GOVERNMENT OF INDIA (ORISSA AND SIND GOVERNORS' ALLOWANCES AND PRIVILEGES) ORDER, 1940. (Hansard, 27 February 1940)

§ THE SECRETARY OF STATE FOR INDIA AND BURMA (THE MARQUESS OF ZETLAND)
My Lords, these seven Draft Orders have been examined by the India and Burma Orders Committee and in the case of six of them they report that the Orders can be passed by the House without special attention, and that no further inquiry is necessary before the House proceeds to a decision on the Resolution to approve the said Orders. With regard to one of them, namely, the Government of India (Distribution of Revenues) (Amendment) Order, 1940, they made a separate Report to the effect that in the opinion of the Committee the Order cannot be passed by the House without special attention, but that no further inquiry is necessary before the House proceeds to a decision on the Resolution to approve the said Order. In these circumstances it seems necessary for me to explain as briefly as may be the purpose of what I am bound to confess is a very complicated matter. The Draft Order deals with the distribution of 607 revenues between the Federal Government of the future, or the Central Government of the present time, and the Governments of the Provinces. It was laid down by Section 138 of the Government of India Act, 1935, that the proceeds of Income Tax should be collected by the Central Government but that at an unspecified date in the future an unspecified amount of the proceeds of Income Tax should be assigned to the Provincial Governments. The question therefore with which we were faced was this: how much of the proceeds of Income Tax was to be assigned to the Provinces, and how soon was any part of the proceeds to be assigned to the Provinces? Upon that the Act itself was silent. It merely said that these things were to be prescribed, and the meaning of the word "prescribed" in its technical sense as used in the Act is "determined by Order in Council."
Let me refer your Lordships first of all to the guiding principles which were laid down in the Act itself. Section 138 says: Taxes on income other than agricultural income shall be levied and collected by the Federation, but a prescribed percentage of the net proceeds in any financial year of any such tax…shall be assigned to the Provinces and to the Federated States, if any.… At the present time, of course, Federation not having come into operation, there are no Federated States, and all we are concerned with therefore are the Provinces. That was the first guiding principle. The second guiding principle was laid down in subsection (2) of the same section in these words: Notwithstanding anything in the preceding subsection, the Federation may retain out of the moneys assigned by that subsection to Provinces and States—

(a) in each year of a prescribed period such sum as may be prescribed; and

(b) in each year of a further prescribed period a sum less than that retained in the preceding year by an amount, being the same amount in each year, so calculated that the sum to be retained in the last year of the period will be equal to the amount of each such annual reduction:"

Your Lordships, if you have been able to follow the provisions of the section, will see that we have to answer four distinct questions. The first is: how much of the divisible pool provided by the proceeds of Income Tax is to be assigned to the Provinces? The second question is: 608 during what period is the Federal Government or the Central Government to be entitled to retain from the Provincial part of the pool a specified share? The third question is: how much of the Provincial pool is the Central Government to be entitled to retain during the first of the two time-periods? And the last question is: what is to be the duration of the second period of time during which the Federal Government gradually reduces the amount which it has been retaining during the first period of time from the Provincial share of the pool? It was quite obvious that it was impossible for anybody to answer those questions without very expert advice, and your Lordships will perhaps recall that I was successful in persuading Sir Otto Niemeyer to proceed to India to make an investigation of the whole financial position and to provide me with answers to, amongst other questions, those which are propounded in respect of Section 138 of the Act.
Sir Otto Niemeyer had no great difficulty in determining the percentage of the divisible pool which should be eventually assigned to the Provinces. The figure he recommended was 50 per cent.—half the divisible pool. He had no great difficulty in determining the duration of the two time-periods which had to be laid down. He suggested in each case a period of five years. But when it came to answering the question how much of the Provincial share of the divisible pool the Centre ought to be entitled to retain during the first five-year period he found himself in much greater difficulty. There were too many uncertain factors in the problem to make it possible to estimate the figures with any certainty; and he therefore approached the problem from a somewhat different angle. He took two of the sources of Central revenue together—Income Tax and the net revenue from the railways—and he asked himself, basing himself, of course, upon past Budgets, what actual sum of money the Central Government would be likely to require out of those two sources of revenue put together during the next five years. The figure at which he arrived was thirteen crores of rupees. He proposed, therefore, that we should assign to the Central Government out of these two sources of income, every year for five years, a sum of thirteen crores of rupees, and that the Provinces should take anything there might be over and above that 609 sum from the two sources of revenue. That recommendation and his other recommendations were accepted and were given the effect of law by Parliament through the agency of an Order in Council.
Perhaps I can explain the thing most simply to your Lordships by giving you an actual illustration of how the Niemeyer formula has worked. I give you the figures of a typical pre-war Indian Budget. The amount from Income Tax in the divisible pool stands, in this Budget, at 12½ crores. The net revenue from the railways in the same Budget stands at 2¼ crores, making a total pool of 14¾ crores. Deducting thirteen crores from that—the figure laid down as the amount required by the Central Government—a sum of of 1¾ crores is left, which went to the Provinces. Very well; the Niemeyer formula so far has worked very fairly and quite satisfactorily. But Sir Otto Niemeyer could not, of course, foresee that there would be a world war, and the effect of the world war upon the financial position of India has been very considerable. In the first place, one of the main sources of the revenue of the Central Government, namely the Customs Duty, has been seriously affected. Owing to the restriction of imports, the revenue from Customs Duties has fallen off by a sum which is likely to be this year something like four crores of rupees; and whereas the revenue from Customs has fallen off, expenditure under the heading of Defence has inevitably increased.
Therefore there is likely to be a very considerable difference between revenue and expenditure in the current Indian Budget, unless the Central Government is able to obtain a larger share of the proceeds of Income Tax and of the railway revenue. Curiously enough, the proceeds of Income Tax and the revenue from the railways are rising and look like continuing to rise, and the result of that, if we were to adhere to the Niemeyer formula, would be this. While the Central Government was losing money over the Customs, and incurring additional expenditure in connection with defence, it could receive no more from the railways and the Income Tax than the thirteen crores laid down; whereas the Provinces would receive a wholly unexpected windfall of a considerable amount. It is clear that that is a situation which must be remedied, and we are 610 proposing, therefore, in the Draft Order which is now before your Lordships to go back to the actual guiding principles of the Act itself: to leave the question of the railway revenue out of the formula altogether, and to assign to the Central Government during each year of the first five-year period—and there are now only three years of the five-year period left—a specified sum. The question is: what is that specified sum to be? We have taken the actual amount which has passed through the Central Government during the last three years from the Provincial share of the Income Tax pool, and we have found that on the average it has been rather more than 4½ crores of rupees. We propose, therefore, to take for our figure the round sum of 4½ crores of rupees.
Now let me illustrate to your Lordships, by applying that formula to the same Budget figures that I have already used, how it will work. The divisible Income Tax pool, as I have already mentioned, in this typical pre-war budget is 12½ crores of rupees. Under the provision that eventually the Provinces are to receive 50 per cent. of the pool and the Central Government 50 per cent., the Central Government retains its 50 per cent. of 12½ crores—that is to say, 6¼ crores. Adding to that the 4½ crores which it is to retain during each of the next two years from the Provincial share of the pool, it receives 10¾ crores; but in addition to that, of course, it gets the whole of the railway revenue. The Provinces still get the 1¾ crores, as they did under the older formula, and in the event of there being any steep rise from now onwards in the proceeds of the Income Tax the Central Government and the Provincial Governments will each get their equal share of the increase.
We have finally, therefore, only to consider the position during the five years of the second five-year period, when the Central Government is gradually to reduce the amount which it has been retaining from the Provincial share of the pool; and a simple arithmetical calculation shows that if you are to reduce the sum of 4½ crores, which you are taking from the Provincial pool, by equal amounts for five years until you reach zero, you must reduce the amount you are retaining by three-quarters of a crore in the first year, a crore and a half in the second year, 611 and so on, with the addition of three-quarters of a crore every year until you come to the end of the second five-year period in the spring of 1947, when you will have reached equilibrium, and the proceeds of the Income Tax will then be divided equally between the Federal Government—if a Federal Government exists at that time—and the Provinces.
My Lords, I am very conscious that this is a very complicated matter, and I am afraid a rather dry one; but I hope that I have been able to make the general principles on which we are proceeding intelligible to your Lordships, and that you will therefore be willing in the circumstances of the present time to agree to the Draft Orders.

§ LORD SNELL
My Lords, the matter which the noble Marquess has presented to your Lordships is one of very great complication and can be fully understood, I feel, only after a close examination of all the documents that may be concerned. It would appear to require almost superhuman wisdom to allocate with equity the sums available between one claimant for them and another; but I understand the noble Marquess to assure us that no constitutional change of a controversial character is involved in these particular Orders, and not only the one on which he has addressed your Lordships. I should like to know, however, if that is possible, what is the Indian reaction to these proposals. Personally, I am very anxious that the Provinces should not be impoverished by any new judgment to the extent that they will be unable to pursue a constructive programme of their own. At this particular time, when there is a controversy with Provincial Governments, it is highly advisable that we should not give to them any kind of financial grievance. I confess that I listened with a good deal of attention to what the noble Marquess said, and if I do not fully understand the implications of this Order he will forgive me. The difficulties of the Indian Income Tax seem to be almost as great as those of the Income Tax of our own country, which I 612 also do not understand; but I am willing, for the purpose of this afternoon's debate, to accept the assurance of the noble Marquess that no constitutional difficulty arises and that it is merely a question of equitable allocation of the funds available to the Central and Provincial authorities. I should like to ask however whether, if in the working out of this Order it does prove that there is anything inequitable, the matter will be again reconsidered.

§ THE MARQUESS OF ZETLAND
I am obliged to the noble Lord for what he has said. The various Provincial Governments were consulted with regard to a formula which was a little less favourable to them than the one which I have now adopted, and one would naturally have expected that all the Provincial Governments with one voice would have raised their opposition to the proposal; but, somewhat to my astonishment, that was not so. It is true that some of the Provincial Governments objected.

§ LORD SNELL
Was this before the Provincial Governments resigned, or since?

§ THE MARQUESS OF ZETLAND
Since; but the noble Lord will remember that not all the Provincial Governments have resigned, and some of those Provincial Governments which have not resigned, namely, popular, responsible Governments, have accepted the formula. On the other hand, one or two of the Governments which are now autocratic Governments, in the hands of the Governor, objected. I can quite understand that they should. They wanted to get hold of as much money as they could, and I do not blame them; but the fact that some of the Provincial Governments appreciated the difficulties occasioned in the financial system by the outbreak of war and accepted the formula which I am now proposing to your Lordships shows, I think, that it cannot be inherently unfair to the Provincial Governments.
What really would have happened would have been this. As I have said, if the Niemeyer formula had been retained, the Provincial Governments would have received a wholly unexpected windfall. Everyone, of course, likes receiving unexpected windfalls, but they would 613 have received it at the expense of the Central Government; and, for the reasons which I have explained, it is essential that the finances of the Central Government should maintain their stability, particularly in time of war. There was only one other question that the noble Lord put to me, and that is whether any change of a constitutional nature was involved. It certainly involves no change of a constitutional nature at all; in fact, the formula which I have adopted in this Draft Order is closer to the provisions of the Act than the Niemeyer formula itself. I hope that the noble Lord will be satisfied on those two points.