Thursday, the 4th November 1948

85. We assume that the ultimate object of theFederation must be to secure for the federating States thesame, or nearly the same standards of economic development,fiscal arrangements and administrative efficiency as in theProvinces. It is only against this background that theStates can have the same identity of interest with the Unionas the Provinces have.

86. The first difficulty met with in our investigationis that many of the smaller States have neither a budget noreffective audit, so that adequate and reliable informationabout their financial position, on a basis permittingcomparison with Provinces, is not available. We recommendaccordingly that it should be made obligatory within asshort a period as possible for each State to arrange for thepreparation and authorisation of a periodical budget and themaintenance of proper accounts and audit and to send copiesof its budget, accounts and audit reports to the UnionGovernment.

87. In the absence of sufficient data, we are not in aposition to make recommendations other than of a generalnature. We are clear in our mind that the States shouldgradually develop all the taxes in the Provinciallegislative List so that they may correspondingly give upreliance on taxes in the Federal Legislative List. Thisprocess however would necessarily take some time and in themeanwhile it will be necessary to have transitionalarrangements.

88. We will now take up Land Customs. We do notrecommend the immediate abolition of Land Customs, for wefind that such a course would lead to a serious dislocationin the finances of many States. Moreover, where there is nolarge re-export trade, these land customs, though a possiblesource of annoyance, are really of the nature of octroi dutylevied at a few point of entry. On a long view, however, inthe interests of the States themselves, these duties mightbe replaced by other taxes, such as sales and turn-overtaxes. We recommend accordingly that Land Customs now leviedby the States should be abolished during the next 10 years.As a first step it may be arranged that -

(1) a State shall not in future levy land customs on a commodity on which there is no such duty now;

(2) a State shall not after a fixed date, increase the rate on any commodity; and

(3) a State levying land customs should grant refunds on re-exports.

Gradual abolition over a period of 10 years should notcause any serious dislocation to the finances of theseStates, nor can there be any question of paying anycompensation to these States, for the simple reason thatthe Union Government will not gain any correspondingrevenue.

89. Maritime customs should be uniform all through theUnion, and the Federal Government should take over theadministration of such customs in all the maritime States.If this arrangement results in the loss of any State of therevenue now enjoyed by it, it is only fair that the Stateshould be compensated for the loss. Pending determination of the appropriate compensation in each case by a StatesCommission, the appointment of which we recommend in a laterparagraph, each State may be given an annual grant equal tothe average revenue from this source during the last threeyears. 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 inall the States, but those States which now enjoy the benefitof a part or the whole of these revenues raised in theirareas should, in lieu of such benefit, receive grants on thebasis of the average revenue enjoyed by them from thesesources during the last three years. In our opinion, neitherthis arrangement nor the one referred to in the foregoingparagraph should present any difficulty from the purelyfinancial point of view either to the Union or to theStates.

91. The Indian Income-Tax Act, with such modificationas may be considered necessary by the President, may beapplied to all the Federating States. The net proceeds of the tax

attributed to the States may be credited to a StatesIncome-Tax Pool and such portion not being less than 75 percent of the net proceeds attributable to each State, asdetermined by the President, may be paid back to the States.

We are aware that many problems will arise in thecourse of allocating these proceeds between the differentstates, but they are not insoluble, and can be solved onlines similar to those followed in allocating similarrevenues between the Provinces.

92. The need for a uniform system of income-tax both inthe Provinces and in the States has become urgent not onlybecause of the facilities afforded for evasion and avoidanceof the Central Income-tax by the existence of States withlower rates of taxation or no tax at all, but also becauseit is alleged that industries are being divertedartificially by the incentive of lower taxation to areas notinherently suited for the industries.

93. Though we do not favour any abrupt change in thestatus quo, we do not attach much weight to the argumentthat the States are, as a whole, industrially backward andthat they cannot, therefore, stand the same high rates oftaxation, particularly income-tax, as the Provinces can. Ifthe productive capacity of a State, and consequently itslevel of income, is low, it follows that the State will nothave to contribute much by way of tax if it falls in linewith the Provinces. If, on the other hand, the point is thatindustries should be artificially stimulated in the Statessomehow by the incentive of lower taxes, it is obvious thatif the State is not suited for industrial development, thecost of bolstering up its industries must ultimately fallupon the Provinces and other States.

94. As already stated, we are not in a position to makedetailed recommendations regarding the States. We recommendfor this purpose the establishment of a States Commissionwith five members who should possess wide knowledge of thefinancial administration of Provincial, Federal or StateGovernments. Preferably, one of these members might be amember of the Finance Commission (for Provinces) referred toearlier in this report. The Commission should advise thePresident, as also the States, about their financial systemsand suggest methods by means of which the States coulddevelop their resources and fall into line with theProvinces as quickly as possible. One of the first tasks of the Commission will be to examine in detail the privilegesand immunities enjoyed by each State, and also the connectedliabilities, if any, and recommended a suitable basis ofcompensation for the extinction of such rights andliabilities. We consider in particular that the StatesCommission should deal with the problems before it withunderstanding and sympathy and suggest solutions which wouldnot only be fair both to the States and to the Provinces,but enable the States to come up to the Provincial standardsin as short a time as possible.

95. The States which come into the above arrangementswould pay their contribution for Defence and other Centralservices through the share of the net proceeds of Centraltaxes retained by the Centre, and nothing more should beexpected from those States. On the other hand, the Stateswhich accede but do not come into the above arrangements,should pay a contribution to the Centre, the amount of whichshould be determined by the States Commission having regardto all the relevant factors.

96. The constitutional arrangements in this respect,particularly during the interregnum of 15 years, should, inour opinion, be kept very flexible. The President should beenabled by order to adopt any financial arrangement he mayfind expedient with each State until such arrangement isaltered by an Act of the Federal Legislature after necessaryconsultation with the States.

97. While the outlines which we have indicated aboveare capable of being applied to most of the major or evenmiddle-sided States, it is, in our opinion, necessary togroup together a number of smaller States in sizableadministrative units before they can be brought into anyreasonable financial


98. We are sorry that we have not been able tocontribute anything more precise then we have done to thispart of the terms of reference to us.

99. We enclose two Appendices (IV and V) one of whichsets out in detail, as far as we have been able to collect,the rights and immunities enjoyed by various States, and theother setting out the total budgets of certain States andthe part played by Land Customs in those budgets.

Summary of Recommendations

100. (1) No major change to be made in the list oftaxes in Federal Legislative List as recommended by theUnion Powers Committee. (Para. 30)*

(2) The limit of Rs. 50 to be raised to Rs. 250 fortaxes on professions etc. levied by Local Bodies. (Para.30)*

(3) An entry to be made in the Federal Legislative Listof a new item "Stock Exchanges and Futures Markets" etc.(Para. 30)*

(4) A few minor changes of a drafting nature to be madein the list of taxes in the Provincial Legislative List; andno new items for insertion in the Provincial LegislativeList. (Paras. 31-33)*

(5) The Centre to retain the whole of the net proceedsof the following taxes, viz., (a) Duties of Customsincluding Export Duties; (b) tax on capital value of assets,etc.; (c) taxes on Railway fares and freights; and (d)Central Excises other than on tobacco. (Para. 34)*

(6) The grant of fixed assignments for a period ofyears to the jute-growing provinces to make up for theirloss of revenue. (Paras. 35-36)*

(7) The net proceeds of the following taxes to beshared with the Provincial Governments, viz. (1) Income-tax,including Corporation Tax; (2) Central Excise on Tobacco;(3) Estate and Succession Duties. (Paras. 38-42)*

(8) The suggestion that the Centre should be allottedonly 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 thebenefit of the provinces. (Paras. 43 and 44)*.

(10) Larger fixed subventions than now, necessary forAssam and Orissa, and subventions for limited periods forEast Punjab and West Bengal, but no precise figuresrecommended for lack of data. (Paras. 45 and 46)*

(11) Grants-in-aid on the Australian model notfavoured. (Para. 48)*

(12) Merging the tax on agricultural income in theCentral Income-tax and similarly the Estate and SuccessionDuties on agricultural property in the similar duties onproperty in general to be examined in consultation withProvincial Government and transfers made from the ProvincialList of subjects, if necessary. (Para. 49)*

(13) Not less than 60 per cent. of the net proceeds ofIncome-tax, including Corporation Tax and the tax on Federalemoluments, to be divided between Provinces in the followingmanner: -

20 per cent. on the basis of population, 35 percent. onthe basis of collection and 5 per cent as an adjustingfactor to mitigate hardship. (Paras. 55 and 56)*

(14) Not less than 50 per cent of the net proceeds of the excise on tobacco to be divided between Provinces on thebasis of estimated consumption. (Para. 57)*

(15) Not less than 60 per cent. of the net proceedsfrom Succession and Estate. Duties to be divided between theProvinces on the following basis: - Duties in

* Reference to paras. are to paras. in the original reports.

respect of real property on the basis of allocation of theproperty, and of the balance, three-fourths on the basis of the residence of the deceased and one-fourth o the basis ofpopulation. (Para. 58)*

(16) Net effect of the recommendations, to transferannually a sum of the order of Rs. 30 crores from the Centreto the Provinces. (Para. 59)*

(17) A Finance Commission with a High Court Judge orex-High Court Judge as Chairman and four other members to beentrusted with the following functions: - viz. (a) allocationbetween the Provinces of their shares of centrallyadministered taxes assigned to them; (b) to considerapplications for grants-in-aid for Provinces and reportthereon; (c) to consider and report on other mattersreferred to it by the President.

(Paras. 65-67)*

(18) The Commission to review the position every fiveyears, or, in special circumstances, earlier. (Para. 70)*

(19) A tax levied by the Centre under its residuarypowers, not to enure to the benefit of a non-acceding Stateunless it agrees to accede to the Centre in respect of thatsubject. (Para. 72)*

(20) Trading operations of Units, as also of LocalBodies, whether carried on within or without theirjurisdiction, to be liable to Central Income-tax or acontribution in lieu, but quasi-trading operationsincidental to the normal functions of Government not to betaxed. (Para. 74)*

(21) The President to be empowered in an emergency tosuspend or vary the normal financial provisions in theConstitution. (Para. 75)*

(22) A few minor changes suggested in regard to theprocedure in financial matters. (Para. 77)*

(23) No change to be made in respect of borrowingpowers of Units. - (Paras. 81-82)*

(24) Early arrangement to be made for the preparationof regulate budgets and the maintenance of appropriateaccounts and audit by all acceding States. (Para. 86)*

(25) States gradually to develop all the taxes in theProvincial Legislative List and correspondingly give uptaxes in the Federal List. (Para. 87)*

(26) Maritime customs and exicises in States to betaken over by the Centre, the States being compensatedtherefor if necessary. (Paras. 89 and 90)*

(27) The Indian Income-tax Act to be applied to all thefederating States, and 75 per cent. of the net proceedsattributable to the States to be divided between them.(Para. 91)*

(28) A States Commission to be set up with five memberswith wide knowledge of the financial administration ofProvincial, Federal or State Governments. (Para. 94)*

(29) The States Commission to examine the privilegesand immunities etc. of States and to suggest suitablecompensation for the extinction of these rights andliabilities. (Para. 94)*

(30) States which do not come into the arrangements topay a contribution to the Centre to be determined by theStates Commission. (Para. 95)*

(31) The interim Constitutional arrangements with theStates to be flexible and small States to be groupedtogether. (Paras. 96 and 97)*


]* Reference to paras. are to paras. in the original reports.


101. Some of our recommendations would need to beemodied in the Constitution while others would be giveneffect to by the order of the President. We have attempted adraft of the necessary provisions in the Constitution togive effect to the former; and these are set out in AppendixVI.*

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.




New Delhi:

5th December 1947.


* Reference to paras. are to paras, in the original reports.



( Not included )


a) Provinces

(in lakhs of Rupees)

Province Provincial RevenueDevolution Grants from the centre including Dev. GrantsTotal RevenueTotal Revenue ExpenditureCumulative Deficit (-)Surplus (+)Balances in Reserve Funds on 31st March 1947Closing balance on 31st March 1947Madras2,63,2724,122,87,392,84,22+ 3,1729,18 56Bombay1,92,52 26,512,19,032,06,69+ 12,3417,07 42Bengal1,65,35 * 69,922,35,272,51,13 *- 15,86 25 2,48United Provinces1,79,33 26,772,06,102,04,99+ 1,1117,31 6,43Punjab1,84,12 11,51 1,95,631,60,46+ 35,17 6,79 47Bihar 75,06 51,10

90,16 81,81+ 8,35 7,78 1,07C.P. & Berar 63,61 7,69 71,30 70,661+ 64 8,14 2,41Assam 35,54 7,89 43,43 42,89+ 54 1,02 1,54N.W.F.P 11,94 11,55 23,49 22,95+ 54 15

63Orissa 17,71 7,93 25,64 25,11+ 53 10 60Sind 55,19 10,27 ** 65,46 60,04 + 5,42 8,14 8 * 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)

Year Revenue

Expenditure Civil Defence TotalDeficit(-) / Surplus (+)1937 - 38 86,61 39,39 47,22 86,61 -- 1938 - 39 84,52 38,97 46,18 85,15 - 631939 - 40 94,57 45,03 49,54 94,57 --1940 - 41 1,07,65 40,57 73,61 1,14,18 -6,531941 - 42 1,34,57 43,33 1,03,93 1,47,26 -12,691942 - 43 1,77,12 74,28 2,14,62 2,88,90-1,11,781943 - 44 2,49,95 81,44 3,58,40 4,39,84-1,89,891944 - 45 3,35,71 1,00,77 3,95,49 4,96,26-1,60,551945 - 46 3,61,18 1,24,38 3,60,23 4,84,61-1,23,431946 - 47(Revised Estimate) 3,36,19 1,43,36 2,38,11 3,81,47 -45,28 TOTAL 19,68,07 7,31,52 18,87,33 26,18,85

-6,50,78 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) Year Share of Jute Export Duty Share of Income taxGrants in aid and Subventions

1937 - 38 2,65 1,25 3,141938 - 39 2,51 1,50 3,051939 - 40 2,56 2,79

3,041940 - 41 1,85 4,16 3,041941 - 42 1,95 7,39 3,031942 - 43 1,40 10,90 2,761943 - 44 1,38 19,50 5,75(a)1944 - 45 1,49 26,56 8,70(b)1945 - 46 1,57 28,75 9,70(c)1946 - 47(Revised Estimate) 2,80 29,87

1,70 TOTAL 20,161,32,67 43,91(d)(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 BSUMMARY OF PROVINCIAL SUGGESTIONSPart I - Taxes TaxAssignment existing or contemplatedProvinces proposingAssignment Proposed for provinces12341. Income tax (other than on agricultural income).[Sec. 138 of the Government of India Act, 1935 and item 54 in Federal Legislative List.]A maximum of 50% of the net proceeds to be distributed among provinces.MadrasBombay U.P.C.P.West BengalBihar Orissa AssamA minimum of 50% of net proceeds.75% of income tax and corporation tax receipts for provinces or 75% of the corporation, income and super taxes paid by residents in a province to be earmarked for that province. From the divisible pool from corporation and income tax 33 1/3 % should be alloted to Bombay which is the largest single contributor to the revenue.

50% for provinces on population basis.

75% Tax on Agricultural income also sholud be collected by centre.

60 % to be distributed in propotion to the collection of these taxes in provinces

Even on the basis of population Bihar should have received 17 crores as against 13 allotted. In future none of the poorer

provinces should get an amount lower that that payable on the basis of population. The distribution should be governed not by residence of the assessees but by the place where the income is earned. The basic factors must be population and the place where the income is earned. If any modifications are to be made they must be done with the object of assisting the financially poorer provinces among which Bihar is at the very bottom.

Distribution of 50 % may continue as at present but the percentages should be revised taking into consideration the factor also of the state of development in addition to those of corporation and residence used by Sir Otto. Due weightage to be given to undeveloped provinces. Should the provincial share exceed 12 crores, 75 % of the exceeds may be left to the discretion of the Central Govt.

After the partition the East Punjab Province faces a deficit of about 3 crores : its share of income tax proceeds should be very appreciably increased to meet the deficit fully

75 % . There should be a drastic revision of the shares of provinces in income tax receipts having regard to the facts that Sind and N.W.F.P. go out that the amounts now available in the divisible pool have enormously exceeded the original estimate and some provinces are now getting , as a result income tax amounts exceeding the entire revenues of some others


2. Corporation Tax. [ Items 46 in federal Leg. List]Wholly FederalMadrasBombayU.P.C.P.

At least 50 % of the net proceed to go to provinces

75 % for provinces

50 % for provinces on population basis

C.P. suggests the inclusion of Corporation tax and taxes on Capital assets in taxes on income for distribution.

3. Central Excise duties (on tobacco and other goods except alcoholic liquors. (item 46)There is provision for in part [ Sec. 140 (1) ] but not so far sharedMadrasBombayU.P.C.P.West BengalBiharOrissaAssamShould be entirely provincialized.Should be provincialized or no less than 50 % of the net proceeds on each producing unit to be allotted to that unit.

Should be entirely provincialized and distributed on population basis.

Should be provincialized or 75 % should be allotted to provinces. The duties should cover some more articles such as rubber goods, papers etc.

25 % of the federal excise should be allocated to provinces .

A portion of the duty sholud be distributed on the basis of the yields in different provinces.

A portion may be distributed to provinces gradually particularly as the provinces are now faced with the loss of their revenue.

At least 75 % of the excise duty collected on her oil should be allotted to Assam. atleast 50 % of the other excise duties (Sugar, Steel, Matches, Tobacco and Beetle Nuts) to be given to the producing units on a formula combining factors of province of production, size of population and level of revenue expenditure.

4. Export Duties on Jute and Jute products62 1/2 % of net proceeds [ Section 140(2) ]West BengalBihar75 % should accrue to the provinces growing and manufacturing jute.The entire net proceeds of the jute producing provinces should be distributed propotionately among the concerned provinces.5. Export Duties .....MadrasBombayU.P.C.P.West BengalOrissaAssamAt least 50 % of net proceeds of all export duties should be distributed to provinces according to principles formulated be federal legislature. Analogy of jute duty arrangement cited.50 % of net proceeds.

All export duties should be entirely provincialized and distributed on population basis.

Export duty on minerals (coal and manganese etc.) sholud be allotted to C.p. ( jute analogy)

25 % of net proceeds of export duties other than jute

A portion may be distributed to provinces gradualyy particularly as the provinces are now faced with the loss of their excise revenue.

At least 75 % of the sale proceeds of export duty realised on her tea.6. Succession duties, Federal Stamp duties, Terminal Taxes (Railway & Air), Taxes on

Railway Fares & Freights.Provided for full distribution to provinces ( Sec. 137)MadrasIt should be provided that the net proceeds shall not form part of the revenues of the federation but shall be distributed to the provinces according to principles formulated by the Federation.The provisions should be fully utilized to augment the resources of provinces.Succession duties in respect also of agricultural land should be transfered from the provincial to the Federal list. The duty should be on ad valoerm basis.

The provincial governments should be empowered to levy them if the Central government do not levy them.

50 percent of income from increase in railway fares and freights above the levels determined by the Railway Budget of February 1947 to go to provinces on population ratios weighted by a given factor in favour of provinces with smaller revenues and expenditure.

7. State LatteriesFederal ( item Federal List )C.P.

Should be transferred to Provincial list.8. Taxes on Trades, professions, callings and employmentProvincial tax Sec. 142-A, Item 46 in Provincial list.The limit of Rs. 50 p.a. should be removed and gradation according to capacity should be provided for.9. Taxes on sales and advertisements.(Item 48 in Provincial list)Sales tax should be levied in all provinces and ascending statePART II - NON TAX PROPOSALSTAXAssignments existing or contemplatingProvinces proposingAssignment proposed for provinces1234U.P.1) The inequity of Niemeyer Award should be rectified and central allocation for U.P. should aim at a minimum of 6 or 7 crores p.a. going upto 12 or 13 crores in the space of 10 years.2) The consolidated debt due from the U.P. to the Govt. of India shoulb be wiped off3) The Govt. of India should share losses on the food grains scheme as originally promised by them.C.P.

A system of central grants derived after taking into account such factors as natural resources, stage of industrial development, taxable capacity, etc. is essential, An expert financial enquiry should be undertaken

West Bengal1) Provision for federal aid to provinces for social and amelioration work2) There should be financial commission on the lines of the Commonwealth Grants Commission in AustraliaBiharIf any grants in aid or subventions are given in future the per capita revenue and expenditure in each province during the last 10 years should be kept in mind. Those with low per capita revenue should be given greater assistance than the richer.

OrissaThe broad lines of the present allocation may be maintained in the new Constitution; but the subvention of 40 lakhs fixed for the province should be increased; it should be stated as a percentage of the revenues of the central govt. and in any case there should be a minimum annual subvention of 150 lakhs.Enforcementof the policy of prohibition and judicial panchayats will make the provincial administration impossible unless the central government multiplies its grants and subventions very liberally

Abolition of the Zamindari system would seriously affect Land revenue and stamps. Make every one pay according to his capacity. Provide for a well regularised house tax on a provincial scale ; a tax on passengers.

Nationalzation of industry will wash away the twin anchor sheets of Central finance- Income tax and Customs.

East Punjab

(1) Particularly as the East Punjab is now to be the frontier of the Indian Dominion, there is a strong case for a recurring subvention of more than 1 crore for it ( N.W.F.P used to get 1 crore).

(2) A non-recurring subvention for the capital of the province.

(Orissa was given such a grant .AssamThere is an obvious cae for an upward revision of the subventions granted to Orissa and Assam.Assam as a frontier as well as a backward province of India deserves special treatment.Its royalty of 5 percent on oil ( as against 10 times that amount of central excise) is unfair . Large amounts of income accrue in assam but are assessed in Calcutta

which in headquarters of the concerned companies . Some provinces like Bombay and Bengal have been allowed to get a large share of increase tax receipts because of their claim to be territorially responsible for the production of incomes . Assam is entitled to similar consideration in regard to certain items of central revenues .ANNEXURE IVAPPENDIX BRIGHTS AND IMMUNITIES ENJOYED BY THE STATES


StateYear to which the figures relateRs. in lakhs Remarks(see footnote) I) Sea CustomsKutch1945 - 4621.18(1)Bhavnagar1945 - 46 .19(2)Morvi1945 - 46 6.80(3)Junagadh(excluding Mangrol)1945 - 46 12.65(3)Nawanagar1945 - 46 15.27(3)Porbandar1945 - 46 3.63(3)Cambay1945 - 46 2.00(4)Baroda

1943 - 44 22.98(5)Janjira1945 - 46 3.00(6)Cochin1944 - 45 22.70(7)Travancore1944 - 45 17.99(7)Sawantwadi1944 - 45 0.12(8)Mangrol1944 - 45 2.33(9)Kashmir1945 - 46 11.00(10) ii) Currency and coinage Hyderabad1945 - 46 105.55(1) In connection with Federation, the proposed methodof calculating the immunity in the case of Kutch was asfollows: - To the trade figures supplied by the State the BritishIndian tariff rates should be applied and from this totalshould be deducted the difference between the dutycalculated at British Indian tariff rates and that actuallycollected at State rates on goods not consumed in the Stateitself.

As the figures necessary to apply this formula are notavailable the figure given in the statement representssimply the amounts of customs duty retained by the State in1945-46.

(2) The value of the immunity in the case of Bhavnagaris the total of customs collections made and retained by theState. The figures for 1945-46 is abnormal.

The figures for 1930-31 to 1935-36 were as follows: -

Year Rs.

1930-31 51,02,974

1931-32 75,91,016

1932-33 81,93,368

1933-34 99,32,628

1934-35 1,21,55,668

1935-36 61,62,300

(B) Note prepared by the Ministry of States on excise arrangements with Indian States

Matches. - In respect of match excise there is a poolingarrangement with the States. The main principal is that thewhole of the proceeds of the tax collected in any State aremade over to the general pool and the whole proceeds of thepool divided between British India on the one hand and thevarious States that agree to come into the pool on the otheron the basis of population, regardless of whether matchesare manufactured or not, in the States. Import of matchesfrom the States that have not joined this arrangement, isprohibited. The conditions that a State is required toaccept for admission to the pool are -

(a) The State should levy duty on matches produced in their territories by means of British Indian banderols and pay the proceeds into the common pool.

(b) The British Indian procedure for the levy and collection of duty should be followed.

Licence fees and fines are not included in the pool.Deduction on account of collection-charges at a uniform rateis allowed. The present rate is 3 per cent of the netcollections. The total net revenue is distributed among thevarious States and British India on the basis of population.While the amount contributed by States during 1944-45 to thepool was Rs. 44,38,970 the amount actually paid to theStates was Rs. 1,00,66,875. The British Indian realisationwas Rs. 5,46,26,781.

3. Sugar. - Arrangements were made in 1934 with thesugar producing States whereby they were required to levythe same rates of excise and under - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - (3) The value of the immunity in these cases isrepresented by the total customs collections less the amountpayable to the Central Government under the Agreements.

(4) By the agreement of 1938 Cambay is

allowed toretain whichever is greater of the following two amounts: -

(i) Rs. 2 lakhs; or

(ii) a proportion of the customs duties collected at the State ports on the basis of population with suitable adjustments to correct difference between the proportion of the urban population to the rural population in the state and the whole of India respectively.

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 collectedby it up to a maximum of 1 per cent. of the average customsrevenue of British India and until this maximum is reachedthe immunity is represented by the State's collections. Thelatest figures available are given here.

(6) Annual payment under the 1940 Agreement, whichrepresents the State's immunity.

(7) The immunity of Travancore and Cochin isrepresented by their share of the pool reduced by thecollection of duty at the British port of Cochin, at Cochinports and Travancore backwaters. In addition it is necessaryto include for Travancore the annual collections of customsduty at their ports other than the backwater ports; and inrespect of commodities such as tobacco, on which Travancorelevies duty at rates other than British Indian rates, theamount of duty at those rates is substituted for the actualcollections.

(8) The immunity is represented by the compensationpayment of Rs. 13,433 less Rs. 1,700 allotted for abolitionof land-customs under the Agreement of 1838.

(9) Actual amount collected and retained by the State.

(10) Drawback from customs on goods imported by seathrough British India.

the same conditions as in force in British India in returnfor which sugar produced in Indian States was to be admittedfree to British India. Soon after the outbreak of war,arrangements were made with the major sugar producingStates, whereby in addition to compliance with the 1934arrangements, these States undertook to hand over to theCentral Government the excess of their earnings from sugarexcise in any year above the highest revenue derived fromthe sugar excise in any of the three years preceding 1939-40. As regards States which had not till the developed adegree of production materially in excess of their ownconsumption and States which had not commenced production,the Residents were asked to watch and report developments.All producing States were, however, requested to levy thesame duty as in British India. In the case of such Stateswhere production now exceeds consumption, the arrangement is that the State retains duty on the basis of population atthe rate of Rs. 3/20 per capita revenue.

The sugar producing States are -


Mysore Baroda

Phaltan Hyderabad

Kolhapur Udaipur

Kapurthala Gwalior

Rampur Aundh

Jaora Nabha

Bhopal Kashmir



The States falling in category A above produce sugar inexcess of their requirements and those falling in category Bless than their requirements. Of the first mentioned States,negotiations were satisfactorily concluded with the firstfive. Bhopal which is surrounded on three sides and Jaorawhich is surrounded on all sides by Indian States, takingfull advantage of their geographical position did not acceptthe settlement at first. Jaora, however, agreed to surrenderits surplus revenue from 1942-43. Sangli and Miraj Statesonly recently developed their sugar factories and haveagreed to surrender the surplus revenue on the basis of theformula at 'A' above but have protested for revision of thearbitrary figure of actual consumption represented by3/20ths. The matter is under consideration.

Name os StateAmount retainableAverage Collection (Rs.) (Rs. in lakhs)Mysore12,91,135

17Kapurthala 2,52,000 8kolhapur 2,33,592 4Rampur11,43,532 16 Phaltan 5,21,262 Sangli 44,007 not known Miraj 6,944 not knownFollowing is the contribution by the above States tothe Central Exchequer in respect of the year 1945-46 -



Kapurthala 6,47,368

Kolhapur 2,26,820


Phaltan 1,40,585

Sangli 1,07,869

Miraj 59,268

Information regarding the amount to be surrendered by Mysoreand Rampur is still awaited.

7. Tobacco. - All States are expected to levy theBritish Indian rate of duty. (Some States where productionis not of much consequence levy excise on the basis of acreage in view of the high cost of administration.) TheStates are entitled to retain the proceeds of the exciseduty subject to the limit, on the basis of their population,worked out in accordance with the following formula -

R X p A = - - - P

Where A is the limit retainable by a State;

R=the total net revenue in any year calculated from 1st April to 31st March, collected in British India and all the participating States (i.e., the gross revenue less the cost of collection, licence fees, penalties, fines etc.);

p=the population of the State concerned;

P=the population of British India and all the participating States.

Some States have not come into the scheme and thetobacco of such States on entry into British India isconfiscated 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 exciseduty, the provisions of this section have not been involvedbecause it has been possible to realise an amount equivalentto the excise duty on State Tobacco under rule 32 of theCentral Excise Rules by means of confiscation. Hyderabad hasnot accepted the formula and does not share the revenue withthe Government of India although it has legislated on thelines of British India. No restrictions have been imposed onthe entry of Hyderabad Tobacco into British India.

To facilitate movement of tobacco from and to theStates, a special procedure for the movement in bond hasbeen devised. Under this procedure the duty is realised atdestination and credited to a Suspense account. The amountsrealised on the State tobacco is at the end of the yearcredited to the State and is taken into account in theState's realisations for purposes of the formula. Therevenue 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 inrespect of tobacco. The only States concerned at present areMysore and Cochin although the other States were asked tolegislate and have legislated on the matter. Of the twoStates, namely, Cochin and Mysore, Cochin's contribution tothe Central Revenues during the year 1943-44 and 1944-45 wasRs. 76,160 and Rs. 41,212 respectively. The Mysore State hasnothing to pay under the formula.

9. Tea, Coffee and Betel Nuts. - The States concernedare: -

Tea: - Mysore, Travancore, Cochin, Tripura, Mandi;

Coffee: - Mysore, Travancore, Cochin;

Betel Nuts: - Mysore, Travancore, Cochin, Tripura,Sawantwadi and Janjira.

The rates of duty imposed by Travancore are asfollows: -

Betel Nut . . . . . . As. 1/6 per 1b.

Coffee . . . . . . " -/6 " "

Tea . . . . . . " 1/9 " "

The same formula as in respect of tobacco has beenadopted in respect of these excises also, although theBoard's intention was that 'P' in respect of these excisesshould denote the population of all India and not limited toparticipating States and British India as in the case oftobacco. Mysore and Travancore, the two important States,have been clamouring for a revision of the formula. In thecase of Travancore the following revised formula has beenoffered: -


Where A denotes per capita consumption figure;

T=the total quantity of the article taxed in BritishIndia and in other participating units;

P=the total population of British India and

otherparticipating States.

On the basis of the per capita consumption figureworked out, the amount retainable by the State will beworked on the basis of the following formula: -

A=a x d x p

Where A=amount retainable by the State;

a=per capital consumption figure of British India andthe participating units;

d=rate of excise duty levied by the State;

p=Population of Travancore.

The excess over 'A' plus cost of collection will have to besurrendered by the State. The State's acceptance of theformula has not yet been received.

In the case of Mysore, we have agreed in respect ofcoffee that the amount retainable by the State may bedetermined on the basis of the Coffee Controller'sstatistics of coffee consumption in the State. Mysore hasaccepted this formula and is pressing for a similar formulain respect of betel nuts. After a recent tour, the Board hasstated that after the establishment of the Betel Nutmarketing Board, it may be possible to adopt the coffeeformula in respect of betel also.