HC Deb 29 April 1935 vol 301 cc71-83

(1) Corporation tax shall not be levied by the Federation in any Federated State until 10 years have elapsed from the establishment of the Federation.

(2) Any Federal law providing for the levying of corporation tax shall contain provisions enabling the Ruler of any Federated State in which the tax would otherwise be leviable to elect that the tax shall not be levied in the State, but that in lieu thereof there shall be paid by the State to the revenues of the Federation a contribution as near as may be equivalent to the net proceeds which is estimated would result from the tax if it were levied in the State.—[Mr. Davidson.]

Brought up, and read the First time.

5.20 p.m.

The CHANCELLOR of the DUCHY of LANCASTER (Mr. J. C. Davidson)

I beg to move, "That the Clause be read a Second time."

This Clause makes specific provision for the two conditions, which it has always been assumed and accepted throughout the discussions, the States would normally make when they accepted the corporation tax as a Federal subject. The reason for the Clause is that it was feared, from representations which were received from Indian States and which are embodied in the White Paper, that there was some misunderstanding about the actual implications of the Bill. It was therefore thought wise to put in as specific provisions the conditions which it was always assumed would be made by the States in regard to the inclusion of a corporation tax in the Federal Budget. In the first line of Sub-section (1) of the new Clause, I would like to add the words "by the Federation" after the words "shall not be levied" to the Clause as it appears on the Order Paper. The reason for this addition is that we wish to safeguard the position of a State which already levies a corporation tax, as in the case of Mysore. If those words were not inserted, the position might be uncertain.

5.23 p.m.

Viscount WOLMER

This is a most extraordinary provision to insert in a Constitution. My right hon. Friend may be telling us what is no more than the truth when he says that this represents an understanding which has been assumed throughout, but when you are drafting a Constitution you cannot proceed on understandings that have been assumed throughout, because they are liable to lead to misunderstandings, as I think the Government have already found out in their dealings with the Princes. They were certainly right to put this in the Bill, but it is a most extraordinary proposal, and it appears to me to set a most important precedent. I should like to see this precedent applied to our English Parliament. We might have an Act saying that there shall be no increase of Super-tax for the next 10 years, and that if any increase is proposed after 10 years' time, any Member of Parliament may elect to pay, not Super-tax, but some other tax instead. Can my right hon. Friend point to a single precedent in any Constitution in the world for a provision of this sort, where one member of a Federation is entitled to say that he does not propose to pay such and such a tax, even though it has been imposed by the Federal Parliament?

I take it that the position visualised by this new Clause is that the Federal Government will propose a corporation tax, which will be debated in the Federal Assemblies. The representatives of any State will have every opportunity to speak against it, to vote against it, to lobby against it, and to use all the influence they can, publicly and privately, against the proposal being carried into law. The representatives of that State may be defeated in both Chambers at every turn, but after this law has passed through all the constitutional stages, it is, under this new proposal, to be open to the Ruler of the State to take this unprecedented action. Let me call the attention of the Committee to the extraordinary wording of this Clause: enabling the Ruler of any Federated State in which the tax would otherwise be leviable to elect that the tax shall not be levied in the State, but that in lieu thereof there shall be paid by the State to the revenues of the Federation a contribution as near as may be equivalent to the net proceeds which it is estimated would result from the tax if it were levied in the State. I should like to ask my right hon. Friend how these points are to be determined. Who will determine how much money a corporation tax would bring in, what the net proceeds of such a tax would be in any given State? The word "net" appears to be a super-extraordinary condition, because it will be open to the Ruler of any State to argue, "It will cost you so much to collect this tax, and it is really worth only half what you think it is worth." Who is to determine how much this hypothetical tax would raise in a given State? The Ruler of the State might have one view and the Finance Minister of the Federal Government another view, but under this Clause it is laid down that the Ruler is to elect that the amount that the corporation tax would bring in shall be paid by him in some other way. I take it from this wording that it will be open for the Ruler to say how much the net proceeds of the tax would be. If that be the case, I think it is an invitation to the Ruler of that State whether his representatives voted in favour of or against it, to say, "Oh, I estimate that the corporation tax in my State would have been so costly to collect that it would only have brought in a very small sum, and that small sum I elect to pay in different fashion."

I submit that there never has been a proposal of this sort in any Constitution in the history of the world, and I challenge my right hon. Friend to produce a single precedent of any importance for this proposal. Secondly, this proposal is inequitable. It is not fair that States should be members of a Federation and that they should have their share of representation in the Legislative Assemblies of the Federation, with opportunities of speaking and voting, and then, when a matter has been decided against them, that they should have power to say, "No, that law will not apply in our State." Thirdly, I maintain that it is unworkable, because no provision is made in the Clause for determining what the amount of any sum in dispute will be. I should be much obliged to my right hon. Friend if he would explain to the Committee how he proposes to work this extraordinary provision.

5.30 p.m.


I wish to raise a rather different point in connection with this new Clause, namely, one of definition. I want to know precisely what we are trying to do by this new Clause. If hon. Members refer to Clause 289 they will find that "corporation tax" is there defined as meaning— any tax on so much of the income of companies as does not represent agricultural income. Thus, agricultural income is cut out and we are then referred back to an earlier part of the Clause which states that "agricultural income" in this connection means agricultural income as defined for the purposes of enactments relating to Indian income tax. Therefore, "corporation tax" is not something which we are defining here. We are taking a definition of "agricultural income" as defined under Indian income tax legislation and, as far as I know, that means any Act of the existing Legislature as it may be amended by the new Parliament which we are now bringing into being. There is nothing to stop the Legislature in future from so altering enactments relating to Indian income tax that agricultural income will take on an entirely different meaning from that which it possesses to-day. In that way it could completely alter the definition of "corporation tax" contained in Clause 289. That seems rather absurd.

I am not going into the points which have been so admirably stated by my Noble Friend the Member for Aldershot (Viscount Wolmer) but if, rightly or wrongly, we are going to impose this disabling provision on the Federation with regard to corporation tax over a period of years, the Clause ought to have a clear and precise meaning. Here we are referred back to a paragraph in Clause 289, which, in turn, refers us to an earlier paragraph of the same Clause, and finally we are referred to existing enactments of the Indian Legislature and there is no disabling provision to the effect that those enactments are not to be altered. Therefore, any words of definition which we have in the Bill seem perfectly meaningless. The object of the Clause may be good or bad. For the moment I am not arguing that question. I am arguing whether we are passing here something which has a permanent meaning, or something which has only a transient meaning. Unless I have wrongly interpreted the significance of the definitions in Clause 289 it would be possible, after the Federation has come into being, to drvie a coach and four through this Clause and the disablement which the Government are proposing to impose on the Federation in respect of the States, would then have no meaning whatever.

5.35 p.m.


Sub-section (1) of the proposed new Clause provides that corporation tax is not to be levied in any federated State until 10 years have elapsed, and it presumably means that no corporation tax is to be levied by the Federation in that period. I understand from the right hon. Gentleman that such tax si already levied in, at any rate, one State. Why in those circumstances is it necessary to have Sub-section (2) of the Clause? If Sub-section (1) were passed alone it would allow 10 years in which the States could adjust themselves. That seems an adequate time and surely Subsection (2) is in those circumstances unnecessary.

5.36 p.m.


I hope the right hon. Gentleman will introduce a novel procedure in this case by actually replying to the points raised by the Noble Lord the Member for Aldershot (Viscount Wolmer) and the hon. Member for South Croydon (Mr. H. Williams), because in this Clause there seems to be an extraordinary departure from any known principle of federal government. This is a remarkable provision unduly limiting the powers of the Federal Government. I do not think that under the constitution of any existing Federation a tax can be levied by a Federal Government on some of the component parts of the Federation but not on certain other component parts. I do not think, for example, that it would be possible for the Commonwealth of Australia to levy a tax and specifically exempt from that tax, say, Tasmania and South Australia. But if we go further into the possible results of this procedure we see that its effect will be to drive industry from British India into the native States. This corporation tax is, definitely, a tax on industry and if it can be established, as we presumably are establishing it now, that industries will be subject to extra taxation in British India to which they would not be subject if they were operating in native States, there must inevitably be a tendency for industry to leave British India and migrate to areas where it will be less heavily taxed.

The second part of the new Clause provides that even after the 10 year period an industry in a native State may still be exempt from the tax which is levied on it in British India. A ruler has only to find some alternative system of raising the money. He can, let us say, squeeze a little more out of the ryot. It has been done before in the native States. In one way or another he can avoid this particular tax on industry and I should say it is extremely possible that a ruler who wanted to see industrial development in his State would not, whatever happened, allow this tax to be levied in his State. Therefore, I suggest that the proposal is unfair to industry in British India, and I hope that the Government will seriously consider that point. Those who speak on the same side as I do on these questions cannot be accused of any undue affection for the Indian manufacturer. Some of us regard him as the source of three-fourths of our trouble. But, at least, I think he is entitled to the same consideration as the potential manufacturer in a native State. It is true that this Clause may go a long way towards conciliating some of the opposition which the Princes apparently have shown in the past towards the Federal Clauses of the Bill. It meets, I think, one of the objections which they have raised but I suggest that the objection which it is meeting is not one which we ought to consider or to tolerate and that they are claiming something to which they have no right and to which no other component part of a Federation anywhere else in the world has any claim. I trust that this matter will be given the most serious consideration, and that between now and the Report stage something will be done to balance conditions more evenly in this respect between British India and the native States.

5.39 p.m.


It appears to me that the new Clause, as it appears on the Paper, will probably lead to considerable friction between the Federal Government and the native States. I ask the right hon. Gentleman to consider whether he could not add words which would make clear what authority is to determine as between the one side and the other the amount of tax which ought to be paid. In case a State decided that they would pay a lump sum that would make the position clearer.

5.40 p.m.


I do not think that this is the time or place for entering into the broader issues of the relations of the States to the Indian Federation, but I shall do my best to answer the points raised by hon. Members.

Viscount WOLMER

This is a Second Reading Debate on the Clause.


I do not think my Noble Friend is quite right in suggesting that we should have a general discussion. I have moved a new Clause dealing with a specific point and questions arising on that specific point I propose to deal with as fully as possible in answer to hon. Members. But, as I said, I do not think that this is the occasion for entering into questions about other constitutions. There is no precedent, and anyone who sat on the Joint Select Committee or the other bodies which have investigated this problem would not look for any precedent from any foreign constitution or any other federal constitution in connection with this new constitution for India. The hon. Member for Gravesend (Mr. Albery) asked whether it would not be possible to leave out Sub-section (2) in view of the provision in Sub-section (1) that no corporation tax was to be levied by the Federation in any State until 10 years have elapsed. To leave out Sub-section (2), however, would be failing to meet one condition which, from the very beginning, was clearly made by the States and accepted by all parties in the preliminary discussions on the Constitution. The States always made it plain that they would preserve to themselves the right, not to withhold contributions, but to decide whether contributions should be derived from direct taxation, as exists in the case of Mysore, or whether equivalent payment should be made out of the revenues of the State to that which would be leviable if it were raised by a corporation tax. On the Report stage the Government intend to move an Amendment to put into the hands of the Comptroller and Auditor-General the right and the duty of making the assessment to which reference is made at the end of Sub-section (2).

The Noble Lord said this provision was without precedent in any constitution. I say again to the Committee that we cannot look for precedents in this matter in other constitutions. The hon. Member for Smethwick (Mr. Wise) made the same point, and I have already answered the hon. Member for Canterbury (Sir W. Wayland) by telling him that the Comptroller and Auditor-General will be the authority to make the assessment. I hope that I have also made it clear already that this new Clause was thought by the Government to be unnecessary and, therefore, there was no provision in the Bill as originally drafted. In our view all that the States wanted could be got during the negotiations previous to accession but, in view of the misunderstanding which was clearly demonstrable in their representations when we published the White Paper, it was thought better to make specific provision for what has been accepted—in spite of what hon. Members say—by the different parties to the discussions on the draft constitution as inevitable and reasonable conditions which the States were entitled to make in connection with direct taxation of this kind.

Major-General Sir ALFRED KNOX

Will the right hon. Gentleman answer the important point made by the hon. Member for Smethwick (Mr. Wise), that this power of the Indian States to refuse to pay corporation tax will tend to attract industry from British India to the States?


The burden on the revenues of a State will be the same burden as if the corporation tax had been imposed.


But from the point of view of industry it will be an advantage.


Not necessarily. It depends on the form of taxation.


Industry can be definitely encouraged in States by exemption from taxation, because taxation can be levied on, say, agriculture or entertainments or something of that sort. That will be a definite magnet to industry as such to go into a native State. That is why these conditions are so unfair.


There is one observation I would have liked to make on many occasions during the passage of this Bill through Committee. A great many hon. Members have referred to the future of the Bill, but have not been conscious of the fact that the situation, as it at present exists, is precisely the same as it will be when the Bill has been passed, and that in this respect there will be no alteration in the existing conditions. If the existing conditions have not led to great alterations in the States, is it likely or reasonable to expect that any tremendous movement will take place in the future which is not taking place at the present time?

5.47 p.m.

Viscount WOLMER

My right hon. Friend cannot get away with the arguments as easily as that. We are setting up a constitution which is, presumably, intended by the Government to last a certain amount of time. The whole industrial movement in India is a very short-lived one; it has only just started; and if the Indian Nationalist movement has its way, as undoubtedly it will, the industrial movement in India will be a big and long drawn-out affair. We are here setting channels into which the industries of India will have to fit themselves, and to a certain extent digging the channels into which they will flow. The point made by my hon. Friend the Member for Smethwick (Mr. Wise) is a sound one. I would remind hon. Members representing the Labour party—I am sorry that on a matter of this industrial importance there are only two present—that the States may have a very much lower standard of factory legislation than the rest of India. This Clause will enable a State not to have the corporation tax, but to levy a tax in some other way which, as the hon. Member for Smethwick pointed out, may be oppressive to the ryot. It may take the burden off the shoulders of the wealthy capitalist and put it on the poor under-dog. There may be an inducement in this new Clause to give industries set up in a State an unfair advantage over industries in British India or in other States. That, of course, is in addition to the gross inequity of putting a provision of this sort in a constitution, and my right hon. Friend has not in the least got rid of the argument that a proposal of this sort cannot work equitably.

I am glad to hear that further Amendments are to be introduced so that the sum in dispute can be decided by some impartial authority. I am glad that the Government recognised that amendment is necessary, but it passes my comprehension how they think that an arrangement like this can last and be accepted by public opinion in India and by representatives of British India. It is one of those concessions which have been made on the backstairs or at a round table conference—I do not care what article of furniture my right hon. Friend has chosen to assist him in his negotiations. A proposal of this sort is incapable of standing the test of impartial examination in framing a constitution. It has not been put in as a workable or an equitable proposal. It has been put in as a bargaining counter in order to get a certain section of the Princes to come in. I do not know whether my right hon. Friend can tell the Committee which States he hopes this Clause will square, but, to my mind, it is only another example of erecting a constitution which you call a Federation, but which is not really a Federation at all. It lacks many of the essential characteristics of a Federation, and must produce a state of affairs which I cannot believe public opinion in India will regard for long as equitable.

5.52 p.m.


The Noble Lord has pointed out what most of us know already, namely, the difficult position that exists in India owing to the fact that India is a network of jurisdictions, and that this country is bound by Treaty obligations not to interfere at present in the internal affairs of Indian States. The question from the point of view of the party on these benches is how far we can get in this Federation towards levelling up conditions in British India and the Indian States. The Noble Lord refers to the question of labour legislation. I do not remember hearing him eloquently supporting the very Amendment which I put forward—

Viscount WOLMER

I did support the hon. Gentleman but I am afraid not eloquently.


I should have thought we might have had the Noble Lord's support with his fervid eloquence. Suppose the Noble Lord is right and we did what he suggests and abandoned all ideas of federation. The difficulty is that we should be left in exactly the same position. There is now no control over the Indian States, and there would be no control except in so far as they adhere to the Geneva Conventions. There would be no control over labour legislation and no control over the question whether taxation is equitable between one kind of property and another. I really rose to ask what is the Noble Lord's solution?

Viscount WOLMER

I am afraid that we should get on to Second Reading ground if I replied to the hon. Gentleman, but my short answer is that we are not in a position to form a Federation at the present moment, because we have not the constituents out of which a real Federation can be formed. I would much rather wait a generation until we have the constituents out of which we can form a real Federation than make myself responsible for a make-believe sham which is going to perpetuate a great many scandals under the aegis and the authority of this Parliament.


I gather that the Noble Lord is not really concerned about the prosperity of industry in British India?

Viscount WOLMER

Certainly I am.


We must really get back to the new Clause.

5.55 p.m.


The right hon. Gentleman said he would deal with all the points, but I was surprised that he did not reply to the powerful speech of my hon. Friend the Member for South Croydon (Mr. H. Williams). My hon. Friend pointed out the possibility—and, I would add, the probability—of the nature of the corporation tax being entirely altered through the Federal Legislature changing the definition of agricultural income. We are anxious about that point, and it should be dealt with before the proposed Clause is allowed to pass. I shall be grateful to the right hon. Gentleman if he will say a few words on the question which was raised by my hon. Friend and say whether he agrees as to the danger which my hon. Friend envisaged, and, if he does agree, say whether the Government propose to take any steps to fix the definition of the corporation tax.


If you are setting up a constitution and giving powers of taxation to the Government, it is impossible to fix by definition a tax which they are to levy. It is true, as the hon. Member for South Croydon (Mr. H. Williams) said, that the corporation tax has as one of its components a, land tax, And that agricultural land is excluded; but in any discussion which may take place in the Federal Assembly on what is or what is not to be the scope of a federal tax within the limits put upon it by this Bill, the States and British India will be represented, and their views will be known. I do not think it would be possible to make absolutely rigid and unchangeable any tax in a Parliament which had the powers of self-government.

5.58 p.m.


My right hon. Friend's answer does not satisfy me. This is a disabling Clause. My right hon. Friend, who is normally so genial and informing says that we must not be too precise in saying what the Federation must not do, but that we must leave it to them. If that be the case, why put in the new Clause at all? If we are to say, "You shall not do a particular thing," we ought to define that thing in such a way that there is no doubt about it. It is absurd to say to the Federation of India, "You shall not do this thing, but you are left to define it." You might say, "Thou shalt not exceed the speed limit," but the motorist is defining the speed limit at the moment. With all respect to my right hon. Friend, who is not, I am satisfied, responsible for the drafting of this new Clause, which is what I am criticising at the moment, we ought to prescribe in a way that cannot be misunderstood what the corporation tax is. It is a tax on the profits of companies, but you have to take from those profits the amount they have already paid in agricultural tax. The agricultural tax might mean certain existing forms of taxation. It might mean some entirely new form of taxation. I do not know whether the profits of tea gardens are agricultural profits. I see no reason why they should not be, and why we should not indicate that agricultural income should include profits on tea gardens. I understand that is not what is contemplated. Or an agricultural tax might include the profits made from ground nuts, which are very largely produced in India, and might be crushed adjoining the land where they are produced, bringing the profits into agricultural income. There must be some clear-cut and effective definition if we are to make it certain that the Clause is not evaded.

Clause added to the Bill.