civil War (1861-1865) and the Fourteenth Amendment (1868), which extended citizenship to blacks, the Fifteenth Amendment (1870) was ratified, providing a mandate that “the right of citizens of the United States to vote shall not be denied or abridged…on account of race, color, or previous condition of servitude.” But after a brief period of relatively open voting, southern states and, especially, Democratic legislators began enacting poll taxes, literacy and property tests, and understanding clauses, which they claimed would exclude the poor and uneducated, in a thinly veiled attempt to eliminate the black vote. Many Southern states, however, had to rely on the cunning of voter registrars to ensure that poor and uneducated whites were not disfranchised by these tests.

Louisiana, looking to find a more straightforward method to exempt whites, created the Grandfather Clause in 1898 which allowed those who were able to vote before 1867 and those whose father or grandfather could vote before 1867 to skip the tests and taxes. As no blacks could vote in Louisiana before 1867, the year in which the Reconstruction Act ordered universal male suffrage, the grandfather clause excluded blacks in an inexplicit manner, thus, in theory, avoiding the ire of the Supreme Court and Northern Congressmen. Additionally, the enactment of the grandfather clause avoided national scrutiny because the national media was preoccupied with the coinciding outbreak of the Spanish-American War.

North Carolina was next to establish the grandfather clause in 1900. Although the North Carolina clause eventually passed, it had to surmount serious opposition from blacks and Republicans wary of aggravating the federal government. Eventually, Alabama, Georgia, Maryland, Oklahoma, and Virginia also put similar statutes into law. In tandem with other methods of black disfranchisement, the Grandfather Clause permitted the continuance and strengthening of the Jim Crow segregation that suppressed black Americans in the South until the 1960s. Blacks constituted a majority in Louisiana and other southern states. At least in part, the absence of black voters ensured black schools would languish and discriminatory policy would pervade Southern society.

The United States Supreme Court deemed grandfather clauses unconstitutional in Guinn v. United States (1915). The Court stated that Oklahoma’s grandfather clause was “repugnant to the prohibitions of the Fifteenth Amendment” and that Oklahoma must remove its clause. The other states that had grandfather clauses were also forced to dismantle their versions. In practice, however, the Supreme Court’s verdict had no impact on black suffrage. Each state affected by the ruling quickly enacted new policy to sidestep Guinn. In Oklahoma, for example, legislators passed a statute which extended the vote only to those who did vote or were eligible to vote prior to Guinn. Black voting remained suppressed in a number of Southern states until the civil rights campaigns of the 1960s.

R. Volney Riser, Defying Disfranchisement: Black Voting Rights Activism in the Jim Crow South, 1890-1908 (Baton Rouge, Louisiana: Louisiana State University Press, 2010); Michael J. Klarman, From Jim Crow to Civil Rights: The Supreme Court and the Struggle for Economic Equality (New York: Oxford University Press, 2004); National Public Radio.