Subsection (2) of section thirty-six of the Finance Act, 1950, shall have effect and shall be deemed to have had effect since the first day of April, nineteen hundred and fifty-one, as if it had contained a second proviso as follows:—
but provided that any pension paid by the Government of India to former servants, civil and military of that Government or of His Majesty's shall be treated separately for this purpose and credit by way of unilateral relief shall he allowed to the full amount of the tax payable under the law of India in respect of such pension, and the amount of the credit to be allowed under this subsection, by way of unilateral relief in respect of other income shall take no account of tax paid in respect of such pensions nor of the tax payable in accordance with the Income Tax Acts in respect thereof."—[Mr. Low.]
§ Brought up, and read the First time.
§ Mr. A. R. W. Low (Blackpool, North)
I beg to move, "That the Clause be read a Second time."
This Clause relates to Indian Service pensions. It seeks to amend Section 36 124 of the Finance Act, 1950, which provided for unilateral relief in the case of double taxation within the British Commonwealth up to three-quarters of the British rate. But it seeks to amend it only with respect to a particular class of income, a class which in my opinion is easily definable and, for reasons I propose to give as shortly as I can, a class which merits separate and very special treatment. They are the class of pensions paid by the Government of India to former members of the Secretary of State for India Service and analogous services.
This House of Commons has already acknowledged that it has a very special responsibility for these men. The Committee will remember that the Prime Minister himself on 10th July, 1947, stated that responsibility in no uncertain terms. He said, during the debate on Second Reading of the Indian Independence Bill:It is, however, recognised that, among the liabilities to which I have referred above, …—he was referring to pension and provident fund liabilities—there is one category for which His Majesty's Government have a special responsibility, namely, towards Europeans who served in the Secretary of State's and analogous Services. We intend to invite the new authorities to negotiate, in due course, an agreement whereby a capital sum in sterling will be set aside to cover this liability."—[OFFICIAL REPORT, 10th July, 1947; Vol. 439, c. 2458.]That agreement was negotiated a year later. During the course of discussion on that agreement a question was asked by my right hon. Friend the Member for Saffron Walden (Mr. R. A. Butler) as to what would happen in the event of the Government of India or the Government of Pakistan imposing tax upon these pensions. The then Chancellor of the Exchequer, Sir Stafford Cripps, replied to the effect that in that event, which did not seem to him likely at that moment, there would be discussions between the Governments. I understand some form of discussion has gone on, but the fact is that these pensions, since 28th February this year, have been subject to tax by the Government of India. They have not been made subject to tax by the Government of Pakistan, which pays something under one-third of the former pensions.
The effect of making these pensions subject to Indian tax is not very great to 125 residents in this country, but it is in certain cases. Even under existing law it imposes a hardship. To show the Committee that this class of income requires special treatment—and I have already mentioned the responsibility of the House of Commons—I want to remind the Committee of the history of these pensions from the point of view of Income Tax. Both by Indian legislation, or ordinances under legislation, and by United Kingdom legislation until February this year these pensions have been specifically exempted from Indian, tax.
So far as India is concerned, the exemption was stated, I think, in an Indian revenue notification under the Indian Income Tax Act, 1919. So far as this Parliament is concerned, the exemption is set out in no uncertain terms in Section 272 of the Government of India Act. 1935. It is there stated that these pensions shouldbe exempt from all taxation imposed by or under any existing Indian law, or any law of the Federal or Provincial Legislature.In fact, I think it might be said—and the Committee will probably agree—that these men who were at that time serving in the Indian Civil Service or other similar service or in the Indian Army were entitled to regard it as an almost implied condition of their service that when their pension became payable it should be paid without deduction of Indian Income Tax.
In face of all those things, the Indian Government have seen fit to change the law, from their point of view, and to impose tax upon these payments. It is no part of my duty or my case to criticise that action; it is a matter which, I have no doubt, is for negotiation between the two Governments. But we must remember, of course, that the Indian Government are a completely sovereign Government and have the right to impose taxation as they may see fit.
This decision to impose tax raises many problems. It raises many important points of principle with which I do not propose to deal in detail at the moment, but in order to satisfy the Committee and the Chancellor that this is a good Clause, or that the principle it seeks to establish is a good principle, I have to prove to the Committee that the case of these pensioners is a special one; and in order to do that I want to underline the broad 126 principle which this action of the Government of India raises.
In my opinion, it raises the question of the moral responsibility of His Majesty's Government to see that all pensions paid to former members of the Secretary of State's service and analogous services are paid free of Indian tax—in fact, free of all tax, subject only to deduction of taxes imposed by the law of the land in which the pensioners reside. But, having said that, I do not want to pursue it except to say that if, as I hope, the Committee accept this Clause, I do not think it will entirely dispose of the hardship created for pensioners, certainly for those resident outside this country, by the recent decision of the Government of India.
May I now very shortly say a few words on the narrow point of what this Clause tries to do in the way of double taxation relief? It applies, of course, only to residents in this country. We must remember that many of these pensioners are no longer resident in this country; indeed many never have been resident here but came, perhaps, from Ireland or Jersey or Guernsey or places like that. What we seek to do for the resident in this country is to ensure that all Indian income paid under the new Indian Legislation, all that amount of tax may be allowed as a deduction from the British tax—the tax which has to be paid here—on the pension.
As the Chancellor and the Financial Secretary said in answer to questions, at the moment the amount of relief claimable under Section 36 of the Finance Act to which I have referred is in many cases sufficient to cover the amount of Indian tax payable. But that is not so in all cases; it is not so for example in the case of pensions of £500 or £600 a year paid to married men with children. In those cases the British tax relief, about which the Chancellor has been so proud, results in a lower overall rate of tax than the Indian rate of tax in force for the time being.
I shall not weary the Committee with details, for I think the Chancellor will have more accurate figures in his possession that I am ever likely to obtain. But in order that these people and others may benefit, we suggest that we should lift the limitation of three-quarters of the British rate of relief and allow them the full relief up to the 127 maximum of the amount of British tax which has to be paid on this pension. That is what we seek to do in the Clause.
Most calculations which have been made of the amount of tax payable under Indian law are based upon the assumption that the Indian Government will tax those pensions as if they were the complete world's income of pensioners. That rule, I think, is in force and will remain until the end of July, but it is a purely transitional rule and the ordinary rule of Indian taxation is much more harsh. I think it is something like this—and perhaps the Chancellor will correct me if I am wrong: it is that the pensioner can have the option either of accepting a flat rate of 8s. in the £, which on pensions of under £1,000 is a very large rate, or of being taxed on the pension at the appropriate rate which would be charged on the whole of his world's income, after he has filled in many forms and proved to the Indian Revenue authorities exactly what is his whole world's income.
In those circumstances, this new Clause will be even more necessary than it is at the moment, and though I think it may be possible to say that in fact only £1 or £2 or £4 or, at the maximum £10, will be saved by any pensioner if the Clause is accepted, that is only on the basis of the rule in force at present, and if the harsher assessments are applied this Clause will save pensioners a much greater sum.
In any case, I think the Committee will agree that even £1, and certainly £10, less tax to pay means a great deal to all of us and particularly to people living on fixed incomes. To a certain extent this is a small point, and I am sure the Chancellor will agree that the Clause will cost the country comparatively little. But bound up with it is a great principle—the responsibility of the House and of His Majesty's Government towards these men who have served the Crown and the House and the country for many years in times of great difficulty, whose pensions and the security of whose pensions are so important to them, and who in many cases have retired on the basis that they would receive a pension of a certain amount but who now find that that amount has been reduced.
§ Mr. Gaitskell
I think it may be for the convenience of the Committee if I intervene immediately in order to indicate the Government's attitude on this important question. We have, of course, for some little time been giving consideration to the problem created by the tax imposed on pensioners by the Indian Government. Indeed, we have been considering it since the tax was imposed, and I should like to inform the Committee of our views.
As the hon. Member for Blackpool, North (Mr. Low) made clear, this Clause is designed to ensure that the pensioners of 'the Government of India, who at present are subject both to United Kingdom tax and to Indian tax, shall receive relief from their United Kingdom tax up to the extent of the full amount of United Kingdom tax paid and not, as the law now provides, up to the extent of three-quarters of it. The hon. Member referred to the legal position here. I do not think there is any disagreement between us, but perhaps I should make the position plain.
The legal immunity which was laid down in Section 272 of the Government of India Act, 1935, came to an end on the transfer of power in 1947. Therefore, legally there is no protection. Nevertheless, I can tell the Committee at once that the Government accept the fact that they have a moral obligation in this matter. I think that there can be no doubt that on the transfer of power it was generally accepted that these pensions would not be taxed, and I have little doubt that had we supposed at that time that they would have been taxed, the matter would have been raised and some Government undertaking would have been given. Although there is no legal obligation on us, we accept the moral obligation.
The Clause does not protect all these pensioners, as I think we should desire them to be protected. For example, it would not protect those who do not pay any United Kingdom tax and it would not protect to the fullest extent those whose Indian tax exceeds the whole of their United Kingdom tax. Therefore, I do not think that this is the best way of dealing with the matter. What we propose to do instead is to compensate the pensioners for the additional taxation in which they have become involved as the result of the decision of the Government of India to levy taxation upon them.
129 We are working at present on a scheme of compensation, and its details and scope will be announced in due course. Perhaps I should say that in the meantime I cannot pledge the Government here and now, whatever the circumstances may be in the future, to pay compensation in every condition. I use these words of caution as I think that I am entitled to do at this stage in the proceedings. It is, however, our intention to see that justice is done.
We shall want to safeguard the interests of the United Kingdom Exchequer by various means. For example, I think that we can reasonably require that the taxpayer shall have taken all the steps open to him to minimise the amount of tax he is asked to pay by the Indian Government, and matters of that kind. But, as I say, we accept the moral obligation. We think that the best way is to pay compensation, and we are working on a scheme to do that. My estimate at the moment of the cost—it is considerably in excess of the cost envisaged in the Clause, but that is not a matter we can take into account—is about £40,000 a year. A more exact figure will be available, I hope, before long and, of course, I shall give the House full details of the arrangement when it is worked out.
§ Mr. Joynson-Hicks
There are two points which I should like to raise. First, the right hon. Gentleman made no reference to any geographical limitations. May we take it that the pensioners whom he is seeking to protect need not necessarily be resident in this country? Secondly, one of the most vital things for the pensioner is security. I appreciate that the right hon. Gentleman cannot adumbrate the details of his scheme, but can he give an assurance that the scheme he is going to put forward will provide for that security for the future—that it will be a permanent scheme so far as the pensioners are concerned?
§ Mr. Gaitskell
As regards the second question, we will do our best to do that subject to the necessary caution one has to have in these matters. As to the first point, I do not think, having examined the position, we can limit this compensation to persons resident in the United Kingdom. There will be questions of double taxation that may arise in relation to the countries where they are resident.
§ Sir Patrick Spens (Kensington, South)
May I say how grateful the pensioners concerned will be for the announcement made by the Chancellor of the Exchequer? I should like to make it quite clear that I am not myself one of those affected. I happen to be an ex-judge for whom, as with other ex-judges who are not members of the Indian Civil Service, the late Parliament made special provision at the end of 1948. Fortunately for us our pensions are paid by moneys supplied by Parliament, but nonetheless one's sympathies are with one's judicial colleagues and others who were in the Services. We are very glad that this action has been taken by the. Government.
The Chancellor said that the change took place on the transfer of power. I do not think the legal position is strictly that. Under the Independence Act the existing law was. in fact, continued until the Constituent Assembly thought fit to alter it. All that has happened is exactly what one might expect, and that is that in the new constitution a provision similar to Section 272 of the India Act was not included.
Thereupon, legally all these pensions payable to persons resident outside India would automatically come within the existing taxation statutes of the Government of India. They are very much like ours. They have Commissioners of Inland Revenue, and, unless there are statutory exceptions provided, they would naturally have to apply the ordinary Indian taxation law to incomes received from India by those resident outside India. That is why I think the change took place in April of this year. But this method of safeguard proposed by the Government is very important. Nothing that we were able to suggest fully protected those receiving the smaller pensions and entitled to family allowances from this country. No provision could be made for a full set-off against what they had to pay in India. Nor could our suggestions protect those not resident here.
There is, of course, the final and more important point which must not be lost sight of. I understand that Indian Income Tax has hitherto been deducted as if the pensions were the sole income of the recipients. But Indian Income Tax law provides that deductions may be 131 made with reference to the recipients' world income. In individual cases deductions may therefore be greatly increased. I understand that the Chancellor has generally and generously promised that compensation will be provided not only for those resident in this country, but also for those resident outside, to the amount of the deductions made, subject, of course, to them taking advantage of every means by which they can reduce the claim that they make on this country. That seems to me extremely fair, and I believe it will relieve a great deal of the anxiety of the pensioners concerned. I am only glad that the right hon. Gentleman has at last made this pronouncement in order to assuage those widespread anxieties.
§ Mr. Heathcoat Amory (Tiverton)
The intimation the Chancellor of the Exchequer has given will, I am sure, be welcome to the whole Committee. We are delighted that the Government are to undertake the moral obligation to these people who have done so much in the past not only for this country, but for India and Pakistan, too. There is only one question I should like to put. Would the right hon. Gentleman tell the Committee the date on which the payment of this compensation will apply? Will it apply from the date on which Indian Income Tax was applied to these pensioners?
§ Colonel Gomme-Duncan
I also am very gratified to learn from the Chancellor that these people are to be given a fair deal. I should like to ask a question about progressive taxation on the part of the Indian Government, in the hope that the compensation the Chancellor has mentioned will cover progressive increases in taxation by the Indian Government if such be imposed, as there are signs that such will be the case. It may be that the right hon. Gentleman. cannot tell us immediately, but I hope that he will be able to do so at some later date.
The other point about which I am not too clear is about Indian incomes other than pensions—small investments which officers or civil servants may have in industry in India, which bring them in a little extra income on the Indian basis. It will be appreciated by the Chancellor, 132 when he states that the Government have a moral duty in this matter, that the moral duty is based upon the contract, which every member of the Civil Service or the Armed Forces in India entered into when he began his job, that he should get a pension in full laid down for his particular service according to the particular grade he had reached at the time of his retirement.
Therefore, if the Indian income and other items make the tax levelled at a higher rate than the pension only, what will be the position? I assume that the extra civil income from industry or investment will not be counted in relieving the officer or other person of taxation upon the pension. The contract which was entered into has worried these people as much as anything. They say, quite rightly: "We entered into the service on certain terms, which were one of the reasons for our accepting the job in the Indian Army or Civil Service." I hope that in the details of the paper to be issued the Government will keep that point fully in mind. I think they will, from what the Chancellor has said about accepting moral responsibility for carrying out the contract.
§ Mr. Gaitskell
I should like to make it plain that the obligation I have accepted is limited to pensions. This is quite a separate matter from the other forms of Income Tax which are to be treated under the Double Taxation Agreement—or, rather, under the unilateral action which took place last year. We are still trying to conclude the Double Taxation Agreement, unfortunately not so far with success. When this applies,- it would apply in such a way as to repay to them the taxation which India has claimed, I think it is from April, when the Indian Government imposed the tax. I do not think I can say any more this evening about it.
§ Sir P. Spens
The point really is that up to date the pensions have, in fact, been taxed by the Indian Government as if they were the recipients' only income. The Government have the power to assess the rate of tax on the pension and other income, both Indian and other. If that is done, and the pension is taxed at the higher rate, does the promise of the Chancellor include the tax on the pension at whatever rate it is assessed in India?
§ Mr. Gaitskell
If the hon. and learned Gentleman will allow me time to think that one over, I will bear in mind what he has said. I would not like to commit myself about it now.
§ Mr. Low
Before I ask leave to withdraw this Motion, I wish to say how pleased I was to hear the Chancellor give in to the quite narrow principle of the Clause and also on the much proader principle of the moral obligation of His Majesty's Government. I was very glad, but there were many others besides myself who were not only glad but somewhat surprised, because it was only on 7th June that the Secretary of State for Commonwealth Relations, who ought to have known better, refused to accept that obligation.
§ Mr. Low
I was not trying to widen it. I was proposing to put the lid on it very quickly. I will leave that point, which shows why I was surprised, and I will advise the Committee that although it was quite possible for the Chancellor to make a concession, which we are very happy he did, on the broad general principle, it was not possible for any Member of the Committee to put down a new Clause going anything like so wide. Many of us have been mentioning this at Question time and we wanted another opportunity to raise it. I am glad that we shall now no longer need it. This was the only opportunity we had of raising the position of these unhappy pensioners, who will now be far less unhappy. I beg to ask leave to withdraw the Motion.
§ Motion and Clause, by leave, withdrawn.