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Constituent Assembly Of India - Volume VII

Dated: November 04, 1948

85. We assume that the ultimate object of the Federation must be to secure for the federating States the same, or nearly the same standards of economic development, fiscal arrangements and administrative efficiency as in the Provinces. It is only against this background that the States can have the same identity of interest with the Union as the Provinces have.

86. The first difficulty met with in our investigation is that many of the smaller States have neither a budget nor effective audit, so that adequate and reliable in formation about their financial position, on a basis permitting comparison with Provinces, is not available. We recommend accordingly that it should be made obligatory within as short a period as possible for each State to arrange for the preparation and authorisation of a periodical budget and the maintenance of proper accounts and audit and to send copies of its budget, accounts and audit reports to the Union Government.

87. In the absence of sufficient data, we are not in a position to make recommendations other than sof a general nature. We are clear in our mind that the States should gradually develop all the taxes in the Provincial legislative List so that they may correspondingly give up reliance on taxes in the Federal Legislative List. This process however would necessarily take some time and in the meanwhile it will be necessary to have transitional arrangements.

88. We will now take up Land Customs. We do not recommend the immediate abolition of Land Customs, for we find that such a course would lead to a serious dislocation in the finances of many States. Moreover, where there is no large re-export trade, these land customs, though a possible source of annoyance, are really of the nature of octroi duty levied at a few point of entry. On a long view, however, in the interests of the States themselves, these duties might be replaced by other taxes, such as sales and turn-overtaxes. We recommend accordingly that Land Customs now levied by the States should be abolished during the next 10 years. As a first step it may be arranged that -

(1) a State shall not in future levy land customs on a commodity on which there is no such duty now;

(2) a State shall not after a fixed date, increase the rate on any commodity; and

(3) a State levying land customs should grant refunds on re-exports.

Gradual abolition over a period of 10 years should not cause any serious dislocation to the finances of these States, nor can there be any question of paying any compensation to these States, for the simple reason that the Union Government will not gain any corresponding revenue.

89. Maritime customs should be uniform all through the Union, and the Federal Government should take over the administration of such customs in all the maritime States. If this arrangement results in the loss of any State of the revenue now enjoyed by it, it is only fair that the State should be compensated for the loss. Pending determination of the appropriate compensation in each case by a States Commission, the appointment of which we recommend in a later paragraph, each State may be given an annual grant equal to the average revenue from this source during the last three years. The right of Kashmir to a rebate on sea customs maybe similarly abolished on payment of a similar grant.

90. The Federal Government may levy Central Excises in all the States, but those States which now enjoy the benefit of a part or the whole of these revenues raised in their areas should, in lieu of such benefit, receive grants on the basis of the average revenue enjoyed by them from these sources during the last three years. In our opinion, neither this arrangement nor the one referred to in the foregoing paragraph should present any difficulty from the purely financial point of view either to the Union or to the States.

91. The Indian Income-Tax Act, with such modification as may be considered necessary by the President, may be applied to all the Federating States. The net proceeds of the tax attributed to the States may be credited to a States Income-Tax Pool and such portion not being less than 75 percent of the net proceeds attributable to each State, as determined by the President, may be paid back to the States.

We are aware that many problems will arise in the course of allocating these proceeds between the different states, but they are not insoluble, and can be solved on lines similar to those followed in allocating similar revenues between the Provinces.

92. The need for a uniform system of income-tax both in the Provinces and in the States has become urgent not only because of the facilities afforded for evasion and avoidance of the Central Income-tax by the existence of States with lower rates of taxation or no tax at all, but also because it is alleged that industries are being diverted artificially by the incentive of lower taxation to areas not inherently suited for the industries.

93. Though we do not favour any abrupt change in the status quo, we do not attach much weight to the argument that the States are, as a whole, industrially backward and that they cannot, therefore, stand the same high rates of taxation, particularly income-tax, as the Provinces can. If the productive capacity of a State, and consequently its level of income, is low, it follows that the State will not have to contribute much by way of tax if it falls in line with the Provinces. If, on the other hand, the point is that industries should be artificially stimulated in the States somehow by the incentive of lower taxes, it is obvious that if the State is not suited for industrial development, the cost of bolstering up its industries must ultimately fall upon the Provinces and other States.

94. As already stated, we are not in a position to make detailed recommendations regarding the States. We recommend for this purpose the establishment of a States Commission with five members who should possess wide knowledge of the financial administration of Provincial, Federal or State Governments. Preferably, one of these members might be a member of the Finance Commission (for Provinces) referred to earlier in this report. The Commission should advise the President, as also the States, about their financial systems and suggest methods by means of which the States could develop their resources and fall into line with the Provinces as quickly as possible. One of the first tasks of the Commission will be to examine in detail the privileges and immunities enjoyed by each State, and also the connected liabilities, if any, and recommended a suitable basis of compensation for the extinction of such rights and liabilities. We consider in particular that the States Commission should deal with the problems before it with understanding and sympathy and suggest solutions which would not only be fair both to the States and to the Provinces, but enable the States to come up to the Provincial standards in as short a time as possible.

95. The States which come into the above arrangements would pay their contribution for Defence and other Central services through the share of the net proceeds of Central taxes retained by the Centre, and nothing more should be expected from those States. On the other hand, the States which accede but do not come into the above arrangements, should pay a contribution to the Centre, the amount of which should be determined by the States Commission having regard to all the relevant factors.

96. The constitutional arrangements in this respect, particularly during the interregnum of 15 years, should, in our opinion, be kept very flexible. The President should be enabled by order to adopt any financial arrangement he may find expedient with each State until such arrangement is altered by an Act of the Federal Legislature after necessary consultation with the States.

97. While the outlines which we have indicated above are capable of being applied to most of the major or even middle-sided States, it is, in our opinion, necessary to group together a number of smaller States in sizable administrative units before they can be brought into any reasonable financial pattern.

98. We are sorry that we have not been able to contribute anything more precise then we have done to this part of the terms of reference to us.

99. We enclose two Appendices (IV and V) one of which sets out in detail, as far as we have been able to collect, the rights and immunities enjoyed by various States, and the other setting out the total budgets of certain States and the part played by Land Customs in those budgets.

Summary of Recommendations

100. (1) No major change to be made in the list of taxes in Federal Legislative List as recommended by the Union Powers Committee. (Para. 30)*

(2) The limit of Rs. 50 to be raised to Rs. 250 for taxes on professions etc. levied by Local Bodies. (Para.30)*

(3) An entry to be made in the Federal Legislative List of a new item "Stock Exchanges and Futures Markets" etc. (Para. 30)*

(4) A few minor changes of a drafting nature to be made in the list of taxes in the Provincial Legislative List; and no new items for insertion in the Provincial Legislative List. (Paras. 31-33)*

(5) The Centre to retain the whole of the net proceeds of the following taxes, viz.,

(a) Duties of Customs including Export Duties;

(b) tax on capital value of assets, etc.;

(c) taxes on Railway fares and freights; and (d) Central Excises other than on tobacco. (Para. 34)*

(6) The grant of fixed assignments for a period of years to the jute-growing provinces to make up for their loss of revenue. (Paras. 35-36)*

(7) The net proceeds of the following taxes to be shared with the Provincial Governments, viz. (1) Income-tax, including Corporation Tax; (2) Central Excise on Tobacco;(3) Estate and Succession Duties. (Par as. 38-42)*

(8) The suggestion that the Centre should be allotted only the excises on specified commodities, not accepted (Para. 41)*

(9) Federal Stamp Duties and Terminal taxes on goods. etc., to be administered centrally, but wholly for the benefit of the provinces. (Par as. 43 and 44)*.

(10) Larger fixed subventions than now, necessary for Assam and Orissa, and subventions for limited periods for East Punjab and West Bengal, but no precise figures recommended for lack of data. (Par as. 45 and 46)*

(11) Grants-in-aid on the Australian model not favoured. (Para. 48)*

(12) Merging the tax on agricultural income in the Central Income-tax and similarly the Estate and Succession Duties on agricultural property in the similar duties on property in general to be examined in consultation with Provincial Government and transfers made from the Provincial List of subjects, if necessary. (Para. 49)*

(13) Not less than 60 per cent. of the net proceeds of Income-tax, including Corporation Tax and the tax on Federal emoluments, to be divided between Provinces in the following manner:-

20 per cent. on the basis of population, 35 percent. on the basis of collection and 5 per cent as an adjusting factor to mitigate hardship. (Par as. 55 and 56)*

(14) Not less than 50 per cent of the net proceeds of the excise on tobacco to be divided between Provinces on the basis of estimated consumption. (Para. 57)*

(15) Not less than 60 per cent. of the net proceeds from Succession and Estate. Duties to be divided between the Provinces on the following basis: - Duties in respect of real property on the basis of allocation of the property, and of the balance, three-fourths on the basis of the residence of the deceased and one-fourth o the basis of population. (Para. 58)*

(16) Net effect of the recommendations, to transfer annually a sum of the order of Rs. 30 crores from the Centre to the Provinces. (Para. 59)*

(17) A Finance Commission with a High Court Judge or ex-High Court Judge as Chairman and four other members to be entrusted with the following functions: -viz.

(a) allocation between the Provinces of their shares of centrally administered taxes assigned to them;

(b) to consider applications for grants-in-aid for Provinces and report thereon;

(c) to consider and report on other matters referred to it by the President. (Par as. 65-67)*

(18) The Commission to review the position every five years, or, in special circumstances, earlier. (Para. 70)*

(19) A tax levied by the Centre under its residuary powers, not to ensure to the benefit of a non-acceding State unless it agrees to accede to the Centre in respect of that subject. (Para. 72)*

(20) Trading operations of Units, as also of Local Bodies, whether carried on within or without their jurisdiction, to be liable to Central Income-tax or a contribution in lieu, but quasi-trading operations incidental to the normal functions of Government not to be taxed. (Para. 74)*

(21) The President to be empowered in an emergency to suspend or vary the normal financial provisions in the Constitution. (Para. 75)*

(22) A few minor changes suggested in regard to the procedure in financial matters. (Para. 77)*

(23) No change to be made in respect of borrowing powers of Units. - (Par as. 81-82)*

(24) Early arrangement to be made for the preparation of regulate budgets and the maintenance of appropriate accounts and audit by all acceding States. (Para. 86)*

(25) States gradually to develop all the taxes in the Provincial Legislative List and correspondingly give up taxes in the Federal List. (Para. 87)*

(26) Maritime customs and excises in States to betaken over by the Centre, the States being compensated therefor if necessary. (Par as. 89 and 90)*

(27) The Indian Income-tax Act to be applied to all the federating States, and 75 per cent. of the net proceeds attributable to the States to be divided between them. (Para. 91)*

(28) A States Commission to be set up with five members with wide knowledge of the financial administration of Provincial, Federal or State Governments. (Para. 94)*

(29) The States Commission to examine the privileges and immunities etc. of States and to suggest suitable compensation for the extinction of these rights and liabilities. (Para. 94)*

(30) States which do not come into the arrangements to pay a contribution to the Centre to be determined by the States Commission. (Para. 95)*

(31) The interim Constitutional arrangements with the States to be flexible and small States to be grouped together. (Par as. 96 and 97)*


101. Some of our recommendations would need to be embodied in the Constitution while others would be given effect to by the order of the President. We have attempted ad raft of the necessary provisions in the Constitution to give effect to the former; and these are set out in Appendix VI.*

102. Mr. Rangachari has signed this report in his personal capacity, and the views expressed in it should not be treated as committing in any manner the Ministry of Finance of which he is an officer.

(Nalini Ranjan Sarker)

(V S Sundaram)

(M V Rangachari)

[Annexure I]



(a) Revenue of the federation

From Taxes

From Commercial operations

Sovereign Functions

Contributions from States –Assigned by His Majesty

A. Levied and collected by the Federation but belonging wholly to the Provinces or Units.

B. Levied and collected by the Federal Government of which a portion is or mat be assigned to the provinces

C. Levied and collected by Federation and, belonging wholly to the fedion.

1. Posts and Telegraph

2. Federal Railways.

3.  Banking

4. Other commercial operations.

1. Coinage and Currency

2. Escheat and lapse in areas administered by Federal government.

Tributes and other payments.

1.Duties on succession to property other than agricultural land.*

2.Stamp Duties on Bills of exchange, Cheques, Pronotes, Bills of Lading, Letters of Credit, Policies of Insurance, Proxies and Receipts.!

3. Terminal Taxes on goods or passengers carried by Railway or air.!!

4.Taxes on Railway fares and freights.* (Subject to the right of the Federation to raise Federal Revenue by a surcharge on all the items in this list.)

a. Assigned by the Act.

b. May be assigned by Federal Law.

1.Taxes in Lists A & B in areas administered by the Federal Government.


3.Corporation Tax.

4.Surcharge mentioned in Lists A & B

5. Taxes on capital values of assets of individuals and companies.

6.Miscellaneous receipts from fees in respect of matters in Federal List (including fees taken in the Federal Court).


1.Income-tax other than Corporation Tax, (Subject to Federal Surcharge.)!

2.Jute Export Duty.!!

1.Duty on Salt.

2.Other duties of excise on Tobacco and on other Goods manufactured or produced in India except.

(a)alcoholic liquor for human consumption.

(b)Opium, hemp and other narcotics and non narcotics drugs.

©Medicinal and toilet preparations.#

3.Duties of Export.%

*Not yet levied.

! These duties continue to be both levied and collected by the Provinces.

!! Levied so far only for the benefit of local bodies.

$Duty now abolished.

#See notes under the other Table.

% No share assigned to Provinces.

(b) Revenue of the province

A. By Taxes

B. Comm-ercial Opera-tions

C. Sovereign Rights Escheat and Lapse

D. Grants -in-aid and subventions from the centre.

A.   Directly raised by the Province.

1.Land Revenue.

2.Duties of excise on alcoholic liquors, etc. excluded from Federal revenues.

3.Taxes on agricultural income.

4.Taxes on Lands and Buildings8 Hearths and Windows.

5.Succession to agricultural land.

6.Taxes on Mineral rights.

7.Capitation taxes.

8.Taxes on Professions, Arts, Trades and Callings.*

9.Animals and Boats.*

10.Sale of Goods and Advertisements.


12.Taxes on luxuries, entertainment, etc.*

13.Stamps—other than Stamps in Federal List.

14.Taxes on Passengers and Goods in inland waterways.


16.Miscellaneous receipts from fees including fees taken in Courts (other than the Federal court).

B. Levied and collected by the Federation and wholly allocated to the Provinces Items in List A of the other Table.

C.   Levied and collected by the Federation but which is or may be allocated in part to the provinces.


(a)By the Government of India Act.

Income-tax. !!

Export duty on Jute.#

(b) By Federal legislation. $


Federal Excise Duty.

Export Duties.#

These taxes are now raised by Municipal and other Local authorities for their needs.

By order in Council 50% of the net proceeds of tax on income other than Corporation tax exclusive of proceeds attributable to Chief commissioners Provinces and taxes in respect of federal emoluments are distributable in accordance with a prescribed ratio.

#62 1/2 assigned to Provinces by Order in Council distributed among jute producing provinces  in proportion to the respective amounts of Jute grown in them.

$Duty abolished.

#No share allotted to Provinces.

!Now abolished—but before abolition was a source of Municipal



(a) Provinces


Provinicial Revenue 

Devolution Grants from the centre including Dev. Grants 

Total Revenue 

Total Revenue Expenditure

Cumulative Deficit (-) Surplus (+)

Balances in Reserve Funds on 31st Mar.1947

Closing balance on  31st Mar.1947








- 56

















United provinces
























C. P.& Berar
















N. W. F. P
























* Subsidy of 3,00 in 1943 -44 taken by Bengal as reduction of expenditure on Famine . Hence Revenue and Expenditure both have been increased by 3,00

*The Subvention was capitalised on 1st April 1944 and the value setup against the Lloyd Barrage Debt.

   Revised Estimate have generally been taken for 1946 - 47

(b) Central Government (1937-38 to 1649-47)

(In lakhs of Rupees)




Expenditure ------------------



Deficit (-)

Surplus (+)























































1946-47(Revised Estimate)












The amounts included in the above on account of revenue assigned to the Provinces and Grants-in-aid and Subventions to them are given below :- 

(In Lakhs of Rupees) 


Share of Jute Export duty

Share of Income-tax

Grants - in aid and subventions




























5,75 (a)




8,70 (b)




9,70 (c)

1946-47(Revised Estimate )








(a) Includes 3,00 Special Grant to Bengal.(b) Includes 7,00 Special Grant to Bengal.

(c) Includes 8,00 Special Grant to Bengal.(d) Includes 7 roundly in all for Coorg.



Part I - Taxes


Assignment existing or contemplated

Provinces proposing

Assignment Proposed forprovinces

   1. Income tax (other than on agricultural income). [Sec. 138 of the Government of India Act, 1935 and item 54 in Federal Legislative List.]

A maximum of 50% of the net proceeds to be distributed among provinces.

Madras  Bombay

A minimum of 50% of net proceeds.

75% of income tax and corporation tax receipts for provinces or 75% of the corporation, income and super taxes paid by residents in a province to be earmarked for that province. From the divisible pool from corporation and income tax 33 1/3 % should be allotted to Bombay which is the largest single contributor to the revenue.


   U. P

50% for provinces on population basis


C. P

75% Tax on Agricultural income also should be collected by collected by centre.


   West Bengal

60% to be distributed in proportion to the collection of these taxes in provinces.



Even on the basis of population Bihar should have received 17 crores as against 13 allotted. In future none of the poorer

provinces should get an amount lower that that payable on the basis of population. The distribution should be governed not by residence of the assessees but by the place where the income is earned. The basic factors must be population and the place where the income is earned. If any modifications are to be made they must be done with the object of assisting the financially poorer provinces among which Bihar is at the very bottom.



Distribution of 50 % may continue as at present but the percentages should be revised taking into consideration the factor also of the state of development in addition to those of corporation and residence used by Sir Otto. Due weightage to be given to undeveloped provinces. Should the provincial share exceed 12 crores, 75 % of the exceeds may be left to the discretion of the Central Government.


East Punjab

After the partition the East Punjab Province faces a deficit of about 3 crores : its share of income tax proceeds should be very appreciably increased to meet the deficit fully



75 % . There should be a drastic revision of the shares of provinces in income tax receipts having regard to the facts that Sind and N. W. F.P. go out that the amounts now available in the divisible pool have enormously exceeded the original estimate and some provinces are now getting , as a result income tax amounts exceeding the entire revenues of some others.

2. Corporation Tax. [Items 46 in Federal Leg. List]

   Wholly Federal


At least 50 % of the net proceed to go to provinces



75 % for provinces


U. P

50 % for provinces on population basis


C. P

C. P. suggests the inclusion of Corporation tax and taxes on Capital assets in taxes on income for distribution.

3. Central Excise duties (on tobacco and other goods except alcoholic liquors. (item 46)

There is provision for in part [ Sec. 140 (1) ] but not so far shared


Should be entirely provincialized.



Should be provincialized or no less than 50 % of the net proceeds on each producing unit to be allotted to that unit.


  U. P

Should be entirely provincialized and distributed on population basis.


  C. P

Should be provincialized or 75 % should be allotted to provinces. The duties should cover some more articles such as rubber goods, papers etc.


   West Bengal

25 % of the federal excise should be allocated to provinces .



A portion of the duty should be distributed on the basis of the yields in different provinces.



A portion may be distributed to provinces gradually particularly as the provinces are now faced with the loss of their revenue.



At least 75 % of the excise duty collected on her oil should be allotted to Assam. At least 50 % of the other excise duties (Sugar, Steel, Matches, Tobacco and Beetle Nuts) to be given to the producing units on a formula combining factors of province of production, size of population and level of revenue expenditure.

 4. Export Duties on Jute and Jute products.

62 1/2 % of net proceeds [ Section 140(2) ]

West Bengal

75 % should accrue to the provinces growing and manufacturing jute.



 The entire net proceeds of the jute producing provinces should be distributed proportionately among the concerned provinces.

5. Export Duties



At least 50 % of net proceeds of all export duties should be distributed to provinces according to principles formulated be federal legislature. Analogy of jute duty arrangement cited.



50 % of net proceeds.


   U. P

All export duties should be entirely provincialized and distributed on population basis.


C. P

Export duty on minerals (coal and manganese etc.) should be allotted to C. P. ( jute analogy)


West Bengal

25 % of net proceeds of export duties other than jute



A portion may be distributed to provinces gradually particularly as the provinces are now faced with the loss of their excise revenue.



At least 75 % of the sale proceeds of export duty realised on her tea.

6. Succession duties, Federal Stamp duties, Terminal Taxes (Railway & Air), Taxes on Railway Fares &Freights.

Provided for full distribution to provinces.(sec.137)


It should be provided that the net proceeds shall not form part of the revenues of the federation but shall be distributed to the provinces according to principles formulated by the Federation.


U. P

 The provisions should be fully utilized to augment the resources of provinces.


C. P

 Succession duties in respect also of agricultural land should be transferred from the provincial to the Federal list. The duty should be on ad valorem basis.


   West Bengal

The provincial governments should be empowered to levy them if the Central government do not levy them.



50 percent of income from increase in railway fares and freights above the levels determined by the Railway Budget of February 1947 to go to provinces on population ratios weighted by a given factor in favour of provinces with smaller revenues and expenditure.

7.State Lotteries

Federal (item 48 Federal List).

  C. P

Should be transferred to provincial list.

8. Taxes on trades, professions Callings and employment.

Provincial tax sec.142-A, Item 46 in provincial list.


The limit of Rs. 50 p.a. Should be removed and gradation according to capacity should be provided for .

9. Taxes on sales and advertisements.

( Item 48 in provincial list )


Sales tax should be levied in all provinces and acceding states.



Assignments existing or contemplated

Provinces proposing

Assignment proposed for provinces


U. P

 (1) The inequity of Niemeyer Award should be rectified and central allocation for U. P. should aim at a minimum of 6 or 7 crores p.a. going up to 12 or 13 crores in the space of 10 years.


(2) The consolidated debt due from the U. P. to the Govt. of India should be wiped off.


(3) The Govt. of India should share losses on the food grains scheme as originally promised by them.


C. P.

A system of central grants derived after taking into account such factors as natural resources, stage of industrial development, taxable capacity, etc. is essential, An expert financial enquiry should be undertaken


West Bengal

(1) Provision for federal aid to provinces for social and amelioration work.


(2) There should be financial commission on the lines of the Commonwealth Grants Commission in Australia.



  If any grants in aid or subventions are given in future the per capita revenue and expenditure in each province during the last 10 years should be kept in mind. Those with low per capita revenue should be given greater assistance than the richer.



The broad lines of the present allocation may be maintained in the new Constitution; but the subvention of 40 lakhs fixed for the province should be increased; it should be stated as a percentage of the revenues of the central govt. and in any case there should be a minimum annual subvention of 150 lakhs.


Enforcement of the policy of prohibition and judicial panchayats will make the provincial administration impossible unless the central government multiplies its grants and subventions very liberally


Abolition of the Zamindari system would seriously affect Land revenue and stamps. Make every one pay according to his capacity. Provide for a well regularised house tax on a provincial scale ; a tax on passengers.


Nationalization of industry will wash away the twin anchor sheets of Central finance- Income tax and Customs.


East Punjab

(1) Particularly as the East Punjab is now to be the frontier of the Indian Dominion, there is a strong case for a recurring subvention of more than 1 crore for it ( N. W. F. P used to get 1 crore).


(2) A non-recurring subvention for the capital of the province. (Orissa was given such a grant) .



There is an obvious case for an upward revision of the subventions granted to Orissa and Assam.


Assam as a frontier as well as a backward province of India deserves special treatment.


 Its royalty of 5 percent on oil ( as against 10 times that amount of central excise) is unfair . Large amounts of income accrue in Assam but are assessed in Calcutta which in headquarters of the concerned companies . Some provinces like Bombay and Bengal have been allowed to get a large share of increase tax receipts because of their claim to be territorially responsible for the production of incomes . Assam is entitled to similar consideration in regard to certain items of central revenues .







Year to which the figures relate 

  Rs. in lakhs 

Remarks (see footnote)

(i) Sea customs 














Jauagadh (excluding Mangrol)












































(ii) Currency and Coinage 






(6 th october 1945-5th october 1946)


(1) In connection with Federation, the proposed method of calculating the immunity in the case of Kutch was as follows:- 

To the trade figures supplied by the State the British Indian tariff rates should be applied and from this total should be deducted the difference between the duty calculated at British Indian tariff rates and that actually collected at State rates on goods not consumed in the State itself.

As the figures necessary to apply this formula are not available the figure given in the statement represents simply the amounts of customs duty retained by the State in1945-46.

(2) The value of the immunity in the case of Bhavnagar is the total of customs collections made and retained by the State. The figures for 1945-46 is abnormal.

The figures for 1930-31 to 1935-36 were as follows: -















(B) Note prepared by the Ministry of States on excise arrangements with Indian States

Matches. - In respect of match excise there is a pooling arrangement with the States. The main principal is that the whole of the proceeds of the tax collected in any State a remade over to the general pool and the whole proceeds of the pool divided between British India on the one hand and the various States that agree to come into the pool on the other on the basis of population, regardless of whether matches are manufactured or not, in the States. Import of matches from the States that have not joined this arrangement, is prohibited. The conditions that a State is required to accept for admission to the pool are -

(a) The State should levy duty on matches produced in their territories by means of British Indian banderols and pay the proceeds into the common pool.

(b) The British Indian procedure for the levy and collection of duty should be followed.

Licence fees and fines are not included in the pool. Deduction on account of collection-charges at a uniform rate is allowed. The present rate is 3 per cent of the net collections. The total net revenue is distributed among the various States and British India on the basis of population. While the amount contributed by States during 1944-45 to the pool was Rs. 44,38,970 the amount actually paid to the States was Rs. 1,00,66,875. The British Indian realisation was Rs. 5,46,26,781.

**  *   **   *

3. Sugar. - Arrangements were made in 1934 with the sugar producing States whereby they were required to levy the same rates of excise and under 

(3) The value of the immunity in these cases is represented by the total customs collections less the amount payable to the Central Government under the Agreements.

(4) By the agreement of 1938 Cambay is allowed to retain whichever is greater of the following two amounts: -

(i) Rs. 2 lakhs: or

(ii) a proportion of the customs duties collected at the State ports on the basis of population with suitable adjustments to correct difference between the proportion of the urban population to the rural population in the state and the whole of India respectively.

Since the net customs revenue collected by the State during 1945-46 was only Rs. 6,993/- the State was entitled to receive from the Central Government difference between that figure and Rs. 2 lakhs. The immunity in this case is therefore Rs. 2 lakhs.

(5) Baroda is entitled to retain all the duty collected by it up to a maximum of 1 per cent. of the average customs revenue of British India and until this maximum is reached the immunity is represented by the State's collections. The latest figures available are given here.

(6) Annual payment under the 1940 Agreement, which represents the State's immunity.

(7) The immunity of Travancore and Cochin is represented by their share of the pool reduced by the collection of duty at the British port of Cochin, at Cochin ports and Travancore backwaters. In addition it is necessary to include for Travancore the annual collections of customs duty at their ports other than the backwater ports; and in respect of commodities such as tobacco, on which Travancore levies duty at rates other than British Indian rates, the amount of duty at those rates is substituted for the actual collections.

(8) The immunity is represented by the compensation payment of Rs. 13,433 less Rs. 1,700 allotted for abolition of land-customs under the Agreement of 1838.

(9) Actual amount collected and retained by the State.

(10) Drawback from customs on goods imported by sea through British India.

the same conditions as in force in British India in return for which sugar produced in Indian States was to be admitted free to British India. Soon after the outbreak of war, arrangements were made with the major sugar producing States, whereby in addition to compliance with the 1934arrangements, these States undertook to hand over to the Central Government the excess of their earnings from sugar excise in any year above the highest revenue derived from the sugar excise in any of the three years preceding 1939-40. As regards States which had not till the developed a degree of production materially in excess of their own consumption and States which had not commenced production, the Residents were asked to watch and report developments. All producing States were, however, requested to levy the same duty as in British India. In the case of such States where production now exceeds consumption, the arrangement is that the State retains duty on the basis of population at the rate of Rs. 3/20 per capita revenue.

The sugar producing States are-





















The States falling in category A above produce sugar in excess of their requirements and those falling in category Bless than their requirements. Of the first mentioned States, negotiations were satisfactorily concluded with the first five. Bhopal which is surrounded on three sides and Jaora which is surrounded on all sides by Indian States, taking full advantage of their geographical position did not accept the settlement at first. Jaora, however, agreed to surrender its surplus revenue from 1942-43. Sangli and Miraj States only recently developed their sugar factories and have agreed to surrender the surplus revenue on the basis of the formula at 'A' above but have protested for revision of the arbitrary figure of actual consumption represented by3/20ths. The matter is under consideration.

The amount retainable by Indian States and the average duty Collected are as follows:-

Name of state 

Amount retainable 

Average Collection 



(Rs. in lakhs)


















Not Known



Not Known

Following is the contribution by the above States to the Central Exchequer in respect of the year 1945-46 -

















Information regarding the amount to be surrendered by My sore and Rampur is still awaited.

7. Tobacco. - All States are expected to levy the British Indian rate of duty. (Some States where production is not of much consequence levy excise on the basis of acreage in view of the high cost of administration.) The States are entitled to retain the proceeds of the excise duty subject to the limit, on the basis of their population, worked out in accordance with the following formula-

       R X P
A = ---------

Where A is the limit retainable by a State;

R=   the total net revenue in any year calculated from 1st April to 31st March, collected in British India and all the participating States (i.e., the gross revenue less the cost of collection, licence fees, penalties, fines etc.);

p= the population of the State concerned;

P= the population of British India and all the participating States.

Some States have not come into the scheme and the tobacco of such States on entry into British India is confiscated and released on payment of fine and penalty. Although section 5 of the Central Excises and Salt Act 1944empowers us to impose customs duty equivalent to the excise duty, the provisions of this section have not been involved because it has been possible to realise an amount equivalent to the excise duty on State Tobacco under rule 32 of the Central Excise Rules by means of confiscation. Hyderabad has not accepted the formula and does not share the revenue with the Government of India although it has legislated on the lines of British India. No restrictions have been imposed on the entry of Hyderabad Tobacco into British India.

To facilitate movement of tobacco from and to the States, a special procedure for the movement in bond has been devised. Under this procedure the duty is realised at destination and credited to a Suspense account. The amounts. realised on the State tobacco is at the end of the year credited to the State and is taken into account in the State's realisations for purposes of the formula. The revenue contributable by the States during the years 1943-44and 1944-45 were Rs. 51,38,809 and Rs. 1,48,07,552respectively.

8. Vegetable Product. - The formula is the same as in respect of tobacco. The only States concerned at present are My sore and Cochin although the other States were asked to legislate and have legislated on the matter. Of the two States, namely, Cochin and My sore, Cochin's contribution to the Central Revenues during the year 1943-44 and 1944-45 was Rs. 76,160 and Rs. 41,212 respectively. The My sore State has nothing to pay under the formula.

9. Tea, Coffee and Betel Nuts. - The States concerned are:-

Tea: - Mysore, Travancore, Cochin, Tripura, Mandi;

Coffee: - Mysore, Travancore, Cochin;

Betel Nuts: - Mysore, Travancore, Cochin, Tripura, Sawantwadi and Janjira. The rates of duty imposed by Travancore are as follows: -

Betel Nut . . . . . .As. 1/6 per 1b.

Coffee . . . . . .As.-/6 ,,  ,,

Tea . . . . . .   As.1/9 ,, ,,

The same formula as in respect of tobacco has been adopted in respect of these excises also, although the Board's intention was that 'P' in respect of these excises should denote the population of all India and not limited to participating States and British India as in the case of tobacco. Mysore and Travancore, the two important States, have been clamouring for a revision of the formula. In the case of Travancore the following revised formula has been offered:-

A= -----

WhereA  denotes per capita consumption figure;

T   =  the total quantity of the article taxed in British India and in other participating units;

P   =  the total population of British India and other participating States.

On the basis of the per capita consumption figure worked out, the amount retainable by the State will be worked on the basis of the following formula: -

A=a x d x p

Where A  =  amount retainable by the State;

a   =  per capital consumption figure of British India and the participating units;

d   =  rate of excise duty levied by the State;

p   =  Population of Travancore.

The excess over 'A' plus cost of collection will have to be surrendered by the State. The State's acceptance of the formula has not yet been received.

In the case of My sore, we have agreed in respect of coffee that the amount retainable by the State may be determined on the basis of the Coffee Controller's statistics of coffee consumption in the State. My sore has accepted this formula and is pressing for a similar formula in respect of betel nuts. After a recent tour, the Board has stated that after the establishment of the Betel Nut marketing Board, it may be possible to adopt the coffee formula in respect of betel also.

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