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 -
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.,
(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:-
(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.
(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)
CONSTITUTIONAL POSITION OF THE CENTRE AND THE PROVINCES IN RESPECT OF REVENUE UNDER THE GOVERNMENT OF INDIA ACT, 1935.
(a) Revenue of the federation
(b) Revenue of the province
FINANCIAL POSITION OF THE PROVINCES AND CENTRE FROM 1937-38 TO 1946-47
* 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)
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)
(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.
Annexure IIIAPPENDIX B
SUMMARY OF PROVINCIAL SUGGESTIONS
Part I - Taxes
PART II - NON TAX PROPOSALS
[ANNEXURE IV ]
RIGHTS AND IMMUNITIES ENJOYED BY THE STATES
(A) ANNUAL VALUE OF THE IMMUNITIES ENJOYED BY THE STATES UNDER SEA
CUSTOMS, CURRENCY AND COINAGE
(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 -
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: -
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:-
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-
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:-
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:-
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.