there be a deficit in the finances of the Central Government-as generally there is—it is made good by fixed annual contributions to it by the Local Governments. This principle of federal finance was accepted by the Report. Apart from the relaxation of control, it has this additional merit, that it leaves to the Local Government any surplus in revenue that might accrue, stimulates it to improve its resources, and places it in a position of financial soundness to make the most of the new opportunities that have been opened before it by the Reforms. Now such a complete separation of Indian and Provincial resources of revenue means the abolition of the "Divided Heads" viz., Land Revenue, Stamps, Excise Income-tax and Irrigation. Let us examine the case of each separately. Regarding Stamps the Report distinguished between General Stamps and Judicial Stamps, provincialising the latter, and keeping the former as an All-India Head, chiefly on the ground that differential rates in commercial Stamps might interfere with inter-provincial commerce. The Financial Relations Committee, however, recommended its provincialization also, and this has now been done. Excise-which had long since been provincialized in Bombay, Bengal and Assam, was similarly treated for other provinces. Land Revenue -though the biggest head and the backbone of Indian Finance, was also made a Provincial Head, on the ground that the machinery for its collection is intimately bound up with the whole system of administration, and its complete or partial Indianization would have been impossible without striking at the root of provincial independence. The provincialization of receipts and expenditure under Irrigation, and of expenditure for Famine Relief, followed logically from the treatment of land revenue with which they are connected. The remaining head of income-tax offered difficulties. Two strong reasons for making it an Indian receipt were (1) the necessity of keeping a uniform rate throughout India (2) the difficulty of finding out where the income was really earned i. e. the locale of the income on account of the widespread and intricate nature of modern industrial operations. For example, though the income-tax of the Tata Iron and Steel Company is paid in Bombay, its factories and mines are in Bihar and Orissa. As against these it was pointed out that Provinces like Bombay and Bengal with important industries like those of cotton, jute, tea, iron, and coal would be unfairly treated in being deprived of a large and steadily increasing source of revenue; and further that the provinces, if deprived of a share in the proceeds of the Income-tax, would have no incentive for its proper assessment and collection. But Lord Meston's Committee did not endorse these arguments and Income-tax was made an All-India head. This was particularly disliked by Bombay, and when the whole question came up for reconsideration before the Joint Committee, some concession had to be made, particularly because great disappointment had been caused to the various provinces on account of the fixed annual contributions to the Government of India that were imposed upon them. (This will be explained presently. ) The Joint Committee were no doubt, definitely opposed on principle to provincialize Income-tax; but they were glad, on grounds of policy, to alleviate the disappointment of the provinces, and recommended 86 that there should be granted to all provinces some share in the growth of revenue from taxation on incomes as far as that growth is attributable to an increase in the amount of income assessed." Rule 15 of the Devolution Rules accordingly provides: (1) There shall be allotted to each local Government a share in the income-tax collectedunder the Indian Income Tax Act, 1918, within its jurisdiction. The share so allocated shall be three pies on each rupee brought under assessment under the said Act in respect of which the incometax assessed has been collec ted. (2) In consideration of this allocation, each local Government shall make to the Governor-General in Council a nor fixed annual assignment of a sum to be determined by the Gover r-General in Council as the equivalent of the amount which would have accrued to the local Government in the Year 192021 (after deducting the provincial share of the cost of special income-tax establishment in that year) had the pie-rate fixed under sub-rule (1) been applied in that year, due allowance being made for any abnormal delays in collection of the tax. (3) The cost of special income-tax establishment employed within a province shall be borne by the local Government and the Governer-General in Council in the proportion of 25 percent and 75 per cent respectively. It will thus be seen that the concession is rather nominal. A province will be able to retain for itself what remains of the proceeds of the one-pie assessment after deducting therefrom the fixed assignment to the Government of India. 40. We may summarise these sources, the words of Devolution Rule 14 in Provincial Sources of Revenue. (a) Balances standing at the credit of the Province jects; (c) a share (to be determined in the manner provided by rule 15) in the growth of revenue derived from income-tax collected in the province, so far as that growth is attributable to an increase in the amount of income assessed; (d) recoveries of loans and advances given by the local Government and of interest paid upon such loans; (e) payment made to the local Government by the Governor-General in Council or by other local Governments, either for services rendered or otherwise; (f). the proceeds of any taxes which may be lawfully imposed for provincial purposes; (g) the proceeds of any loan which may be lawfully raised for provincial purposes, (h) Provincial con. tributions. any other sources which the Governor-General in Council may by order declare to be sources of provincial revenue. 41. The result of this redistribution of revenue by which the provinces are net gainers, is a deficit in the Budget of the Central Government. The resources of that Government are not capable of expansion; Customs Revenue is entirely dependent upon the fiscal policy which the Government might adopt in future; Railways have always remained an uncertain factor; Salt Impost has always remained an unpopular impost; Opium Revenue is disappearing. And any improvement under these or other heads is sure to be swallowed by the growing cost of defence. In any case, therefore, a deficit has to be faced and provided for; and our next step is to explain how it has been done so. It was evident that each Province must contribute a sum to the Central Government. But the principle by which the contribution should be determined was not so clear. This was left to be determined by a Special Committee, known as the Financial Relations Committee, under Lord Meston. 1 The guiding principles which the Committee arrived at were briefly these ;-(1) Though provincial contributions were inevitable for some years to come, any permanent financial arrangement which involved them was unsatisfactory and the Central Government, therefore, should so direct its policy as to reduce those contributions with reasonable rapidity, and with a view to their ultimate cessation. (2) Though the initial contributions of each province must, in any case, be arbitrary, in view of the diversity of revenue and expenditure of each province and its past financial history, any such contribution ought to be regarded as temporary and provisional, and steps ought to be taken to fix a standard and equitable scale of contributions towards which the provinces should be required to work by stages. (3) The initial contributions which each Province had to pay in the year 192122 must be fixed on arbitrary considerations, dictated by the existing financial position of each province, and not by any equitable standard, such as its capacity to pay. We shall begin with the last.-The Report examined and rejected many alternatives of fixing this contribution. "We saw that equality of contribution was impracticable, because we have not a clean slate. In spite of the variations in income which resulted from the permanent settlement in some areas, stereotyped scales of expenditure have grown up, which makes it useless to attempt any theoretic calculation, on which a uniform contribution, from the Provinces could be based, such as an equal percentage of revenue, or a contribution based on a population basis." The Report calculated that the abolition of divided heads would improve provincial finance to the extent of 1564 lacs, and entail a deficit of 1363 lacs in the Government of India. The deficit is 87 per cent of the improvement, and the Report therefore, proposed to assess the contribution as percentage. viz. 87 per cent of the difference between the gross provincial revenue and the gross provincial expenditure. The authors of the Report admitted that such a uniform levy hit heavily provinces like Madras and the United Provinces which had to pay disproportionately heavy contributions; but they answered that their proposal merely continued a disparity which was masked by the system of divided heads, that it was not intended to be of a final nature, and that when revenue |