Page:White Paper on Indian States (1950).pdf/105

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Financial Adjustments on Revenue Account

196. This was one of the most important subjects dealt with by the Committee. The main object was the avoidance of sudden dislocation of the finances of the States or of the Centre as a result of federal financial integration. The technique suggested for this purpose was as follows:

(1) A computation should be made of the revenue from "federal" sources and from internal customs duties which each State would lose, and of the "federal" expenditure which it would save as a result of federal financial integration. For this purpose the "privy purse" payable to Rulers under the Covenants entered into with them should be regarded as expenditure to be borne by the Centre, if it were subsequently decided (as has now been done) that they should be a "federal" liability under the new Constitution.
That the loss of revenue to the States should be measured by the average of such revenue during the three completed financial years of the State immediately preceding 1st April 1950; and the saving of expenditure should be measured by the expenditure on federal subjects actually incurred by the State in only the last of such years, where reliable accounts for earlier years were not available, as in the case of five Unions of States, the loss of revenue was to be measured, except as regards Railway revenue, on the basis of one year only.
These recommendations have been accepted by all States, with the modification that instead of a three-year average for revenues, a two-year average would be taken. Certain other minor modifications affecting the computation of particular items of revenue were also made.
(2) The loss of revenue from internal customs duties should be wholly borne by the States, except where such duties were to be entirely abolished on 1st April 1950.
This recommendation was accepted by all States.
(3) As regards "federal" revenues, properly so called, the net loss (or profit) to a State resulting from federal financial integration was to be computed by setting off the 'federal' expenditure saved against the 'federal' revenues lost.