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183. The States and Unions of States which continued as separate units had retained their own pre-existing public finance structures. These had one common feature, distinguishing them from the Provinces of India, in that except in respect of certain matters covered by the Stand-still Agreements, the States were free to follow their own policies in matters of "federal" finance and taxation, that is to say, in that field of public finance, such as Custom, Income-tax, Central Excises, Railways, Posts and Telegraphs, etc., which in the Provinces of India, was reserved for the Central Government. Moreover, unlike the Provinces, the States and Unions continued to bear expenditure of a federal nature, such as that relating to Defence; and many of them continued to derive substantial revenues from internal customs duties upon trade with the rest of India. The question of extinguishing these special rights and obligations of the States in the field of federal finance and of making good to them the net gap in their revenues, which might arise if their revenues and expenditure of a federal character were taken over by the Central Government as being more appropriate to its functions, was a difficult one; and the situation was further complicated by the variety of conditions prevailing in this respect, and also in the field of "provincial" finance, in the various States.

184. Apart from this central problem of federal finance in relation to the future Constitution of India, in which it was hoped that the States and Unions would occupy precisely the same position as Provinces, there was the further need, on purely economic and fiscal grounds, to bring about uniformity in the structure and administration of federal finance throughout the country, without which the unity of India would be altogether incomplete and any co-ordinated progress in the economic sphere impracticable. The following observations of the Joint Parliamentary Committee on Indian Constitutional Reforms (1933-34) had already indicated the dangers inherent in an unco-ordinated fiscal administration in India, even at that time:—

"The existing arrangements under which economic policies, vitally affecting the interests of India as a whole, have to be formulated and carried out are being daily put to an ever-increasing strain, as the economic life of India develops. For instance, any imposition of internal indirect taxation in British India involves, with few exceptions the conclusion