HC Deb 15 February 1940 vol 357 cc1083-91

9.32 p.m.

Sir H. O'Neill

I beg to move: That an humble Address be presented to His Majesty in pursuance of the provisions of Section 309 of the Government of India Act, 1935 praying that the Government of India (Orissa and Sind Governors' Allowances and Privileges) Order, 1940, be made in the form of the draft laid before Parliament. This proposed Address to His Majesty, and the other six that follow on the Paper, deal with a number of different matters. I would propose, with your concurrence, Sir, to deal in my statement with the first four and the sixth and seventh Orders, all of which deal with points which I do not think raise any matter of difficulty. The fifth Order—the Distribution of Revenues (Amendment) Order—deals with a rather more important point, and I should like to speak about that separately.

The first Order is the Government of India Act, 1935 (Orissa and Sind Governors' Allowances and Privileges Order). The purpose of this Order is to extend, by three years in the case of Orissa, and two years in the case of Sind, the period of three years which was prescribed by Order-in-Council in March, 1937, as the time within which the building of new Governors' residences, the cost of which was to be charged on the revenues of the Provinces, was to be completed. The necessity for the extension of time arises from a variety of reasons, including, in the case of Orissa, delay in the selection of the site. New and improved residences are required in Sind and Orissa, because these were two Provinces created under the Act of 1935, and no suitable accommodation for a Governor was available.

The second Order is the Government of India (Adaptation of Indian Laws) (Amendment) Order, 1940. By the enactment of the Government of India Act, 1935, it became necessary to make numerous adaptations over the whole field of Indian Statute law, both Central and Provincial, in order to bring it into conformity with the distribution of powers effected by the new Constitution. The object of the Amendments to the original Adaptation of Laws Order which are proposed to be made by this Order, is to make the necessary adaptations required in accordance with the provisions of Section 7 of the India and Burma (Miscellaneous Amendments) Act passed a few weeks ago, the object of which was to make it clear that jurisdiction over certain Indian universities is within the power of the Provinces and not of the Centre.

The third Order is the Government of India (High Court Judges) (Amendment) Order, 1940. The proposed Amendment to this Order has two purposes, both of which arise out of the passage of the Miscellaneous Provisions Act recently. Firstly, it provides for the formal changes required when the Government of Sind convert their Judicial Commissioner's Court into a Chief Court, as they are now empowered to do. Secondly, it provides for the consequential Amendment required by the provision empowering the Governor-General to appoint a High Court judge to act temporarily as a judge of the Federal Court.

The next Order, the fourth, is the Government of India (Federal Court) (Amendment) Order, 1940. This Order also provides for some further purely technical Amendments now required in the definition of "Acting Judge." I will leave the fifth Order and refer to it more fully in a moment.

The sixth Order deals with Burma. It is the Government of Burma (India-Burma Financial Settlement) Order, 1940. Section 134 of the Government of Burma Act gave power to prescribe by Order-in-Council the terms of the various financial adjustments between India and Burma arising out of the separation of Burma from India. This is the fourth Order of this character to be made, and it deals with the share which it is proposed that Burma shall contribute towards the cost of Central pensions payable in respect of service in India up to the date of separation. The settlement forms the subject of an agreement between the Governments of India and Burma and it provides for an annual payment by Burma of 7½per cent. of the actual sum paid from Indian Central revenues, in respect of these pensions in each year.

Paragraph 5 of the proposed Order deals with a separate and distinct matter and is consequential on the enactment of Section 15 of the Miscellaneous Provisions Act, 1940. It provides for the transfer to Indian revenues of a sum of 43½lakhs of rupees, representing duty on a quantity of motor spirit which was produced in Burma before, and collected in India, after separation.

The seventh Order also deals with Burma. It is the Government of Burma (Shan States Federal Fund) Order, 1940. Under Section 68 of the Government of Burma Act, 1935, provision may be made by Order-in-Council for the finances of the Federal Fund of the Shan States and the settlement of payments as between the Federal Fund and the revenues of Burma. Under an Order-in-Council made in 1937 it was provided that for the first two years the payments should be settled by the Governor in his discretion. Meanwhile the whole financial position as between Burma and the Shan States has been exhaustively investigated by the financial authorities in Burma, whose recommendations have been generally endorsed by the Governor and are incorporated in this proposed Order. The object of the present Order is to provide a settlement for the next three years ending on 31st March, 1942. After this period has elapsed further experience will have been gained in the light of which it is hoped that a more durable settlement of this complicated matter may be reached.

9.41 p.m.

Mr. Attlee

I have looked at these Orders and they all deal with either minor or technical matters. There are only two points about which I would like to ask the right hon. Gentleman. First, as to the Order dealing with the finances of Burma and India with regard to oil, do I understand that this is approved not only by the Governor of India but also of Burma, and, on the last Order, has the settlement been agreed by the authorities in the Shan States?

9.42 p.m.

Sir H. O'Neill

With the leave of the House I will reply. The right hon. Gentleman asks me, with regard to the first Order dealing with Burma, whether the Burmese Government approved of the settlement with regard to oil. What happened was that there was a certain amount of motor spirit produced in Burma before Burma was separated from India. That motor spirit was shipped to India and the excise duty upon it was paid when it reached the port in India to which it was consigned. The Indian authorities natur- ally claimed the right to have that duty which was, in fact, paid by the consumer in India. Until the Act which dealt with the matter was passed the other day, Burma had a technical and legal claim to this money. The Government of Burma realised perfectly well that their claim was purely technical and I do not think they have made a serious claim that they should have it. This Order is to legalise the real position—namely, that this duty should belong to the Government of India. With regard to the other point about the Shan States I understand that the arrangement that this is to last for only three years has been come to between the Governor of Burma and the Commissioner of the Shan States. I do not know if my right hon. Friend has ever been to the States. I have not, but he probably knows what they are and, roughly, how they are governed through a Commissioner who has the advice of an advisory council of the Federation. I understand the matter has been agreed between the Commissioner and the Governor.

Mr. Attlee

And the Council?

Sir H. O'Neill

That I could not say. Ordered, "That the Debate be now adjourned."—[Sir H. O'Neill.] Debate to be resumed upon Thursday next.

Motion made, and Question proposed, That an humble Address be presented to His Majesty in pursuance of the provisions of Section 309 of the Government of India Act, 1935, praying that the Government of India (Adaptation of Indian Laws) (Amendment) Order, 1940, be made in the form of the draft laid before Parliament. Ordered, "That the Debate be now adjourned."—[Sir H. O'Neill]

Debate to be resumed upon Thursday next.

Motion made, and Question proposed, That an humble Address be presented to His Majesty in pursuance of the provisions of Section 309 of the Government of India Act, 1935, praying that the Government of India (High Court Judges) (Amendment) Order, 1940, be made in the form of the draft laid before Parliament.

Ordered, "That the Debate be now adjourned."—[Sir H. O'Neill]

Debate to be resumed upon Thursday next.

Motion made, and Question proposed, That an humble Address be presented to His Majesty in pursuance of the provisions of Section 309 of the Government of India Act, 1935, praying that the Government of India (Federal Court) (Amendment) Order, 1940, be made in the form of the draft laid before Parliament."—[Sir H. O'Neill.] Ordered, "That the Debate be now adjourned."—[Sir H. O'Neill]

Debate to be resumed upon Thursday next.

Motion made, and Question proposed, That an humble Address be presented to His Majesty in pursuance of the provisions of Section 309 of the Government of India Act, 1935, praying that the Government of India (Distribution of Revenues) (Amendment) Order 1940, be made in the form of the draft laid before Parliament."—[Sir H. O'Neill.]

9.45 p.m.

Sir H. O'Neill

This Order, which is the fifth on the list, raises a point of rather more substance than the others with which I have already dealt and I propose to deal with it at greater length and to explain it in considerable detail. Section 138 of the Government of India Act, 1935, provided that taxes on income in India should be levied and collected by the Central Government, and laid down the principles governing its distribution between the Central and Provincial Governments. Broadly speaking, the scheme of distribution was that the proceeds of Income Tax were to be shared between the Centre and the Provinces, but that for a period to be denned after the commencement of the Act the Centre should retain for itself a part of the Provincial share until such time as it had been able to adjust its finances to the new conditions. The interim period was to be divided into two sections during the first of which the Centre would retain such sum as might be prescribed and during the second of which this retained portion would be given up by equal annual reductions. The length of the two periods and the sum to be retained by the Centre out of the Provincial share were to be settled by Order-in-Council.

As soon as the Act became law it was therefore necessary to settle these points by Order-in-Council in accordance with the provisions of the Section, and as the matter was a complicated one and was of great importance to the future financial prospects both of the Centre and of the Provinces, the Government decided to ask Sir Otto Niemeyer to investigate the whole situation and make his recommendations. He went out to India, made an exhaustive examination of the position, and reported in April, 1936. The conclusions at which he arrived were subsequently embodied in the Distribution of Revenues Order made in July, 1936. Sir Otto Niemeyer recommended that each of the prescribed periods should be five years, and that the percentage of the divisible heads of Income Tax which should go to the Provinces should be 50 per cent. It is that half, or 50 per cent., with which we are dealing in the proposed Amendment to the Order-in-Council which is now before the House. Sir Otto Niamey had to decide what proportion of the Provinces' half-share of Income Tax was to be retained by the Central Government during the first five-year period, and he laid down a formula which has governed the distribution during the two financial years which have already elapsed since the Act came into operation.

That formula was that the Central Government should retain sufficient out of the share of the Provinces to bring the Central share, together with the contribution of the railways to general revenues, up to 13 crores of rupees (£9,750,000) and that the Provinces should get the balance. Under this formula in respect of 1937–38 the Provinces received 1.63 crores (£1,200,000); in respect of 1938–39 they received 1.53 crores (£1,100,000), which was in each year the excess over the 13 crores (£9,750,000) retained by the Centre. Sir Otto Niemeyer's formula was produced in time of peace and clearly did not contemplate a situation such as now confronts us. The war will have two main effects on the Budget of the Central Indian Government. In the first place, it will mean considerably less revenue from Customs owing to lower imports, and, in the second place, it will mean greatly increased expenditure on defence services. On the other hand the two sources of revenue which will show substantial increases under war conditions are taxes on income and receipts from the railways; and under the existing formula any increase under either of these heads will go almost wholly to the Provinces. It has become obvious, therefore, that some alteration in the method of distribution is necessary if the Central Government is to be saved from the prospect of a heavy deficit. The Amendment which we are now considering effects the change which is proposed.

Under the new formula it is proposed, in the first place, to eliminate the receipts from the railways from the pool to be distributed. This was an extraneous source of revenue not dealt with under Section 138, but brought in by Sir Otto Niemeyer in order to increase the amount which would be available for distribution at a time when India was beginning to emerge from the great depression of the early 1930's. With the railway receipts eliminated, we are, therefore, back again al the strict provisions of Section 138. Secondly, the new formula provides that the Central Government shall retain a definite pecuniary amount of the Provincial share, which it is proposed shall be 4½ crores (£3,400,000). This will leave the Provinces with the difference between this sum and their half share in the pool, and therefore, with a 50–50 share in any expansion of income tax revenue. The sum of 4½ crores (£3,400,000) has been decided upon because it is roughly the average amount which the Centre has actually retained so far under the old formula, and there can be no fairer or safer guide than this. The amounts retained by the Centre have been—in 1937–38, 4.3 crores (£3,200,000); in 1938–30, 5.05 crores (£3,800,000); and estimated for 1939–40, 4.54 crores (£3,400,000). Taking the average of these sums a round figure of 4½ crores is obtained, though it should be noted that there is a difference in favour of the Provinces of 13 lakhs (nearly £100,000) between the round figure and the actual average. As I have just said, this figure of 4½ crores (£3,400,000) has been fixed as the part of the Provincial share to be retained by the Centre during the last three years of the first five-year period.

The House may be interested to have an example of the application of the two formulas to figures which have actually been realised. If you take the average of the two years 1937–38 and 1938–39, the divisible income tax was Rs.12.5 crores (£9,400,000) and the railway contribution was Rs.2.1 crores (£1,500,000), making a total of Rs.14.6 crores (£10,900,000). Out of this the Centre's share was Rs.13 crores (£9,750,000) and that of the Provinces was Rs.1.6 crores (£1,200,000). If the new formula had been applied in these two years the average result would have been that the Centre would have received Rs.12.8 crores (£9,600,000) and the Provinces Rs.1.8 crores (£1,300,000). In other words, in respect of the first two years since the constitution came into operation the Provinces would have got actually more under the new formula than under the old one. As the divisible pool expands, however, the new formula will operate more in favour of the Centre. The fact is that if, as seems certain in time of war, the proceeds of income tax show considerable expansion, the Provinces will in future get a fair share of that expansion, though not as much as they would have got under the old formula. For instance, in the year 1939–40, which is now drawing to a close, I think I can safely say, without giving away any budget secrets, that the amount of income tax which the Provinces will receive under the new formula will be nearly half as much again as the estimate which was made under the old formula at the beginning of the year, and that next year they are going to do even better.

These proposals are put forward as a fair and equitable solution of quite unforeseen conditions which have arisen out of the war. They should enable the Central Government to retain sufficient of the Income Tax revenue to maintain its solvency under war conditions and at the same time they will give to the Provinces, if Income Tax expands as expected, larger sums than they could ever have contemplated as possible at the time when the Niemeyer award was made.

9.57 p.m.

Mr. Attlee

This subject of the division of revenues between the Provinces and the Centre in India is very complicated. I gather from what right hon. Gentlemen has said that the yardstick which was taken for the division has proved to be too flexible in time of war and therefore a change has to be made. The only question I would like to ask is, how was the new arrangement arrived at? Is it just a decision of the India Office, or has it been evolved by discussion between the Centre Government and the Provincial governments in India? Is there general agreement, or is it an award made between contesting parties?

9.58 p.m.

Sir H. O'Neill

The hon. Gentleman has asked whether this arrangement was arrived at by agreement. The position is that when it became obvious that some change had to be made, the Provinces were consulted and various suggestions were made by them. Some of them agreed to the proposal which was then put up; others were more lukewarm, and some of the Provinces, definitely, did not like it. As a result of those consultations, very considerable modifications were made in the scheme, in directions favourable to the Provinces. The scheme which is now put forward is the result of those discussions which took place between the Centre and the Provinces and is very much more favourable to them than the original proposal.

Miss Wilkinson

Have any proposals been made by the Government by which the Provincial Governments, who feel considerable financial stringency owing to the number of calls which they have to meet on revenues which are admittedly inadequate, will have made up to them the amount of any sum which they lose under the new suggestion?

Sir H. O'Neill

I do not think that any proposal has actually been made in the exact form suggested by the hon. Lady, but she will appreciate from what I have said that the Provincial Governments are going to get very much more out of the Income Tax under this arrangement than they would have thought possible at the time when the original award was made.

Ordered "That the Debate be now adjourned."—[Sir H. O'Neill.]

Debate to be resumed upon Thursday next.

Motion made and Question proposed. That an humble Address be presented to His Majesty in pursuance of the provisions of Section 157 of the Government of Burma Act, 1935, praying that the Government of Burma (India-Burma Financial Settlement) Order, 1940, be made in the form of the draft laid before Parliament."—[Sir H. O'Neill.]

Ordered "That the Debate be now adjourned."—[Sir H. O'Neill]

Debate to be resumed upon Thursday next.

Motion made and Question proposed: That an humble Address be presented to His Majesty in pursuance of the provisions of Section 157 of the Government of Burma Act, 1935, praying that the Government of Burma (Shan States Federal Fund) Order, 1940, be made in the form of the draft laid before Parliament."—[Sir H. O'Neill.]

Ordered, "That the Debate be now adjourned."—[Sir H. O'Neill.]

Debate to be resumed upon Thursday next.