Constituent Assembly Of India - Volume VII
Dated: November 04, 1948
Shri B. Das: He has just spoken in Hindustani, the purport of which is that he has moved his amendment. This iscontrary to the practice of this House. I think it is out oforder and it should not be allowed.
Mr. President: I think I had better allow the Maulana Saheb to move the amendment. Then, you may take the point oforder.
Maulana Hasrat Mohani: *[I was telling the reason why I do not regard this Constituent Assembly as a competent body. Firstly, because all over the world wherever a Constituent Assembly has been set up, it has been done as an outcome of revolution. Revolution does not necessarily mean an armed revolution. It only means that, when the prevailing system of Government has come to an end and another is intended to be set up in its place, a Constituent Assembly has been invariably called to frame and pass a constitution in the light of new conditions. If the previous form of Government were to continue then there was no need of a Constituent Assembly. Look at our new constitution drafted by Dr.Ambedkar. There is nothing new in it. He has mostly copied out either the Government of India Act of 1935 or, as admitted by himself, has drawn from the constitutions of other countries. A bit from here and a bit from there-it is a Pandora's Box. This is what has been produced by our friend Dr. Ambedkar! My biggest complaint on this account is that if for the purpose of drafting a constitution he had to copy out the constitutions of other countries, then why did he not embody the latest and the best constitution? How was it that he looked up to the constitutions of Australia, Canada, America, and England, but the constitution of the Soviet Union did not catch his eye? I have jotted down althea points he has made in his speech. This is not the time to reply them in detail, but this much I can say that he has retained all the bad points that he could lay his hands upon. He has observed that there should be no rigidity and legalism, but has he at any place said that a Unitary System of Government should be established? At one place he mentioned that he could not provide for the village Panchayats. If he had kept the Soviet Constitution in view, there would have been no difficulty in his way. I claim it and I challenge him on that point. For example, he has said that unless there is a unitary type of Government and powerful Centre, nothing can be done. Such talk is beside the point. He does not know that it is so in the Soviet Constitution. What he has done is to allocate some subjects to Provinces, some to the Centre and some have been put in the concurrent list. In the Soviet Constitution every constituent state has been made a permanent republic; and towing its confidence every component unit has been given control over the defense, foreign relations and communications. What has been the result? He says that it would be detrimental, but there the Soviet Government have gained the confidence of their component states. The result has been that all parts of the Soviet Union - considered from the point of view of population they are all Muslim republics - have helped their utmost in the last war. People of Caucasia and of every war-ravaged region have stood wholeheartedly by the Soviet Union. Cossacks and others who rendered help all belonged to the Union. Thus his observation is unjustified. He is not taking the people into his confidence, and says that all should merge.]
Pandit Balkrishna Sharma: May I rise to a point of order? The revered Maulana Sahib is discussing the merits of the Constitution whereas the proposal that is put forward before us is that we must not consider this Constitution. The discussion of the merits of the Constitution cannot be brought before the House when we are to consider only the question of postponement of the discussion.
*  Translation of Hindustani speech.
Mr. President: I thought it would save time if you left him alone.
Maulana Hasrat Mohani: *[I repeat what I have already said, that the reason why this House is not competent, is that you have consulted all the constitutions of the world; but you have not cared to see the latest and the best constitutions. The second point arises, what was the basis of the election of our Constituent Assembly? It was on communal basis. Muslims had elected Muslims and Hindus had voted for the Hindus, but the States were not represented. What was the position at the time of the first meeting of the Constituent Assembly? On your own admission there were three parties, namely, the Congress, the Muslim League and the States; but up to that time the States had not come in. No member of the Muslim League had taken any part. The result has been that the constitution that has been framed has been forged by one party alone. How can you enforce it on others? I mean to say that no reliance can be placed by us as the Constitution has been framed by one party alone. In the situation that has how arisen we also find the same, namely that there is only one party. It is like this: the Muslim League is finished, it has dissolved itself and althea States have merged themselves in the Indian Union and now only the Indian Government, namely one party, has remained in the field. That is why we have to form political parties so that your difficulties may come to an end.]
Shri Satyanarayan Sinha (Bihar: General): *[Did you find out any better solution?]
Maulana Hasrat Mohani: *[I am coming to that. Dr.Ambedkar has just said that the majority party should be considerate towards the Minority party. I say: we do not want them. You have provided in the constitution that 14 percent of the seats should be reserved for the Muslims. You still consider yourself 86 per cent and Muslims to be 14 percent. So long as you have this communalism, nothing can be done. Why do you say that Muslims are in a Minority. So long as you depict them in communal colours Muslims shall remain a Minority. When we come as members of a political party or as members of the Independent Communist party or as Socialists and then form a coalition party, then as a whole they will be arrayed against the rest.
You say that a long time has elapsed that many things have happened and that you have worked so hard. Mr.President, I would recall that when Pandit Jawahar Lal Nehruhad presented the Draft Constitution, I had then raised an objection and he had advised me to leave alone a primary matter. I had thereupon pointed out to him that it would be absurd to leave aside a point which is to be settled first. I had also pointed out that by doing so he would not be taking any strong and firm stand but would be stuffing irrelevant matter in all directions. I had also enquired what he would do if questions were raised on these issues, if without taking any decision, he started framing the constitution. It is a futility; we should see what type of Constitution is required. We want to make a picture, but if that picture is not painted correctly, then it cannot be termed a picture. You will say that you have worked hard and that quite a long time has elapsed. My answer would be that there is no difficulty about it, neither was there any risk. I had protested at that time and I was glad that the Honorable President had stated that the point would be considered and it was on that understanding that we had discussed the resolution. You know that the same thing has happened in Pakistan as well. Mr. Jinnah had said that soling as the Constituent Assembly was not elected, the constitution could not be passed. This is the reason why I am telling you that so long as the Constituent Assembly is not elected on non-communal basis, you have no right to get a constitution passed by this Constituent Assembly. No matter receives any consideration from you, because you are inflated with the idea that you are in a majority and that whatever you like will be passed. Do not
*  Translation of Hindustani speech.
imagine that no blame will come upon you. I am alone and I am saying all I can say. You may not agree. In reality you are doing all that the British Government had been doing. After sometime they used to give us pensions and used to ask us to stay at home. But why should we do so?
I would like to ask you what you are doing in Hyderabad. You say that a Constituent Assembly will be setup which would frame a constitution. You have accepted this principle for Hyderabad. Why don't you do it here? Obviously all this is being done on communal lines in which truth and justice have no place.
If he says that he cannot do that, he has no power to elect a new Constituent Assembly on the basis of joint electorate and that would be done after the constitution has-been framed, then I repeat what you have said, that `legalism' and `rigidity' should be cast aside. I ask him whether he can set up a Constituent Assembly in Hyderabad without the Noam’s fireman. But here we set up an electorate for the Constituent Assembly as we felt the need for it; so it is incorrect to say that we cannot do it."Where there is a will, there is a way." If you are in earnest to be just to the country and if you want to treat everyone equally, then I give you a warning that your Endeavour to assimilate all into one whole, to build a paramount Indian power, will bring disaster. The latest example is that of Aurangzeb the Emperor. After conquering the whole of India he annexed the two Southern States of Bijapur and Golcanda with the intention of founding aunitary Moghul Empire. What was the result? They say Aurangzeb lost his kingdom because of his bigotry but I say it was lost because of his imperialistic ideas. If he had not done that, he would not have lost a kingdom. Do not think it is easy to form a single unitary Government by coercing each and all into your fold. That can not last. You should hold fresh elections on non-communal basis, on the basis of joint electorates, and then whatever constitution you frame will be acceptable to us. We regard the constitution framed by you worthy of being consigned to the waste paper basket.]
Shri B. Das: I wish to point out that under Rule 31sub-clause (2) the motion for adjournment on the motion moved by the Honourable Dr. B. R. Ambedkar for the consideration of Draft Constitution of India should not have been allowed by the Chair.
Mr. President: I have taken this under Rule 25, Clause(5), sub-clause (b) as a motion for adjournment of consideration of a motion which is under discussion.
Shri B. Das: But he wants a fresh election to take place first in the country. That is a negation of the whole idea.
Mr. President: I have liberally construed the rule forth Honorable Member and I have taken it, as I have said, under Rule 25, Clause (5), sub-clause (b).
Begum Aizaz Rasul (United Provinces: Muslim): Sir, before we adjourn for the day, may I know how many days the Chair proposes to allow for the general discussion on Dr.Ambedkar's motion?
Mr. President: As at present advised, it is hoped to conclude the discussion tomorrow. I will limit the time of each speaker and if I find that there is a considerable opinion in favour of further discussion, more time may be given.
The Constituent Assembly then adjourned till Ten of the Clock on Friday the 5th November 1948.
*  Translation of Hindustani speech.
CONSTITUENT ASSEMBLY OF INDIA
New Delhi, the 21st October 1947.
CONSTITUENT ASSEMBLY OF INDIA,
We, the members of the Committee appointed by you in accordance with the motion adopted by the Constituent Assembly on the 30th July, 1947, for the purpose of recommending constitutional changes in the five Centrally administered areas, viz., Panth Piploda, Andaman and Nicobar Islands, Coorg, Ajmer-Merwara and Delhi, submit this ourreport and the annexure thereto. We have adopted broadly theprinciples of responsible government as the basis of the constitution for the three last mentioned provinces. Wehave, however, made some modifications in the provisionsadopted by the Assembly in respect of the Major Provinces.Before formulating our proposals we fully considered theposition of these provinces with respect to their geography,financial condition and the working of the existing system of government in these areas.
2. Panth Piploda is a small tract of territory consisting of only 10 1/2 villages situated in Malwa in the Central India Agency. In view of its small size and isolated position we have recommended that it should form part of the province of Ajmer-Merwara. This step was also suggested by some influential citizens of Panth Piploda. As regards the group of islands in the Bay of Bengal known as the Andamanand Nicobar Islands which have ceased to be penal settlements, we recommend that they should continue to be administered by the Government of India as at present with such adjustments in their administrative machinery as may be deemed necessary.
3. Before recommending any constitutional changes for the three Chief Commissioners' Provinces of Coorg, Ajmer-Merwara and Delhi which we propose to designate as Lieutenant Governors' Provinces, we took into account the following considerations:-
Among the important decision taken by us are:-
4. We are fully alive to the circumstances which led tothe formation of the Delhi province in 1912. We also recognize the special importance of Delhi as the Capital of the Federation. We are, however, of the opinion that the people of the province which contains the Metropolis of India should not be deprived of the right of self-government enjoyed by the rest of their country-men living in the smallest of villages. We have, accordingly, placed the Delhi Province on a par with Ajmer-Merwara and Coorge and have recommended responsible Government subject to the limitations already indicated. Our detailed recommendations are given in the annexure.
(B Pattabhi Sitaramayya)
N. GOPALASWAMY AYYANGAR
C. M. POONACHA
MUKAT BEHARI LAL BHARGAVA
Members of the Committee.
LIEUTENANT GOVERNORS' PROVINCES
Delhi, Ajmer-Merwara including Panth Piploda, Coorg and such other provinces as may be so designated shall be Lieutenant Governors' Provinces.
The Provincial Executive
2. In each Province there shall be a Lieutenant Governor who shall be appointed by the President of the Federation.
3. The provisions of the Constitution Act relating tithe term of office, qualification for appointment, eligibility for re-appointment, conditions of office, declaration before entering office by the Governor shall as far as possible be applicable in the case of the Lieutenant Governor. He may be removed from office by the President on grounds upon which a Governor may be impeached.
4. (i) The executive authority of the Province shall be vested in the Lieutenant Governor and may be exercised by him either directly or through persons acting under his authority.
(ii) The power to suspend, remit or to commute the sentence of any person convicted of any offence shall be vested in the Lieutenant Governor as in the case of major provinces.
(iii) Nothing in this section shall prevent thePresident of the Federation or the Provincial Legis lature from delegating functions to subordinate authorities.
Administration of Provincial Affairs
5. (i) There shall be a Council of Ministers with the Chief Minister at the head to aid and advise the Lieutenant Governor in the exercise of his functions except in so far as he is by or under this Constitution required to exercise his functions or any of them in his discretion. The number of ministers shall not exceed three except with the approval of the President of the Federation.
(ii) In case of difference of opinion between the Lieutenant Governor and his ministers on any issue which he considers important, he may refer the matter to the President of the Federation, whose decision shall be final and binding upon the Province.
6. The provisions of the Constitution Act relating tithe appointment, dismissal and with respect to the determination of the salaries of the ministers in the Governors' Provinces shall, as far as possible, be applicable in the case of Lieutenant Governors' Provinces.
7. There shall for each of the Lieutenant Governor’s Province be a Legislature, consisting of a single Chamber to be known as the Legislative Assembly. It shall be composed of members chosen by election.
8. The term of office of the elected members of the Assembly, the basis of franchise and other general provisions shall be on the lines as provided in the Constitution Act for Governors' Provinces except that the representation of the different territorial constituencies in the Assembly shall be on a scale of not more than one representative for every 5,000 persons subject to a maximum of 33 for Coorg, 15,000 subject to a maximum of 40 in the case of Ajmer-Merwara including Panth Piploda and 20,000subject to a maximum of 50 in the case of Delhi.
9. The Provincial Assembly shall not have the power to make laws for federal subjects; and the subjects included in both the provincial and concurrent lists in the new constitution, will be treated as concurrent in respect of these minor provinces. Laws made by the federal legislature for these provinces in respect of any of these subjects shall prevail over laws passed by the Provincial Assembly in so far as the latter are inconsistent with the Federal laws.
10. Laws passed by the Provincial Assembly shall require the assent of the President of the Federation.
11. The provisions of the Constitution Act relating to prorogation and dissolution of the legislature, the right of the Governor to address and send messages, election of members as Officers of the legislature and fixation of their salaries in Governor's Provinces shall apply mutatis mutandis in the case of Lieutenant Governors' Provinces.
12. The Provisions of the Constitution Act relating tithe making of declaration by members, vacation of seats, disqualifications of members, their privileges and immunities, salaries and allowances, in the Provincial Legislatures shall be as far as possible be applicable in the Lieutenant Governors' Provinces.
13. The provisions of the Constitution Act relating to language to be used in the Provincial Legislature shall as far as possible be applicable in the case of these Provinces.
14. If at any time the President of the Federation is satisfied that the government of the Province cannot be carried on in accordance with these provisions, he should have power to supersede these arrangements, take the administration into his own hands and make such other provision for conducting it as he may consider necessary. The exercise of this power will be subject to the usual provisions relating to report to and control by the
Federal Legislature in the case of emergencies in a Governor’s Province.
15. (i) In the case of Coorg, the powers of a High Court shall be exercised by the Madras High Court.
(ii) For Delhi and Ajmer-Merwara there shall be a High Court established in Delhi having original as well as appellate jurisdiction over both the provinces. The constitution of this High Court, the appointment of judges and their salaries, its jurisdiction and administrative functions shall be governed by the provisions of the Constitution Act applicable to the High Courts.
16. (i) For higher appointments provision shall be made in the recruitment of All India Administrative Services for meeting the requirements of these three provinces.
(ii) Provision shall be made for transfers inter se of service personnel recruited in the above manner in these three provinces.
Representation in the Federal Legislature
17. Notwithstanding anything to the contrary in the Union Constitution regarding the basis of representation forth Houses of Federal Legislature, each of these three Minor Provinces should be treated as a unit of the Federation for purposes of representation in the two Houses of the Federal Legislature.
CHIEF COMMISSIONERS' PROVINCES
18. (i) Andaman and Nicobar Islands and such other areas as may be so designated shall be the Chief Commissioners' Provinces.
(ii) The Andaman and Nicobar Islands shall continue to be administered as at present with such adjustments in the administrative machinery as may be deemed necessary.
Additional Note by Shri Mukat Behari Lal Bhargava and Shri C. M. Poonacha, to the Chief Commissioners' Provinces Constitution Committee Report.
We, the members representing Ajmer-Merwara and Coorg having signed the report find it necessary to append thisadditional note regarding the future of these two provinces.
The special problems arising out of the smallness of area, geographical position, scantiness of resourcesattended with, what may be called administrative difficulties of many a complex nature may, at no distant future, necessitate the joining of each of these areas with a contiguous unit. Therefore, we feel that a specific provision should be made in this chapter of the constitution to make possible such a union after ascertaining the wishes of the people of these areas. No doubt, our attention was drawn to clause 3 of the Union Constitution Committee Report, which is yet to be adopted by the Constituent Assembly, wherein certain provisions relating to the creation of a province, altering the boundaries of a province, etc., are embodied. But after careful examination we feel that the proposed clause 3 of the Union Constitution Committee Report is of a very restrictive nature and does not in specific terms contemplate the inclusion of an Indian Province of areas with a State or Group of States. Taking into account the situation of Ajmer-Merwara which is surrounded on all sides by Rajputana States such a clause would perpetually leave Ajmer-Merwara in isolation even though the people of Ajmer-Merwara may at any time decide against it. Accordingly we press upon the Constituent Assembly the urgency of incorporating a suitable provision in this chapter of the Constitution so as to make it possible for each of these areas to join a contiguous unit.
CONSTITUENT ASSEMBLY OF INDIA
Delhi, the 5th December 1947.
CONSTITUENT ASSEMBLY OF INDIA,
COUNCIL HOUSE, NEW DELHI.
Expert Committee on Financial Provisions
I have the honour to forward herewith the Report of the Expert Committee on Financial Provisions of the Union Constitution for submission to the Hon'ble the President.
I have the honour to be,
Your most obedient servant,
(M V Rangachari)
Terms of Reference
We were appointed by the President of the Constituent Assembly to examine and report on the Financial Provisions of the Constitution Act with the following terms of reference:-
I. To examine, with the aid of the memoranda on the distribution of revenue between the Centre and the Provinces sent by the Government of India and the Provinces, the existing provisions relating to finance and borrowing powers in the Government of India Act, 1935, and their working during the last ten years and to make recommendations as tithe entries in the lists and sections to be embodied in the new Constitution.
The following points shall, in particular, be kept in view in making the recommendations:-
II. What should be the principles on which Federal grants should be made to the Units in future? What should bathe machinery for the determination of such grants: could the same Financial Commission as is referred to in I(d)above act as the machinery for this purpose also, or should it be a different one?
III. How could the Indian States be fitted into this general system as far as possible on the same terms as Provinces? Should a time lag be provided for their being so fitted in?
IV. On the assumption of financial responsibility for Defence, Foreign Affairs and Communications on behalf of the Indian States under arrangements for accession to the Federation, what special financial arrangements, if any, are necessary between the acceding States and the Federation?
V. Should the existing rights of the Indian States as to Federal taxes now levied by them be acquired on payment of compensation?
VI. How far is it feasible, on the centralization of all customs levied at the Federal frontiers, to permit Indian States affected by such centralization to retain such portion of the customs so levied at their frontiers as might be attri- ments between the Centre and certain important Indian States as regards maritime customs, excises etc. may be of value in this connection.]
VII. Some Provinces have claimed a larger percentage of the income-tax to be made over to them than under the existing system. Does this claim merit consideration; if so, to what extent?
VIII. A suggestion has been made that the Centre should be allocated only the excises on specified commodities, the rest of the field of excise being left to the Provinces to tap according to their needs. Would this be possible without any material detriment to Federal revenue?
IX. On the basis that the residuary powers are vested in the Centre in the new Constitution so far as the Provinces are concerned, and in the States so far as the States are concerned, is it necessary that any additional specific taxes should be entered in the Provincial List, and if so, what?
X. Is it necessary to make any modifications in the existing provisions as regards procedure in financial matters contained in Sections 33 to 37 and 78 to 83 of the Government of India Act, 1935?
XI. A large number of Indian States at present derive substantial revenues from land customs levied at the frontiers between their limits and those of neighbouring States or Provinces. One of the fundamental rights already adopted by the Constituent Assembly is to remove all internal barriers in regard to trade between Unit and Unit. Could these land customs be done away with either immediately or over a
period of years, and if so, should any prejudice caused thereby to the finances of particular States be compensated and in what manner?
[The Committee should kindly indicate clearly which ofits recommendations should go into the body of theConstitution and which should be provided for by Federal law.]
2. We began our work on the 17th November and have been sitting continuously. We have received memoranda from the various Provincial Governments setting out their claims for larger resources as well as their points of view in connection therewith. We have also received a memorandum from the Ministry of Finance of the Central Government giving a picture of the financial position of the Centre in the near future. The Secretariat of the Constituent Assembly has collected for us information on various matters relating to the States, and also helpful information regarding other Federations. It has also prepared a draft of the sections which come within our terms of reference; and this has considerably helped us in our work. We are indebted for all these memoranda, information and drafts. We are also indebted to some of the Provincial authorities who appeared before us in person and discussed with us informally the question arising out of the memoranda presented by their Governments. We availed ourselves also of the specialized knowledge and experience of not only some of the officials of the Central Secretariat, but of some members of the Constituent Assembly and others who have unique knowledge of some of the problems under our consideration. All our discussions, however, were free and informal; and we did not, therefore, record any evidence, apart from the memoranda placed before us.
3. In particular, the other two of us would like to place on record our grateful appreciation of the assistance we have received from our colleague and Secretary Mr.Rangachari, who amidst his exacting, multifarious duties, including the preparation of the interim budget, not only found time regularly to attend our meetings, but also placed his wide knowledge and experience at our disposal, and arranged to secure at short notice most of the available information required by us. We should also like to thank Mr. B. Das Gupta of the West Bengal Government Secretariat for the intelligent and extremely well informed assistance he gave us. We are also indebted to Mr. Mukerjee, Joint Secretary of the Constituent Assembly, for his help throughout our sittings and in particular for putting our recommendations in the shape of draft amendments to the Constitution.
4. Our terms of reference may be divided broadly into the four following groups:
We have accordingly, for convenience, regrouped our terms of reference as follows:
Brief History of Financial Relations
5. Before dealing with the working of the financial arrangements in the Government of India Act, 1935, it is necessary to give a brief account of the earlier arrangements so that we can have a correct picture of the problems before us.
6. The period before the passing of the Government of India Act, 1935, falls into two well-defined parts, namely, the period ending with the 31st March, 1921, i.e., before the operation of the Government of India Act, 1919, and the period covered by that Act.
7. The process of financial development in this country has been one of evolution from a unitary to a quasi-federal type. The Government of India started as a completely unitary Government in entire control of the revenues of the country with the Provincial Governments depending on the Central Government for all their requirements. In the earlier years, Provincial Governments were given fixed grants for meeting the expenditure on specific services, and the first step in making specific sources available to them was taken when the Provincial Governments were given the whole or part of certain heads of revenue like Forest, Excise, Licence Fees (later to develop into Income-tax), Stamps, Registration, Provincial Rates, Law and Justice, Public Works, Education, etc. The funds released by this allocation were not adequate for the requirements of the Provinces and had to be supplemented, mainly by sharing with them in varying proportions the main source of Central revenue, namely, Land Revenue, and partly by making to them additional cash assignments. In 1904, the settlements with the Provinces were made quasi-permanent, thereby making the Provinces less dependent on the fluctuating grants from the Centre. This method of financing the Provinces was examined more than once and retained as the best suited to the then circumstances.
8. The Government of India Act, 1919, which, among other things, aimed a giving a reasonable measure of autonomy to the Provinces as the first step in the processor self-government, made the first clear-cut allocation of resources between the Centre and the Provinces without having any divided heads between them. Under this Act, certain specific heads were given wholly to the Provinces and the remaining sources were retained by the Centre. Thus among the principal heads of revenue, Land Revenue, Excise and Stamps were given to the Provinces, while the Centre retained Customs, Income-tax, Salt and Opium. Of the three great Commercial departments of Government, Railways and Posts and Telegraphs were retained by the Centre, while irrigation was handed over to the Provinces.
9. This allocation of resources between the Centre and the Units, particularly the assignment of the whole of Land Revenue to the Provinces, left the Central budget in a substantial deficit; and in the earlier years of this scheme, the Centre had to depend on the Provinces for contributions for balancing its budget. These contributions were fixed by what is commonly known as the Meston Award, and were designed to produce for the Centre an estimated shortfall of Rs. 9.8 crores resulting from the rearrangement of resources between the Centre and the Provinces. The contributions ranged from Rs. 348 lakhs from Madras to Rs.15 lakhs from Assam, while one Province, namely, Bihar and Orissa, had to make no contribution at all. It is unnecessary for the present purpose to describe in detail the method by which these contributions were fixed. It is enough to mention that they became a source of constant friction between the Centre and the Provinces; and when substantial Provincial deficits occurred, an unceasing clamor developed for their withdrawal. Between 1925 and 1928these contributions were partially remitted and they were completely extinguished in 1929.
10. The experience of the years under the 1919 Act clearly showed that the sources of revenue allocated to the Provinces were inelastic, and were insufficient to meet the increasing requirements of the Provinces for their expanding needs for nation building services such as Education. Medical Relief, Public Health etc., which fell almost wholly in the Provincial field. It was clear that some additional revenue heads had to be released to the Provinces; and while the Government of India Act. 1935 did not make any radical change in the allocation of heads between the Centre and the Units, it revived in a somewhat modified form the earlier principle of dividing the proceeds of certain Central heads, the two heads concerned being Customs and Taxes on Income. The Act also provided for the grant of fixed subventions to some of the smaller Provinces, and gave the Centre power to raise Excise and Export duties for distribution among the Provinces and federating States. After an enquiry into the relative needs of the Centre and the Provinces by Sir Otto Niemeyer, the Provincial shares in the divided heads of Central revenue and the subventions to some of the Provinces were fixed by an Order-in-Council, which, subject to a modification during the war, continued till 15th August, 1947.
Present Constitutional Position
11. Under the Government of India Act. 1935, which is the starting point of our enquiry, the taxing jurisdictionsof the Central and Provincial Legislatures are entirelyseparate. But, while the Provinces retain the whole of thenet proceeds of all taxes levied by them, the Central Government has to give away either in part or in whole the net proceeds of some of the taxes levied by it.
12. The taxes, the net proceeds of which are to be given away wholly to the Provinces, if levied, are -
The Centre can levy a surcharge on those taxes entirely for its own purposes. None of these taxes has in fact been levied, except that the Federal Stamp duties continue to believed under the old laws, the duties however being collected and retained by the Provinces.
13. The Federal Taxes, the net proceeds of which are to be shared with the Provinces, fall into two groups:-
14. Besides providing for giving away the net proceeds of taxes in whole or in part to the Provinces, the Constitution also provides for fixed grants-in-aid to some Provinces.
15. There is also a general provision for giving grants to Provinces at the discretion. of Central Government either for general or specific purposes.
16. Two tables showing the Constitutional position in respect of the revenues of the Federal and Provincial Governments respectively under the Government of India Act, 1935, will be found in Appendix I. We are indebted to Mr.Ayyangar's commentary on the Government of India Act, 1935, for these tables.
Review of Finances of Provinces and the Centre
17. Two tables giving the financial position of the Provinces and the Centre during the year 1937-38 to 1946-47are set out in Appendix II. In considering the working of the existing arrangements during the last decade, the most important point to note is that war broke out soon after the Government of India Act, 1935, came into operation.
18. During the war, all Provinces except Bengal and Assam had surplus budgets. Revenue receipts increased several times, mainly on account of wartime conditions and also because the Provinces levied a number of new taxes and increased the rates of existing ones; there were remarkable increases in receipts under Provincial, i.e., Liquor and Drugs, Excises, and in the Provincial share of Income-tax. Most Provinces were under Section 93 administration. All development work was stopped. The Provinces are now faced with a heavy programmer of expenditure without any corresponding increase in revenue. On the contrary, even apart from voluntary abandonment of revenue as in the case of Liquor Excises, the revenue is likely to go down much below wartime levels. Land revenue, both in the permanently and temporarily settled provinces, is not likely to expand. State purchases of seminaries will not bring any return for years to come. In ryotwari Provinces, remissions are likely to be more liberal than before, and there is thus little prospect of an increase in land revenue. Receipts from stamps and registration fees are not likely to increase much, while forest revenue will perhaps dwindle on account of large scale felling during the war. Receipts from sales tax, entertainment tax may not fall, thought they will be below the war-time peak for some time to come.
19. During the war and after, most of the Provincial Governments have practically exhausted the entire field of taxation reserved for them. Moreover, Provincial Governments have to share the Provincial field with Local Bodies, and on that account too, need adequate resources. A substantial transfer of revenues from the Center to the Provinces, therefore, seems inevitable, if essential and overdue programmers of social service and economic development have to be undertaken.
20. At this stage, we would refer to the adoption, by most Provincial Governments, of a prohibitionist policy; and of the inevitable loss of substantial revenue by all of them. Obviously, it is for the provinces to find alternative provincial resources from which to recoup the loss; and incase, it any case, it would not be practicable for provinces to expect sufficient assistance from the Center for this purpose, at any rate for many years. The point that we wish to emphasize is that it will be for the provincial Government to balance the urgency of schemes of development against the advisability of social reforms like prohibition, and that in any case, they must not embark on schemes, whether of reform or development, depending merely on the possibility of obtaining assistance automatically from the Centre.
21. To turn now to the Centre, it has been working on deficit budgets. The large surpluses that were expected sometime ago have not been, and are not likely to be realized, mainly because of the food shortage, the refugee problem and other causes arising out of the partition of the country, particularly, continued heavy expenditure on Defence. These are, however, temporary problems, and we consider that the financial position of the Centre is essentially sound. As these temporary problems are solved, the budgetary position of the Centre will necessarily get better. There is scope for improvement in the administration of Central taxes, and particularly of taxes on income. In respect of taxes on income, it should be possible for the Centre not only to collect more in future in the ordinary course every year, but to secure for the exchequer, by legislative changes, if necessary, the large sums that are believed to have been successfully kept back from the Government in recent years. We do not, however, expect any appreciable change under Customs and Excise; and we do not expect Railway contributions on anything like the scale during the war. Even after the temporary problems referred to above have been solved, expenditure on Defence and Foreign Affairs would still be substantial. The Defence Services will probably be reorganized and re-equipped, and it is not possible to foresee what would be the scale of expenditure for properly equipped defense services even on a peace-time basis. There is little prospect on the other hand of reduction in the service of the national debt but there is, however, scope for reduction in the existing civil expenditure.
22. The problem before us is how to transfer from the Centre to the provinces, sufficient amount which, while not placing too great a strain on the Centre, would provide adequate resources for the inauguration of useful schemes of welfare and development by the Provinces. While the Centre, on its present basis, may not be in a position to part with substantial sums, we fell that with the resolution of its temporary difficulties and improvement in its tax administration, together with the levy and collection of taxes evaded in the past, it can with no serious risk to its own budget part with sizable sums every year. We are suggesting later in detail how these sums should be regulated. We have already referred to the need for Provinces having clear priorities as between contending demands for money, and we have no doubt that the Provinces will in the earlier years utilize the additional resources now placed at their disposal by concentrating on schemes that would add to the productive capacity of the country and consequently the income of the people and thus enable the provinces to embark on further schemes of reform and development.
23. Every Province has drawn pointed attention to the urgency of its programmes of social service and economic development and to the limited nature of its own resources, both existing and potential, and all of them have asked for substantial transfer of revenues from the Central sources. A summary of the detailed suggestions made by them, which very considerably, is set out in Appendix III.
24. On the question of apportionment of income-tax among Provinces also, the provinces differ widely in their views. Bombay and West Bengal support the basis of collection or residence, the United Provinces that of population and Bihar a combined basis of population and origin (place of accrual); Orissa and Assam want weightagefor backwardness. East Punjab, while suggesting no basis, wants her deficit of Rs. 3 crores somehow to be met.
25. In the case of excise taxes, the bases suggested are production, collection, consumption and population, while Assam suggests some weight age for its low level ofrevenue and expenditure. Assam has further pressed for special treatment of excises collected on wasting assets, e.g., the petroleum raised in Assam Assam also wants a share of the export duty on tea.
26. Before we proceed further we would make a few general observations.
India has federal form of Government, and every federation is based on a division of authority and involves certain amount of compromise. In this country, federation has been the result of gradual devolution of authority. It has not come into existence through agreements among sovereign States as in some other federations.
27. What we have to do is to distribute the total available resources among Federal and Provincial Governments in adequate relation to the functions imposed on each; so, however, that the arrangements are not only equitable in themselves and in the interests of the country as a whole but are also administratively feasible. We have also to ensure that there is not too violent a departure from the status quo, and also to see that while we have as much uniformity as possible, weak Units are helped at least to maintain certain minimum standards of services.
28. The basic functions of a Federal Government are Defence, Foreign Affairs and the service of the bulk of the national debt, and they are all expensive functions, particularly in the light of the limited resources of the country. The head "Communications" would ordinarily at least pay for itself. The Federal Government may also have to assume leadership in the co-ordination and development of research and higher technical education. Normally, however, apart from war or large scale internal disorder, the expenditure of the Centre should be comparatively stable. The needs of the Provinces are in contrast, almost unlimited, particularly in relation to welfare services and general development. If these services, on which the improvement of human well-being and increase of the country’s productive capacity so much depend, are to be properly planned and executed, it is necessary to place at the disposal of Provincial Governments adequate resources of their own, without their having to depend on the variable munificence or affluence of the Centre. The Provinces must, therefore, have as many independent sources of revenue as possible. On the other hand, it is not practicable to augment their revenues to any considerable extent by adding more subjects to the Provincial Legislative List, without simultaneously up-setting the equilibrium of the Centre. We cannot, therefore, avoid divided heads; and what we have to aim at is to have only a few divided heads, well-balanced and high-yielding, and to arrange that the shares of the Centre and the Provinces in these heads are adjusted automatically without friction, or mutual interference.
29. In this country the lack of sufficient economic and financial statistics and other similar data is a great handicap. Therefore, the allocation of resources has to be made largely on the basis of a broad judgment, at any rate until the necessary data become available. We attach great importance to the collection of these statistics and to connected research, and trust that the Government will make the necessary arrangements without delay. In the meantime we have made our recommendations on the best judgment we couldgive to the exiguous data available.
Lists of taxes for the Centre and the Units
30. We recommend no major change in the list of taxes in the Federal Legislative List as recommended by the Union Powers Committee. We however, recommended the substitution of the limit of Rs. 250 for Rs. 50 in clause 200 of the Draft Constitution relating to taxes on professions, trades, callings and employments. We observe from the Draft Constitution that it has been proposed to transfer to the Federal Legislative List stamp duty on transfer of shares and debentures, but we presume that the duties will continue to accrue to the Provinces. In view of the far-reaching effects on public credit and finance of Stock Exchange transactions, we consider that the Centre should have the power to legislate for the regulation of such transactions. If such regulation involves the levy of taxes, we recommend that such taxes should be retained by the Centre except that if the taxes take the form of mere duties on transfers of shares and debentures, the Provinces should have these duties just like other Stamp duties. We accordingly recommend the entry in the Federal Legislative List of a new item "Stock Exchanges and futures market and taxes other than Stamp duties on transactions in them".
31. In the list of taxes in the Provincial Legislative List, we recommend the following changes:-
32. One of the Provincial Memoranda has suggested that the entry "State Lotteries" should be transferred to the Provincial List, but, as we do not wish to encourage State Lotteries, we should prefer the subject to remain Central where, too, we hope, it will not be used.
Shares in certain taxes
33. We have no new items to suggest for insertion in the Provincial Legislative List.
34. The Federal Government will levy and collect all the taxes in the Federal Legislative List. But, according to our recommendations in the following paragraphs the Centre will retain the whole of the net proceeds of the following taxes only, viz.:-
35. At present, the Central Government shares the net proceeds of the Jute Export duties with the jute-growing Provinces and has to hand over to the Provinces the whole of the net proceeds of taxes on railway fares and freights, if levied. As regards the latter, we recommend that, if such taxes are to be levied at all, they should be wholly Central, for, we cannot see any difference in substance between such taxes and a straight addition to fares and freights. As regards the former we are of the opinion that an export duties are capable of very limited application and have to be levied with great caution, they are unsuitable for sharing with the Provinces.
36. It is necessary, however, to compensate the Provinces concerned for the loss of this item of revenue and we recommend that, for a period of 10 years or till the export duties on jute and jute products are abolished, whichever may be earlier, fixed sums as set out below be paid to these Governments as compensation every year.
In arriving at these figures which we have based on the figures of pre-war years, we have taken all relevant circumstances into account, and in particular the concentration of manufacture in West Bengal. If at the end of ten years, which we think should be sufficient to enable the Provinces to develop their resources adequately, the Provinces still need assistance in order to make up for this loss of revenue, it would no doubt be open to them to seek grants-in-aid from the Centre, which would be considered on their merits in the usual course by the Finance Commission.
37. Of the remaining Federal Taxes, we recommend that the net proceeds should be wholly or partly given away tithe Provinces as indicated below:
38. Under the present arrangement the Provinces receive50 per cent of the net proceeds of income-tax, except what is attributable to Chief Commissioner, Provinces and taxes on federal emoluments. The net proceeds of the Corporation Tax are also excluded for the purpose of the sharing. Subject to what we have said in paragraph 49 regarding tax on agricultural income, we recommend that, while the net proceeds attributable to Chief Commissioners' Provinces should be retained wholly by the Centre, the other reservations should go, and that the Provinces should get not less than 60 per cent of the net proceeds of all income tax including the net proceeds of Corporation Tax, and taxes on federal emoluments. For the purpose of the division, income-tax will mean any levy made under the authority of the entry "Taxes on Income" in the Federal Legislative List.
39. We also consider that over and above its share in the net proceeds retained by it normally, the Centre should be empowered to levy a surcharge whenever conditions require such a levy; obviously such occasions should be rare are not last for unduly long periods.
40. Excise duties are ordinarily closely connected with customs duties and, barring liquor and drug excises, which we consider, should continue to remain Provincial are inherently not suited for provincial taxation. On the other hand, they are only a species of consumption taxes of which another species namely, sales, turnover and purchase taxes have been the subject of provincial taxation for some time. The Memoranda received by us from the Provincial Governments are almost unanimous in demanding some share under excises; and our problem is to find not only more resources for the units but to make their revenues more balanced. If it was possible to have excises on commodities not subject to Customs duties (whether revenue or protective) or not competing, or capable of competing with, or of substitution for, commodities subject to customs duties, e.g., on rice or wheat or millets or on jute and jute goods consumed in India, we see no reason why such excises or a share thereof should not be allotted to the units, apart from the general political objection to the division of heads, viz., the divorce of benefit from responsibility. But such excises are not likely to be levied. Again, it is obvious that Excise duties on commodities subject to a protective tariff or even a high revenue tariff could not be conveniently shared. In the circumstances, the utmost that we can suggest by way of assistance in this respect to the Provincial Governments is to hand over to them a share of one of the important Central Excises on a commodity not receiving tariff protection,viz., Tobacco. Incidentally, the effective administration of this excise requires the active co-operation of Provincial Governments, which would be better forthcoming if they had a share in the tax. We are averse to giving the units a share in too many Central Excises; for, such an arrangement would not only magnify the political objection of benefit without responsibility but lead to administrative inconvenience, since the rates could not be altered except by the consent of all the beneficiaries.
We accordingly recommend that 50 per cent of the net proceeds of the excise duty on tobacco should not form part of the revenues of the Federation but should be distributed to the Provinces.
41. It will be seen from what has been said above that we are not in favor of the suggestion made in item VIII of the Terms of Reference, viz. that the Centre should be allocated only the excises on specified commodities, the rest of the field of excise being left to the Provinces.
42. These duties cannot be administered satisfactorily except by or in the closest touch with the income-tax staff; and in any case, if the Centre is to part with a substantial amount of taxes on income and also a part of certain Central excises, it is appropriate that it should get a share of the estate and succession duties. This will also give to the Federal Government a direct interest in the duty. Subject to what we have said in paragraph 49 about taxes on agricultural property, we recommend that not more than 40per cent of the net proceeds of such duties should be retained by the Centre.
43. We recommend the continuance of the status quo, i.e., the legislation in respect of the duties on the specified documents should be Central but Provinces will collect and retain the duties.
44. These taxes are not suitable except for purely local purposes, i.e., for the benefit of municipalities, pilgrim funds, etc., but they can be conveniently levied and collected only by the Centre. The existing provisions may stand.
Grants-in-Aid and Subventions
45. Item II of our terms of reference refers to Grants-in-aid.
Assam and Orissa now get fixed subventions of Rs. 30and Rs. 40 lakhs per annum, respectively. The recommendations that we have made for the increase in the Provincial share of income-tax and the transfer of a share in the excise on tobacco will increase their revenues substantially like those of other Provinces. Even so, however, we have little doubt that these two Provinces will still require fixed subventions on higher scales than at present.
The position of East Punjab is peculiar. Everything there is unsettled, and it will take some time for things to settle down. It is clear, however, that this Province will require a substantial annual subvention for some time to come.
The position of West Bengal is uncertain, and it is not clear how her finances will shape as a result of the partition. The liability that she will have to take over as a result of the partition is not yet known. All told, however, she will perhaps need some temporary assistance.
46. For lack of time and data, we have not been able to assess the subventions required by these four Provinces. We, therefore, recommend that the Central Government should immediately take up the question so that the amounts required by each of these Provinces may be determined in time. The amounts should be subject to periodical review byte Finance Commission to which we refer later.
47. We have suggested elsewhere that till the Finance Commission has been able to recommend a better basis of distribution, a part of the divisible pool of income-tax should be used in order to mitigate hardship in individual cases. The provision also contains an element of grants-in-aid.
48. It is clear that during the developmental stages of the country it will be necessary for the Centre to make specific purpose grants to the Provinces from time to time. The provisions of clause 203 of the Draft Constitution seem to be adequate for the purpose. We have considered the question whether, as in Australia, grants should be made in order to equalize, or at any rate to reduce the disparity between the levels of services and of severity of taxation in the different provinces. There is undoubtedly something attractive in seeking to bring up the backward units at least to `average' standards, both in effort (severity of taxation) and in performance (standards of services). In Australia, the maximum difference between the levels is said to be of the order of 20 per cent and the number of unit States is small. In India, on the other hand, as for example in the U.S.A., the difference in the levels is very wide and the number of units larger when acceding States come into the picture. In such a background `averages' would be mere mathematical concepts totally unrelated to actual facts. On the other hand, even in a Federation of autonomous units, there is a great deal to be said for helping the less prosperous units to come up to the level of the more prosperous ones. As in all such matters we must take a realistic decision with reference to the conditions in our country. While we do not recommend the adoption in this country of the Australian system, we have no doubt that the Centre, when distributing specific purpose grants under clause 203 of the Draft Constitution; will bear in mind the varying circumstances in the different Provinces.
48-A. Section 199 of the Draft Constitution provides for special assistance to Assam in respect of expenditure for promoting the welfare of the scheduled tribes in the Province. We agree with this provision. It has been represented to us on behalf of Orissa that a similar provision should be made for assisting her to develop the backward areas of the Province. In the absence of any data, we have been unable to assess the measure of assistance, if any, required by this Province, and we content ourselves with expressing the view that if the Central Government, after a due examination of the question in all its aspects, decide the special assistance is necessary it should be provided on adequate scale.
Taxes on Agricultural Income and Property
49. It is obvious that the taxation of agricultural income by the Provinces, while all other income is taxed byte Centre, stands in the way of a theoretically sound system of income-tax in the country. We should, therefore, have liked to take this opportunity to do away with this segregation. In view of the ease with which the origin of agricultural income can be traced, it could be arranged that the tax from such income, even though levied and collected by the Centre as part of an integrated system of income-taxes, should be handed back to the Provinces; and it could be further arranged that till such time as the Centre infect levied a tax on agricultural income, the Provinces already levying this tax might continue to levy it without restriction and with full power to vary the rates of tax. The interests of Provinces could thus be fully protected, and there could, therefore, be no financial objections from them. On the other hand, the present arrangement has the political merit of keeping together in one place both benefit and responsibility, a rather important point, seeing that the Provinces will have full control over but few important heads of revenue. A few provinces have, in fact, levied the tax and are administering it for some time. Perhaps also, the Provinces can administer this particular tax with greater `facility than the Centre. For the present, therefore, we have decided to continue the status quo, but, in view of the importance of the matter, would recommend that the Provinces should be consulted at once and if majority, including of course those now levying the tax, agree, tax on agricultural income may be omitted from the Provincial List of subjects, consequential changes being made elsewhere in the Constitution. Our foregoing remarks apply mutatis mutandis to Succession and Estate Duties on agricultural property also.
Division of proceeds of Revenue between Provinces
50. Income-tax - As regards the basis of distributing between Provinces the share of proceeds from taxes on income, we are of the opinion that no single basis would lead to equitable results. Origin or locus of income is no doubt relevant, but in the complex industrial and commercial structure of modern times, where a single point of control often regulates a vast net-work of transactions, where the raw materials come from one place, are processed in another, manufactured in a third, marketed wholesale in a fourth and ultimately sold in retail over a large area, contracts are made at places different from where they are performed, money is paid in at one place and goods delivered at another and more than one of these stages relate to the same tax-payer the assignment of a share of profits to each stage can only be empirical or arbitrary.
51. Again, the residence of the tax-payer is an important factor, but apart from the artificial legal definition of residence for income-tax purposes; the predominance of joint stock enterprise in business, the dispersion of the shareholders of companies all over the country and even outside, the possibility (emerging from the artificial definition) of simultaneous residence in more than one area, the non-assessment (due to various reasons)of a large number of shareholders, and the absence of authoritative, i.e., tested, information in the income-tax records as to the province of a residence of a resident of India (for, today, it is immaterial to the Income-tax Department in which particular Province on assessed is resident), all these together make this criterion of residence a difficult factor to apply in practice in distributing the proceeds of the tax. Even if the statistical difficulties were got over, residence could be changed at the will of the tax-payer.
52. Another possible criterion is the place of collection. This place is usually the principal place of business of the tax-payer, or his residence, if he is not carrying on a business or profession. The objection to this factor is that it is unfair to the areas of origin and sale which it completely ignores, while it gives far too much weight to the place of control of a business, which is usually, though not necessarily, the place of collection. Moreover, even more than in the case of residence, the place of collection can be easily altered at the will of the tax-payer.
53. Another possible basis is that of needs, i.e., the shares would be regulated somewhat like grants-in-aid, and rather than go into elaborate enquiries for this purpose, the population of a Province could be taken as a rough measure of its needs. The objection to this basis is that a `share' is something to which a Province is entitled because its citizens or things have in some measure contributed tithe fund, while a grant is something given to it without regard to its contribution to the Centre or to any common pool.
54. We have said enough to show the difficulties of the problem, but the difficulties have somehow to be faced and met, unless we keep the whole of the taxes on income as Central and permit Provinces simultaneously to levy provincial income-tax on the basis of origin. In our opinion the latter course is not feasible in the circumstances of this country even if justifiable in theory; and pending enquiry by the Finance Commission the setting up of which we suggest later, we have no choice except somehow to make the distribution on as equitable a basis as can be devised in the circumstances.
55. We propose to proceed on the basis of collection as well as population and also to make some provision for adjustment on the basis of need. We recommend that the Provincial share, i.e., 60 per cent. of the net proceeds be distributed among the Provinces, as follows:-
For the distribution of the first two blocks, population figures of the previous census and collection figures as certified by the Auditor-General should be accepted as authoritative.
56. The third block of 5 per cent. should be utilized the apportioning authority as a balancing factor in order to mitigate any hardship that may arise in the case of particular Provinces as a result of the application of the other two criteria; in distributing this block it would be open to the authority to take into account all relevant factors.
Excise duty on Tobacco
57. In our view, the most equitable method of distributing this duty is on the basis of estimated consumption. We have no doubt that the Government will take steps to obtain necessary statistical information if it is not already available.
Estate and Succession Taxes
58. These taxes have not so far been levied. One of the hurdles to be crossed before they can be levied is the determination of the manner of distribution of the net proceeds among Provinces. Until the taxes are actually levied and collected for some time, no data about their incidence will be available. Hence, the levy will have to start with some a priori basis of apportionment among Provinces. We accordingly recommend that until the Finance Commission is in a position to evolve a better method on the basic of data available to it, the net proceeds should be distributed among the Provinces as follows:-
The net proceeds attributable to real property - On the basis of the location of the property.
Of the balance-
The administration and distribution of these taxes would, in the ordinary course, fall on the Central Board of Revenue, but it would be necessary to empower an appropriate authority to adjudicate in the case of disputes between Provinces as to the residence of individuals.
Effect of the proposals
59. The net effect of all our recommendations together is that, on the present basis of revenue, the Centre will have to transfer to the Provinces a sum of the order of Rs.30 cores annually. It will recover a part of this loss byte imposition of the Estate and Succession Duties, of the net proceeds of which it will retain 40 per cent. We believe that it will not be beyond the capacity of the Centre to part with this amount annually during the next five years, though it must cause some strain, while at the same time the transfer will enable the Provinces to start their programme of essential social services and economic development.
60. In our recommendations regarding the distribution of proceeds of taxes among the Provinces, we have not only proceeded on more than one basis, but have provided for an element of flexibility in order to mitigate hardship. Wehave also provided for a periodical review so that the method of apportionment can be adapted to changing conditions from time to time on the basis of experience. Wehave further provided for grants-in-aid both to the weaker Provinces and to Provinces in difficulty.
61. We have also tried to make the whole arrangement as automatic and free from interference as possible. The basic features of the scheme will be embodied in the Constitution itself, while periodic changes will be made by the President on the recommendation of the Finance Commission, which we hope will command the confidence of all. As frequent changes are undesirable, we have recommended a five-yearly review, though in special circumstances the Finance Commission may embark on a review at a shorter interval. The Provinces will now be sure of their position and can go ahead with their plans.
62. It is needless for us to add that to the extent that the Centre transfers its resources to the Provinces in the shape of new or increased shares in revenue, its ability to give grants to the Provinces for specific or other purposes must be correspondingly reduced.
63. We may not have been able in our proposals to satisfy everybody or to provide for every contingency that may possibly arise in the future, but we have tried to do the best possible under the circumstances.
64. For reasons already stated, our recommendation as to the initial basis of apportionment among Provinces is not intended to be permanent. Conditions may change. The working of the scheme for some time will in itself produce some data that would indicate the nature and direction of the changes required. It is necessary, therefore, to have a periodical review of the whole position by a neutral expert authority.
65. We recommend for this purpose, among others, the appointment of a high level Tribunal of five members including a Chairman who has been, or is, holding high judicial office, not lower than that of a Judge of a High Court. This Tribunal may be called the Finance Commission. There may not ordinarily be enough work for the Commission to keep it busy continuously, and the members need not, therefore, devote their whole time to the work. The members should be appointed by the President in his discretion if only because a Commission of this kind would have frequently occasion to deal with points of conflict between the Centre and the Units. While we would not lay down any conditions in the Statute as to how these members should be selected, we recommend that two should be selected from a panel of nominees of Units Governments and two others from a panel of nominees of Units Governments and two others from a panel of nominees of the Central Government, the Chairman being selected by the President himself. One at least of the five should possess close knowledge of the finances and accounts of Governments, while another at least should have a wide and authoritative knowledge of economics, It would be an advantage if one or more were public men with vide experience. it would be further advantage if a member possessed more than one qualification, and steps should be taken to secure the services of such individuals. The appointments might be made for 5 years and be renewable for another five years.
66. Between now and the setting up of the Finance Commission, we recommend that the Central Government should take steps in consultation with the Provinces, to collect, compile and maintain statistical information on certain basic matters such as the value, volume and distribution of production, the distribution of income, the incidence of taxes, both Central and Provincial, the consumption of important commodities, particularly those that are taxed or likely to be taxed, etc. The Finance Commission, when setup, would then have some basic information to go upon, and would no doubt call for such further information as it may need. It would also, to the extent necessary, arrange for continuous examination and research in respect of all-important matters.
67. The Finance Commission should be entrusted with the following functions:-
68. While these categories would exhaust the duties of the Commission, it should be open to the Commission to make any recommendations it may think expedient in the course of the discharge of these duties. It may, for example, suggest variation in the heads of revenue assigned to the Provinces, i.e., the transfer of new heads or the withdrawal of existing heads, or increases in the shares of existing heads or a reduction in these shares. In making all such recommendations, the Commission will take into account all relevant matters, including the state of finances of the Centre. Its recommendations, in so far as they do not involve any change in the Constitution, would, when accepted by the President, be given effect to by him by order, while recommendations involving a change in the Constitution, if similarly accepted by him, would be dealt with like another proposed amendment to the Constitution.
69. The Commission's first function would be of the nature of arbitration, and therefore, the Commission’s decisions will be final. As regards one second function, we have no doubt that the recommendation of the Commission in respect of grants-in-aid would be given the utmost weight by the President and not ordinarily departed from by him.
70. The basis for the allocation of revenues referred to in item (a) should ordinarily be settled by the Commission at intervals of five years, but it should be open to the Commission to shorten the interval if it feels satisfied in special circumstances that such shortening is called for.
71. We would further recommend, in order saving time that the Finance Commission may be set up in advance of the coming into effect of the Constitution and its status regularized after the Constitution comes into effect.
Residuary Powers of Taxation
72. It appears that under the new
Constitution, residuary powers will be vested in the Centre, so far as the Provinces are concerned, while the corresponding residuary powers in respect of the States will be vested in the States themselves. The question has therefore been raised whether, as a consequence, as many specific taxes as possible should not be entered in the Provincial List of subjects. We cannot think of any important new tax that can be levied by the Provinces, which will not fall under one or the other of the existing categories included in the Provincial List. We think that the chance of any practical difficulty arising out of the proposed constitutional position is remote, and, in any case, it seems to us that if a tax is levied by the Centre under its residuary powers, there will be nothing to prevent the proceeds of the whole or a part of this tax being distributed for the benefit of the Provinces only. As a matter of abundant caution, however, it may be laid down in the Constitution that if any tax is levied by the Centre in future under its residuary powers, and to the extent that the States do not agree to accede to the Centre in respect of the corresponding subject the whole or a part of the proceeds of the tax shall be distributed between the Provinces and the acceding States only.
This disposes of Item IX of our Terms of Reference.
Exemption of Provincial Governments from Taxation
73. Section 155 of the Government of India Act provides that profits from trading by a Provincial Government would-be taxable only if the trade was carried on outside the Province. The exemption from Central taxation of trade by Provincial Governments carried on within the provincial limits did not matter much in the past; for the Governments had few trading operations. With the present tendency towards nationalization (e.g., many provinces have already taken up quite seriously the nationalization of road transport). the Centre should have some power to levy either income-tax or a contribution in lieu of income-tax in respect of these trading activities. Disputes as to such contributions should, we consider, be examined and adjudicated upon by the Finance Commission to which we have already referred. We feel that if nationalization of industries or trades takes place rapidly, the whole question would have to be reviewed de novo, for the entire structure of the tax system of the country would be completely changed.
74. In the meantime we make the following recommendations:-
75. The needs of the Centre in times of emergency, such as war or large scale internal disorder cannot be provided for through the detailed allocation of heads of revenue or of shares therein. It is obviously not possible to legislate how emergencies should be met. We would suggest that there should be a special provision in the Constitution authorizing the President in an emergency to suspend or vary the financial provisions in such manner as he may think best in the circumstances. For example, if there is a war and an Excess Profits Tax is levied, it might be necessary for the Centre to retain the whole of this tax for itself.
Procedure in Financial Matters
76. Item X of our terms of reference is as follows: -
77. The present financial procedure in the federal sphere is laid down in sections 33-37 of the Government of India Act, 1935. The corresponding clauses in the Draft Constitution as prepared by the Secretariat of the Constituent Assembly are 74, 75 and 77-81. We have two recommendations to make:-
Subject to these two recommendations, we approve of the provisions in the Draft Constitution.
78. Financial procedure in the Provincial field is governed by sections 78-82 of the Government of India Act.1935. The corresponding provisions in the Draft Constitution occur in clauses 149-153. We recommend -
79. It is usual in written democratic constitutions to provide that no money can be drawn from the treasury excepton the authority of the Legislature granted by an act of appropriation. In this country, the practice has been to authorize expenditure by resolutions of Government after the demands have been voted, and not by law. As the existing practice has been working well in this country, appropriation by law does not appear to be necessary.
80. Though the question has not been specifically referred to us, we consider that the status and powers of the Auditor-General are so closely connected with financial procedure that we have gone into this matter also. The provisions in respect of the Auditor-General of the Federation are contained in clauses 106-109 of the Draft Constitution, and those in regard to the Auditor-General of the Provinces, in clauses 174-175. In substance, all these clauses repeat the existing provisions in the Government of India Act. We consider the provisions to be adequate for the purpose of securing the independence of the Auditor-General. We notice that the Auditor-General of India is to perform the functions of the Auditor-General in respect of the Provincial Governments also for an initial period of three years, and thereafter, until a particular Provincial Government chooses to appoint its own Auditor-General. We favour the continuance of a single Auditor-General for the Government of India as well as for the Provincial Governments, and it is possible that the Provincial Governments will also prefer that course, and will choose not to use their power of appointing separate Auditor-General for the Government of India as well as for the Provincial Governments, and it is possible that the Provincial Governments will also prefer that course, and will choose not to use their power of appointing separate Auditor-General of their own. The Draft Constitution, however, gives them the option to appoint Auditors-General if they think fit so to do. We are not sure whether it is possible altogether to do away with this option, much as we should like to do so; but if the option remains, we recommend that the provisions of sub-clause 3 of clause 174should be amended so as to make the Auditor-General of a Province eligible for appointment as Auditor-General of another Province also.
81. This question is covered by Item I of our Terms of Reference.
The present position is that the Provinces have the freedom to borrow in the open market in India except when they are indebted to the Centre.
The most outstanding advantage of the freedom of borrowing is the sense of financial responsibility it creates; for, there is no more accurate, sensitive and dependable meter of the credit of a borrowing Government than the reaction of the securities market. We do not therefore wish to withdraw this freedom. Nevertheless, it is necessary to have some machinery which would ensure that borrowing Governments do not, by their competition, upset the capital market. This machinery is now provided through the Reserve Bank which advises all the Governments, but in view of the ambitious programmers of development both by the Centre and by the Units, it may become necessary to set up some kind of expert machinery, both competent and definitely empowered, to fix the order of priority of the borrowings of the different Governments. In some countries, this co-ordination is affected either by a Ministerial Conference or by a Loans Council. Such machinery should not affect the responsibility of a Government for its borrowing policy, and should help only in the timing of the loan and avoidance of unnecessary competition. The co-ordination by the Reserve Bank has worked well in practice and so long as it works well we do not recommend any change. We assume that there will be no distinction between federating States and the Provinces in this respect.
82. We are of the opinion that it should not be open to a Provincial Government or to a Government of a State to go in for a foreign loan except with the consent of the Federal Government and except under such conditions, if any, as the Federal Government may think fit to impose at the time of granting the consent. We notice, however, that there is an entry, viz., "18. Foreign Loans" in the Federal Legislative List in the Draft Constitution. We are not sure whether, the insertion of this entry in the Federal Legislative List is enough to prevent the Government of a Unit from going in for a foreign loan. We, therefore, recommend that the point be examined, and if the provision is not found to be adequate, a specific provision should be made in clause 210 of the Draft Constitution making it necessary for the Government of a Unit to obtain the consent of the Federal Government before going in for a foreign loan.
Problem of Indian States
83. The points at issue are contained in items III, IV, V, VI and XI of our terms of reference.
This part of our work is the most difficult party thereof, and the difficulty arises as much from the lack of statistical data as from the complications of the problem itself; for, not only do conditions differ widely between the Provinces as a whole and the States as a whole, but from State to State, so that it is difficult to apply a common yard-stick.
84. The Union Powers Committee of the Constituent Assembly in Para. 2 (d) of their report, dated 17th April,1947, has expressed its view on this subject in the following terms:-