Provident Fund-Due Date

For determining “due date” for payment of Provident Fund contributions, clause (1) of Paragraph 38 of Employees’ Provident Fund Scheme, 1952 is relevant. It reads as follows :-
“The employer shall, before paying the member his wages in respect of any period or part of period for which contribution are payable, deduct the employee’s contribution from his wages which together with his own contribution as well as an administrative charge of such percentage [of the pay (basic wages, dearness allowance, retaining allowance, if any, and cash value of food concessions admissible thereon) for the time being payable to the employees other than an excluded employee and in respect of which provident fund contributions are payable, as the Central Government may fix], he shall within fifteen days of the close of every month pay the same to the Fund by separate Bank drafts or cheques on account of contributions and administrative charge.” It has been held in:-
(a) Fluid Air (India) Ltd. Vs. D.C.I.T. (1997) 63 ITD 182 (Mumbai)
And
(b) Madras Radiators & Pressings Ltd. Vs. D.C.I.T. (1996) 59 ITD 515 (Mad.)/ (1996) 56 TTJ (Mad.) 662 that the term “month” has not been defined in the Scheme, there is ambiguity regarding interpretation of the words “fifteen days from the close of month” appearing in Paragraph 38 of Employees’ Provident Fund Scheme as to whether it should be reckoned from the month in which such contributions are received by the assessee from its employees or from the month in respect of which such contributions are received by the assessee, in cases where wages are paid in subsequent month(s), and this ambiguity should be resolved in favour of assessee, i.e. fifteen days are to be reckoned from close of the month in which employees contributions are recovered i.e. the month of payment of wages.
With due respect to above decisions, in my opinion, there is no such ambiguity. Proper analysis of Paragraph 38 of E.P.F. Scheme reveals as follows:-
(i) Employer’s liability to deduct employee’s contribution arises before paying wages to employees (and not as and when wages are earned by employees) in respect of any period or part of period. Thus the employees’ contribution comes in the hands of the employer during the wage disbursal month and not during the wage period (which may be a calender month or any other period and not necessarily a period equal to one month.)
(ii) Employees’ contribution thus deducted is to be deposited together with employer’s contribution within 15 days of the close of month. Thus, if both employees’ and employer’s contributions for Provident Fund is made within 15 days of the close of month in which wages are paid, it will be within due date. So, relevant month to be considered for determining due date is payment month i.e. wages disbursement month and not month or period to which wages relate.
Otherwise also, any other interpretation would produce absurd results in following cases:-
1. Where wage-period is not month. It may be weekly or daily and may cover portions of two months.
2. Where due to lock-out or strike or due to natural calamities or financial stringency, wages are paid after return of the situation to normalcy.
3. Increment in wages is effected with retrospective effect.
The view that payment month is relevant for considering due date for payment of Provident Fund contribution is also supported by Calcutta Tribunal ‘E’ Bench’s decision dated 28-5-2001 rendered in the case of Kanoi Paper & Industries Ltd,. Calcutta Vs. ACIT, Co. Circle 7(2), Calcutta [ITA No.1260(Cal) of 1996], an unreported decision till the date of this write-up, which held in para 6 of its order as follows:-
“Clause 38 of the Employees’ Provident Fund Scheme, 1952, fixes the time limit for making payment in respect of contribution to the provident fund to be 15 days from the close of the month concerned. However, the issue here is whether the “month” should be considered to be the month to which the wages relates or the month in which the actual disbursement of the wages is made. We are of the considered opinion that the expression “month” should mean here the month during which the wages/ salary is actually disbursed irrespective of the month to which the same relates. Thus, the scheme of the Govt. in this regard is that once a deduction is made in respect of the employees’ contribution to the provident fund from the salary/ wages of the employee or the employer also makes his contribution, factually at the time of disbursement of the salary the payment in respect of such contribution should be made forth with. If for some reason or other the payment of salary for a particular month be held up for considerable period of time it cannot be said that the employer would be liable to make payments in respect of the “employer’s” as well as “employees” contribution in respect of wages for such period within a period of 15 days from the close of the month to which the wages relates. On the other hand, in our view, most appropriate interpretation would be that the employer’ would be at liberty to make payment of the contribution concerned within 15 days (subject however to the further grace period) from the end of the month during which the disbursement of the salary is actually made and the contribution of the provident fund are, thus, generated.”
Since the due date has to be determined under the provisions of the Employees provident Fund & Misc. Provisions Act 1952, let us examine some other provisions of E.P.F. Scheme framed under the said Act.
While returns and forms are required to be filed with reference to the month (meaning calender month as per provisions of the General Clasues Act), or currency period (referring to period of financial year of Government i.e. period commencing in April and ending in March next), mention of wage period(s) is required specifically. Form No.12 is captioned as follows:-
“Statement of Contributions for the month of ………..19….
Wage Period from …………… to ………………..”
Form No.3A on annual contribution card requires tabulation of date for the currency period o calendar-monthly basis and the first month mentioned is “March paid in April”.
The last month mentioned is “February paid in March”.
The intention is apparent that wages paid between April to March and contributions deducted there from are to be reported in this form, although the wages may relate to any period from March to February next.
In Form No.12A (revised), monthly statement of contributions requires report on amount of contribution “recovered from the workers”. As per paragraph 38, recovery of contributions can be made only at the time of disbursal of wages. Thus the data required to be produced should relate to the payment-month irrespective of the wage period.
Also, five days of grace period has been allowed to employers for payment of Provident Fund contributions by clause (iii) of CPFC’S Circular No.E.128(1) 60-III dated 19-3-1964 as modified by circular No.E11/128 (section 14-B Amendment)/73 dated 24-10-1973.
CONCLUSION REGARDING ISSUE OF ‘DUE DATE’:
Due date for payment of Provident Fund contributions is 15 days from the end of month in which wages are paid (plus grace period of 5 days). Thus, if wages pertaining to April’ 2003 is paid on, say, 7th May’ 2003, due date for payment of Provident Fund contribution is 20th June’ 2003 [i.e. 15th June' 2003 as increased by grace period of 5 days].

The Descent of Finance
by Niall Ferguson
When today’s great crisis ends, the U.S. financial system will be a shadow of its former self, but America will be stronger than ever. History shows that money and power don’t always go hand in hand.
If the ascent of modern finance began in the 1980s, with “liar’s poker” on Wall Street and the City of London’s Big Bang, it ended on September 15, 2008—the day Lehman Brothers Holdings went bankrupt. Seven years on, 9/15 supplanted 9/11 as the costliest day in Wall Street’s history.
Lehman Brothers’ demise was one of seven events that, in the space of just 19 days, signaled the end of an epoch. The first, on September 7, was the nationalization of the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). On September 14 Bank of America announced that it would buy Merrill Lynch. On September 16 a money market fund, Reserve Primary, broke the buck—that is, its net asset value dropped below $1 per share—because of losses on the unsecured commercial paper it had bought from Lehman. That same day the Federal Reserve agreed to give AIG $85 billion to avoid a lethal chain reaction if the insurance giant couldn’t meet its obligations on the credit default swaps it had sold to banks. Nationalization in this case took the form of a warrant to the Federal Reserve for 79.9% of the company’s equity. On September 22 the investment bank became an extinct species when Goldman Sachs and Morgan Stanley converted themselves into bank holding companies. Finally, on September 25, Washington Mutual Bank was seized by the Office of Thrift Supervision and placed into the receivership of the Federal Deposit Insurance Corporation—marking the biggest bank failure in America’s history.

Although the crisis began nearly two years ago, September 2008 was the month American finance fell off a cliff. What will be the long-term impact on the U.S. economy and the global financial system?

From Crisis to Breakdown
Imagine the worst-case scenario: The current recession turns out to be another great depression. The one that began in August 1929 lasted 43 months, according to the U.S. National Bureau of Economic Research. However, the first great depression, which only historians now remember, began with the Panic of 1873 and lingered for 65 months. If the U.S. economy keeps shrinking that long, there won’t be a sustained recovery until after May 2013.

Fast-forward to 2013. The government-owned Citibank of America, formed by the forced merger and nationalization of the United States’ two biggest banks, now dominates retail banking. The number of U.S. banks has fallen by half, from 8,534 in 2007. There are just 3,000 hedge funds all over the world—less than a third of the precrisis total. The regulatory framework that was imposed by Treasury Secretary Timothy Geithner in the previous four years has completely changed the financial landscape. With new restrictions on executive compensation, bank capitalization, and derivatives trading, retail banking has become more like a public utility. Even nonbank entities like hedge funds and insurance companies have to operate under the unsleeping eye of the new Financial Authority for the Regulation of Systemic Institutions (FARSI).

Despite FARSI’s extensive powers, the U.S. government is still grappling with the fiscal legacy of the crisis. The federal debt is now around $20 trillion—$3 trillion higher than the Obama administration forecast in its 2009 budget. The top income tax rate is 45%. The S&P 500 is down to 418, where it was in December 1991—a decline comparable to that between 1929 and 1934. The United States, it appears, is stuck in the middle of its own lost decade, with real GDP having grown by barely 1% per annum since 2010.

We started out calling it the Subprime Crisis. It quickly became the Credit Crunch and then the Global Financial Crisis. By 2013 a new name has stuck: the Breakdown.

Worlds Fastest Growing Companies

The world's fastest growing company is Canada-based Research In Motion, the maker of BlackBerry phones.

Three Indian-founded companies Infosys Technologies, Robin Raina-founded insurance company Ebix, and Bharat Desai co-founded IT company Syntel, have made it to Fortune's 100 fastest growing companies. Ebix is ranked 4th, while Syntel is ranked at 81st. Infosys is ranked at 100th. Google and Apple have also been named among the world's 100 fastest growing companies by the American magazine, Fortune. Cognizant is placed at 90th, Apple at 39th position, and Google takes the 68th spot.About Infosys, the magazine said, 'India's No 2 IT firm counts Goldman Sachs and UBS among its 570 clients.'Five Chinese companies have been listed by Fortune among the top 100. Companies were ranked based on their revenue, profit growth and total return in the past three years.

Check out the world's top 10 fatest growing companies...

1. Research In Motion (RIM)Research In Motion has topped the Fortune list with a three-year average earnings-per-share growth of 84 per cent, revenue growth of 77 per cent and total return of 45 per cent.
Research In Motion (RIM) is one of the leading designers and manufacturers of innovative wireless solutions for the worldwide mobile communications market. The company's growth has been driven by its flagship product, blackberry. RIM founded in 1984 has grown at fast pace, it plans to raise headcount to 12,000 employees by the end of the year.Jim Balsillie is the co-chief executive officer and Mike Lazaridis is president and co-chief executive officer of Research In Motion.
Revenue: $11,065.2 million
(Revenue figures are of the last four quarters)

2. Sigma Designs

RIM is followed by Sigma Designs. Sigma Designs develops and markets high-performance, highly-integrated System-on-a-Chip (SoC) semiconductors. Headquartered in Milpitas, California, the company has sales offices in China, Europe, Hong Kong, Japan and Taiwan. The company was founded in 1982. The company's CEO is Trinh Q. Tran.Revenue: $209.2 million

3. Sohu.com
Sohu.com is ranked third in the Fortune list. Sohu.com Inc, a search engine company based in China offers a network of web properties and community based/web 2.0 products. Sohu has built one of the most comprehensive matrices of Chinese language web properties and proprietary search engines.Sohu was incorporated under the name Internet Technologies China Incorporated (ITC) in 1996. Charles Zhang is the CEO of the company.
Revenue: $460 million

4. EbixThe Robin Raina-founded company Ebix is fourth in the Fortune list. It is a leading international supplier of software and e-commerce solutions to the insurance industry. The company is headquarted in Atlanta.
Revenue: $78.8 million

5. DG FastChannel
DG FastChannel is the fifth fastest growing company in the world. It offers digital media services to the advertising industry and operates the largest network designed specifically for spot distribution. DG FastChannel digitally delivers over six million television and radio commercials each year for more than 5,000 national advertisers and advertising agencies
Scott K. Ginsburg is the CEO of the company.
Revenue: $169.3 million

6. CF Industries Holdings
CF Industries comes next at the 6th position. A subsidiary of CF Industries Holdings, it is one of North America's largest manufacturers and distributors of nitrogen and phosphate fertilizer products.A fertilizer brokerage operation by a group of regional agricultural cooperatives founded in 1946, CF Industries grew by enhancing its distribution capabilities and diversifying into fertilizer manufacturing.
Stephen R. Wilson is the CEO of the company.
Revenue: $3,934.4 million
Image: Courtesy, CFI

7. Shanda Interactive Entertainment
The 7th ranked Shanghai-based Shanda Interactive Entertainment is a leading media company. Shanda offers entertainment content including massively multi-player online role-playing games (MMORPGs) and advanced casual online games in China, as well as online chess and board games and e-sports game platform. The company came into existence in 1999.Tianqiao Chen is the CEO of the company.
Revenue: $574.1 million
Image: A game from Shanda.Photographs: Courtesy, Shanda Interactive Entertainment.

8. Arena Resources
Arena Resources Inc is the 8th fastest growing company. The Oklahoma-based oil and gas exploration, development and production company has operations in Texas, Oklahoma, Kansas and New Mexico. Founded in 2000, the company has made significant acquisitions, increased their proven reserves to an estimated 65.6 million BOE's (barrel of oil equivalents).Phillip W. Terry is the CEO of the company.
Revenue: $183.7 million
Image: Arena bets big on oil & gas.

8. Arena Resources

Arena Resources Inc is the 8th fastest growing company. The Oklahoma-based oil and gas exploration, development and production company has operations in Texas, Oklahoma, Kansas and New Mexico. Founded in 2000, the company has made significant acquisitions, increased their proven reserves to an estimated 65.6 million BOE's (barrel of oil equivalents).Phillip W. Terry is the CEO of the company.
Revenue: $183.7 million
Image: Arena bets big on oil & gas.

10. Potash Corp of Saskatchewan
Potash Corp, ranked 10th in the list is an integrated producer of fertilizer, industrial and animal feed products. The world's biggest fertilizer company, it produces three primary plant nutrients: potash, phosphate and nitrogen. William J. Doyle is the CEO of the company.
Revenue: $8,478.4 million
Image: Potash Corp, a world leader.Photographs: Courtesy, Potash Corp

Make money in volatile markets

Practically all stock selection techniques are designed to identify issues that will rise faster than average in bull markets or hold up better than average in bear markets.
Unfortunately, few stocks possess both attributes. Stocks that outperform the market on the upside tend to fall most rapidly in a general decline, while those that lag behind an advance tend to suffer less in a collapse.
Just as price trends seem to persist under certain conditions, the tendency of a specific stock or group of stocks to exhibit above average volatility also persists over time.
But while all price trends ultimately come to an end, the volatility characteristics of most stocks persist for years or even decades. Hence volatility can, in and of itself, be an especially useful stock selection criterion.
When the market is expected to rise, diversified portfolios of stocks, -- and, equally, diversified equity mutual funds, with a history of highly volatile price swings - will almost certainly outperform the market averages. Random walk theorists hasten to attribute these above average returns to the additional risk inherent in volatile stocks.
They claim that on a "risk adjusted basis," such portfolios will provide only average returns. Their concept is easily proven (to their own satisfaction, at least) by defining risk as volatility - hence they contend that higher returns accruing to portfolios of volatile stocks - or volatile equity mutual funds - are directly attributable to higher risk and do not represent superior stock selection.
Investors interested in making money rather than debating semantics might well argue that the only risk they fear is the risk of loss, and that kind of risk is low in a rising market. On the other hand, in a falling market almost every diversified portfolio or fund will lose money and an investor who expects a decline should be out of stocks altogether, not merely switching to less volatile stocks that will just lose money for him more slowly.
Thus, to the extent that investments are confined to periods of generally rising prices, namely to bullish phases, highly volatile stocks and equity funds are superior investments and can provide above average returns on a far more consistent basis than most other stock selection techniques.
Beta volatility
'Volatility' can be measured in many ways. One crude method is to calculate each stock's average daily or weekly price change (ignoring the sign, up or down, of those changes) over the past year or two. A far more sophisticated approach is to correlate a stock's daily or weekly percent price changes with the daily or weekly percent price changes of a broad based market index (e.g., Standard & Poor's 500 Index). This type of relative volatility is called a "Beta" statistic and is derived from a complex mathematical calculation, usually made by computer.
A Beta tells not just how volatile a stock has been, but how volatile it has been: relative to the market. An extremely useful characteristic of Beta statistics of stocks is that they are so stable through time that it is relatively unimportant whether they are calculated from daily, weekly, or monthly data, or whether the historical base used in the calculation is one, two, or even five years in length.
A Beta of 1.00 means that, on average, a stock has traditionally matched the market's swings, moving just as rapidly as the indices on the upside and downside. A Beta greater than 1.00 reflects above average volatility, and a Beta less than 1.00 indicates below average volatility.
A Beta that is actually less than zero - a negative Beta - is typical of assets that move contrary to the general market, going down in bull markets and rising in bear markets. (Gold mining stocks often have negative Betas.)
Betas have been so widely used in recent years that they have become available at low cost to most investors. They have been widely studied and numerous historical analyses have proven that portfolios of stocks with high Betas will continue to exhibit the characteristic of high volatility in the future.
It is worth noting, however, that Betas do have a tendency to drift back towards 1.00. Volatile portfolios selected on the basis of Beta alone will therefore never be quite as volatile as expected, although the Beta volatility estimate will still be very good.
Square root volatility
Low priced stocks are more volatile than high priced stocks. A formal statement of that assertion is the Square Root Rule which hypothesizes that the magnitude of a stock's price move is directly related to the price of the stock: the lower the price of the stock the more volatile it is, and, the higher the price of the stock the less volatile it is.
In a declining market, when all stocks should lose the same number of points from the square root of their beginning prices, we would expect the lower priced stocks to decline more rapidly and the higher priced issues to decline at a somewhat lesser rate.
Unlike the Beta statistic, the Square Root Volatility for a stock is always positive: All stocks are always expected to move in the same direction, albeit in different magnitudes, as the market. As a measure of expected performance for a single stock, this is, of course, somewhat unrealistic since all stocks do not always move in the same direction as the market.
However, like the Beta statistic, as the portfolio becomes more broadly diversified Square Root Volatility becomes a better measure of expected percentage change. For very large portfolios it is extremely accurate. Indeed, the author's research reveals that Square Root Volatility is usually superior to Beta as an estimator of future expected return, even though Betas are much better known and more widely used.
Conclusion
Used independently or jointly, the Beta and Square Root Volatility measures are valuable and highly functional stock selection tools. Most investors would improve their overall performance if they refined their market timing techniques and simply resorted to holding highly volatile securities during bull markets.

DTAA With Singapore

41. Agreement for avoidance of double taxation and prevention of fiscal evasion with Singapore
Whereas the annexed Agreement between the Government of the Republic of India and the Government of the Republic of Singapore for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income has entered into force on 27th May, 1994 on the notification by both the Contracting States to each other of the completion of the procedures required by their respective laws, as required by the said Agreement;
Now, therefore, in exercise of the powers conferred by section 90 of the Income-tax Act, 1961 (43 of 1961), the Central Government hereby directs that all the provisions of the said Agreement shall be given effect to in the Union of India.
Notification : No. GSR 610(E), dated 8-8-1994.
TEXT OF AMENDED AGREEMENT
The Government of the Republic of India and the Government of the Republic of Singapore, desiring to conclude an Agreement for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income,
Have agreed as follows :
ARTICLE 1 : Personal scope - This Agreement shall apply to persons who are residents of one or both of the Contracting States.
ARTICLE 2 : Taxes covered - 1. The taxes to which this Agreement shall apply are :
(a) in India :
income-tax including any surcharge thereon
(hereinafter referred to as Indian tax) ;
(b) in Singapore :
the income-tax (hereinafter referred to as Singapore tax).
2. The Agreement shall also apply to any identical or substantially similar taxes which are imposed by either Contracting State after the date of signature of the present Agreement in addition to, or in place of, the taxes referred to in paragraph 1. The competent authorities of the Contracting States shall notify each other of any substantial changes which are made in their respective taxation laws.
ARTICLE 3 : General definitions - 1. In this Agreement, unless the context otherwise requires :
(a) the term India means the territory of India and includes the territorial sea and air space above it, as well as any other maritime zone in which India has sovereign rights, other rights and jurisdictions, according to the Indian law and in accordance with international law ;
(b) the term Singapore means the Republic of Singapore ;
(c) the terms a Contracting State and the other Contracting State mean India or Singapore as the context requires ;
(d) the term company means any body corporate or any entity which is treated as a company or body corporate under the taxation laws in force in the respective Contracting States ;
(e) the term competent authority means in the case of India, the Central Government in the Ministry of Finance (Department of Revenue) or their authorised representative; and in the case of Singapore, the Minister for Finance or his authorised representative ;
(f) the terms enterprise of a Contracting State and enterprise of the other Contracting State mean respectively and enterprise carried on by a resident of a Contracting State and an enterprise carried on by a resident of the other Contracting State;
(g) the term fiscal year means :
(i) in the case of India, previous year as defined under section 3 of the Income-tax Act, 1961 ;
(ii) in the case of Singapore, calendar year ;
(h) the term international traffic means any transport by a ship or aircraft operated by an enterprise of a Contracting State, except when the ship or aircraft is operated solely between places in the other Contracting State ;
(i) the term national means any individual, possessing the nationality of a Contracting State and any legal person, partnership or association deriving its status as such from the laws in force in the Contracting State ;
(j) the term person includes an individual, a company, a body of persons and any other entity which is treated as a taxable unit under the taxation laws in force in the respective Contracting States ;
(k) the term tax means Indian tax or Singapore tax, as the context requires, but shall not include any amount which is payable in respect of any default or omission in relation to the taxes to which this Agreement applies or which represents a penalty imposed relating to those taxes.
2. As regards the application of the Agreement by a Contracting State, any term not defined therein shall, unless the context otherwise requires, have, the meaning which it has under the law of that State concerning the taxes to which the Agreement applies.
ARTICLE 4 : Resident - 1. For the purposes of this Agreement, the term resident of a Contracting State means any person who is a resident of a Contracting State in accordance with the taxation laws of that State.
2. Where by reason of the provisions of paragraph 1, an individual is a resident of both Contracting States, then his status shall be determined as follows :
(a) he shall be deemed to be a resident of the State in which he has a permanent home available to him; if he has a permanent home available to him in both States, he shall be deemed to be a resident of the State with which his personal and economic relations are closer (centre of vital interests) ;
(b) if the State in which he has his centre of vital interests cannot be determined, or if he has not a permanent home available to him in either State, he shall be deemed to be a resident of the State in which he has an habitual abode ;
(c) if he has an habitual abode in both States or in neither of them, he shall be deemed to be a resident of the State of which he is a national ;
(d) if he is a national of both States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement.
3. Where by reason of the provisions of paragraph 1, a person other than an individual is a resident of both Contracting States, then it shall be deemed to be a resident of the State in which its place of effective management is situated.
ARTICLE 5 : Permanent establishment - 1. For the purposes of this Agreement, the term permanent establishment means a fixed place of business through which the business of the enterprise is wholly or partly carried on.
2. The term permanent establishment includes especially :
(a) a place of management ;
(b) a branch ;
(c) an office ;
(d) a factory ;
(e) a workshop ;
(f) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources ;
(g) a warehouse in relation to a person providing storage facilities for others;
(h) a farm, plantation or other place where agriculture, forestry, plantation or related activities are carried on ;
(i) premises used as a sales outlet or for soliciting and receiving orders ;
(j) an installation or structure used for the exploration or exploitation of natural resources but only if so used for a period of more than 120 days in any fiscal year.
3. A building site or construction, installation or assembly project constitutes a permanent establishment only if it continues for a period of more than 183 days in any fiscal year.
4. An enterprise shall be deemed to have a permanent establishment in a Contracting State and to carry on business through that permanent establishment if it carries on supervisory activities in that Contracting State for a period of more than 183 days in any fiscal year in connection with a building site or construction, installation or assembly project which is being undertaken in that Contracting State.
5. Notwithstanding the provisions of paragraphs 3 and 4, and enterprise shall be deemed to have a permanent establishment in a Contracting State and to carry on business through that permanent establishment if it provides services or facilities in that Contracting State for a period of more than 183 days in any fiscal year in connection with the exploration, exploitation or extraction of mineral oils in that Contracting State.
6. An enterprise shall be deemed to have a permanent establishment in a Contracting State if it furnishes services, other than services referred to in paragraphs 4 and 5 of this Article and technical services as defined in Article 12, within a Contracting State through employees or other personnel, but only if :
(a) activities of that nature continue within that Contracting State for a period or periods aggregating more than 90 days in any fiscal year; or
(b) activities are performed for a related enterprise (within the meaning of Article 9 of this Agreement) for a period or periods aggregating more than 30 days in any fiscal year.
7. Notwithstanding the preceding provisions of this Article, the term permanent establishment shall be deemed not to include :
(a) the use of facilities solely for the purpose of storage, display or occasional delivery of goods or merchandise belonging to the enterprise ;
(b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or occasional delivery;
(c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise ;
(d) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise, or of collecting information, for the enterprise ;
(e) the maintenance of a fixed place of business solely for the purpose of advertising, for the supply of information, for scientific research, or for similar activities which have a preparatory or auxiliary character, for the enterprise.
However, the provisions of sub-paragraphs (a) to (e) shall not be applicable where the enterprise maintains any other fixed place of business in the other Contracting State through which the business of the enterprise is wholly or partly carried on.
8. Notwithstanding the provisions of paragraphs 1 and 2, where a person - other than an agent of an independent status to whom paragraph 9 applies - is acting in a Contracting State on behalf of an enterprise of the other Contracting State that enterprise shall be deemed to have a permanent establishment in the first-mentioned State, if
(a) he has and habitually exercises in that State an authority to conclude contracts on behalf of the enterprise, unless his activities are limited to the purchase of goods or merchandise for the enterprise ;
(b) he has no such authority, but habitually maintains in the first-mentioned State a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the enterprise ; or
(c) he habitually secures orders in the first-mentioned State, wholly or almost wholly for the enterprise itself or for the enterprise and other enterprises controlling, controlled by, or subject to the same common control, as that enterprise.
9. An enterprise of a Contracting State shall not be deemed to have a permanent establishment in the other Contracting State merely because it carries on business in that other State through a broker, general commission agent or any other agent of an independent status provided that such persons are acting in the ordinary course of their business. However, when the activities of such an agent are devoted wholly or almost wholly on behalf of that enterprise itself or on behalf of that enterprise and other enterprises controlling, controlled by, or subject to the same common control, as that enterprise, he will not be considered an agent of an independent status within the meaning of this paragraph.
10. The fact that a company which is a resident of a Contracting State controls or is controlled by a company which is a resident of the other Contracting State, or which carries on business in that other Contracting State (whether through a permanent establishment or otherwise shall not of itself constitute either company a permanent establishment of the other.
ARTICLE 6 : Income from immovable property - 1. Income derived by a resident of a Contracting State from immovable property situated in the other Contracting State may be taxed in that other State.
2. The term immovable property shall have the meaning which it has under the law of the Contracting State in which the property in question is situated. The term shall in any case include property accessory to immovable property, livestock and equipment used in agriculture and forestry, rights to which the provisions of general law respecting landed property apply usufruct of immovable property and rights to variable or fixed payments as consideration for the working of, or the right to work, mineral deposits, sources and other natural resources. Ships and aircraft shall not be regarded as immovable property.
3. The provisions of paragraph 1 shall also apply to income derived from the direct use, letting or use in any other form of immovable property.
4. The provisions of paragraphs 1 and 3 shall also apply to the income from immovable property of an enterprise and to income from immovable property used for the performance of independent personal services.
ARTICLE 7 : Business profits - 1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as it directly or indirectly attributable to that permanent establishment.
2. Subject to the provisions of paragraph 3, where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment. In any case where the correct amount of profits attributable to a permanent establishment is incapable of determination or the determination thereof presents exceptional difficulties, the profits attributable to the permanent establishment may be estimated on a reasonable basis.
3. In the determination of the profits of a permanent establishment, there shall be allowed as deductions expenses which are incurred for the purposes of the business of the permanent establishment including executive and general administrative expenses so incurred, whether in the State in which the permanent establishment is situated or elsewhere, in accordance with the provisions of and subject to the limitations of the taxation laws of that State.
4. Insofar as it has been customary in the Contracting State to determine the profits to be attributed to a permanent establishment on the basis of an apportionment of the total profits of the enterprise to its various parts, nothing in paragraph 2 shall preclude that Contracting State from determining the profits to be taxed by such an apportionment as may be customary; the method of apportionment adopted shall, however, be such that the result shall be in accordance with the principles contained in this Article.
5. No profits shall be attributed to a permanent establishment by reason of the mere purchase by that permanent establishment of goods or merchandise for the enterprise.
6. For the purposes of the preceding paragraphs, the profits to be attributed to the permanent establishment shall be determined by the same method year by year unless there is good and sufficient reason to the contrary.
7. Where profits include items of income which are dealt with separately in other Articles of this Agreement, then the provisions of those Articles shall not be affected by the provisions of this Article.
8. For the purpose of paragraph 1, the term directly or indirectly attributable to the permanent establishment includes profits arising from transactions in which the permanent establishment has been involved and such profits shall be regarded as attributable to the permanent establishment to the extent appropriate to the part played by the permanent establishment in those transactions, even if those transactions are made or placed directly with the overseas head office of the enterprise rather than with the permanent establishment.
ARTICLE 8 : Shipping and air transport - 1. Profits derived by an enterprise of a Contracting State from the operation of ships or aircraft in international traffic shall be taxable only in that State.
2. The provisions of paragraph 1 shall also apply to profits from the participation in a pool, a joint business or an international operating agency engaged in the operation of ships or aircraft.
3. Interest on funds connected with the operation of ships or aircraft in international traffic shall be regarded as profits derived from the operation of such ships or aircraft, and the provisions of Article 11 shall not apply in relation to such interest.
4. For the purposes of this Article, profits from the operation of ships or aircraft in international traffic shall mean profits derived from the transportation by sea or air of passengers, mail, livestock or goods carried on by the owners or lessees or charterers of the ships or aircraft, including profits from :
(a) the sale of tickets for such transportation on behalf of other enterprises;
(b) the incidental lease of ships or aircraft used in such transportation;
(c) the use, maintenance or rental or containers (including trailers and related equipment for the transport of containers) in connection with such transportation; and
(d) any other activity directly connected with such transportation.
ARTICLe 9 : Associated enterprises - Where
(a) an enterprise of a Contracting State participates directly or indirectly in the management, control or capital of an enterprise of the other Contracting State, or
(b) the same persons participate directly or indirectly in the management, control or capital of an enterprise of a Contracting State and an enterprise of the other Contracting State,
and in either case conditions are made or imposed between the two enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises, then any profits which would, but for those conditions, have accrued to one of the enterprises, but, by reason of those conditions, have not so accrued, may be included in the profits of that enterprise and taxed accordingly.
Article 10 : Dividends - 1. Dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other State.
2. However, such dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident and according to the laws of that State, but if the recipient is the beneficial owner of the dividends, the tax so charged shall not exceed :
(a) 10 per cent of the gross amount of the dividends if the beneficial owner is a company which owns at least 25 per cent of the shares of the company paying the dividends;
(b) 15 per cent of the gross amount of the dividends in all other cases.
This paragraph shall not affect the taxation of the company in respect of the profits out of which the dividends are paid.
3. Notwithstanding the provisions of paragraph 2 of this Article, as long as Singapore does not impose a tax on dividends in addition to the tax chargeable on the profits or income of a company, dividends paid by a company which is a resident of Singapore to a resident of India shall be exempt from any tax in Singapore which may be chargeable on dividends in addition to the tax chargeable on the profits or income of the company.
4. The term dividends as used in this Article means income from shares or other rights not being debt-claims, participating in profits, as well as income from other corporate rights which is subjected to the same taxation treatment as income from shares by the laws of the State of which the company making the distribution is a resident.
5. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the dividends, being a resident of a Contracting State, carries on business in the other Contracting State of which the company paying the dividends is a resident through a permanent establishment situated therein or performs in that other State independent personal services from a fixed base situated therein, and the holding in respect of which the dividends are paid is effectively connected with such permanent establishment or fixed base. In such case, the provisions of Article 7 or Article 14, as the case may be, shall apply.
6. Where a company which is a resident of a Contracting State derives profits or income from the other Contracting State, that other State may not impose any tax on the dividends paid by the company except insofar as such dividends are paid to a resident of that other State or so far as the holding in respect of which the dividends are paid is effectively connected with a permanent establishment or a fixed base situated in that other State, nor subject the companys undistributed profits to a tax on the companys undistributed profits, even if the dividends paid or the undistributed profits consist wholly or partly of profits or income arising in such other State.
7. (a) Dividends shall be deemed to arise in India if they are paid by a company which is a resident of India ;
(b) Dividends shall be deemed to arise in Singapore :
(i) if they are paid by a company which is a resident of Singapore ; or
(ii) if they are paid by a company which is a resident of Malaysia out of profits arising in Singapore and qualifying as dividends arising in Singapore under Article VII of the Agreement for the Avoidance of Double Taxation between Singapore and Malaysia signed on 26th December, 1968.
Article 11 : Interest - 1. Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.
2. However, such interest may also be taxed in the Contracting State in which it arises, and according to the laws of that State, but if the beneficial owner of the interest is a resident of the other Contracting State, the tax so charged shall not exceed :
(a) 10 per cent of the gross amount of the interest if such interest is paid on a loan granted by a bank carrying on a bona fide banking business or by a similar financial institution (including an insurance company) ;
(b) 15 per cent of the gross amount of the interest in all other cases.
3. The term interest as used in this Article means income from debt-claims of every kind, whether or not secured by mortgage and whether or not carrying a right to participate in the debtors profits; and in particular, income from Government securities and income from bonds or debentures, including premiums and prizes attaching to such securities, bonds or debentures. Penalty charges for late payment shall not be regarded as interest for the purpose of this Article.
4. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the interest, being a resident of a Contracting State, carries on business in the other Contracting State in which the interest arises, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the debt-claim in respect of which the interest is paid is effectively connected with such permanent establishment or fixed base. In such case, the provisions of Article 7 or Article 14, as the case may be, shall apply.
5. Interest shall be deemed to arise in a Contracting State when the payer is that Contracting State itself, a political sub-division, a local authority, a statutory body or a resident of that State. Where, however, the person paying the interest, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the indebtedness on which the interest is paid was incurred, and such interest is borne by such permanent establishment or fixed base, then such interest shall be deemed to arise in the Contracting State in which the permanent establishment or fixed base is situated.
6. Where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the interest, having regard to the debt-claim for which it is paid, exceeds the amount which would have been agreed upon by the payer and the beneficial owner in the absence of such relationship, the provisions of this Article shall apply to the last-mentioned amount. In such case, the excess part of the payments shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of this Agreement.
Article 12 : Royalties and fees for technical services - 1. Royalties and fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.
1[2. However, such royalties and fees for technical services may also be taxed in the Contracting State in which they arise and according to the laws of that Contracting State, but if the recipient is the beneficial owner of the royalties or fees for technical services, the tax so charged shall not exceed 10 per cent.]
3. The term royalties as used in this Article means payments of any kind received as a consideration for the use of, or the right to use :
(a) any copyright of a literary, artistic or scientific work, including cinematograph film or films or tapes used for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right, property or information ;
(b) any industrial, commercial or scientific equipment, other than payments derived by an enterprise from activities described in paragraph 4(b) or 4(c) of Article 8.
4. The term fees for technical services as used in this Article means payments of any kind to any person in consideration for services of a managerial, technical or consultancy nature (including the provision of such services through technical or other personnel) if such services :
(a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received ; or
(b) make available technical knowledge, experience, skill, know-how or processes, which enables the person acquiring the services to apply the technology contained therein ; or
(c) consist of the development and transfer of a technical plan or technical design, but excludes any service that does not enable the person acquiring the service to apply the technology contained therein.
For the purposes of (b) and (c) above, the person acquiring the service shall be deemed to include an agent, nominee, or transferee of such person.
5. Notwithstanding paragraph 4, fees for technical services does not include payments :
(a) for services that are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of property other than a sale described in paragraph 3(a) ;
(b) for services that are ancillary and subsidiary to the rental of ships, aircraft, containers or other equipment used in connection with the operation of ships or aircraft in international traffic ;
(c) for teaching in or by educational institutions ;
(d) for services for the personal use of the individual or individuals making the payment;
(e) to an employee of the person making the payments or to any individual or firm of individuals (other than a company) for professional services as defined in Article 14 ;
(f) for services rendered in connection with an installation or structure used for the exploration or exploitation of natural resources referred to in paragraph 2(j) of Article 5 ;
(g) for services referred to in paragraphs 4 and 5 of Article 5.
6. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties or fees for technical services, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties or fees for technical services arise, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the right, property or contract in respect of which the royalties or fees for technical services are paid is effectively connected with such permanent establishment or fixed base. In such case, the provisions of Article 7 or Article 14, as the case may be, shall apply.
7. Royalties and fees for technical services shall be deemed to arise in a Contracting State when the payer is that State itself, a political sub-division, a local authority, a statutory body or a resident of that State. Where, however, the person paying the royalties or fees for technical services, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the liability to pay the royalties or fees for technical services was incurred, and such royalties or fees for technical services are borne by such permanent establishment or fixed base, then such royalties or fees for technical services shall be deemed to arise in the State in which the permanent establishment or fixed base is situated.
8. Where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of royalties or fees for technical services paid exceeds the amount which would have been paid in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In such case, the excess part of the payments shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of this Agreement.
ARTICLE 13 : Capital gains - 1. Gains derived by a resident of a Contracting State from the alienation of immovable property, referred to in Article 6, and situated in the other Contracting State may be taxed in that other State.
2. Gains from the alienation of movable property forming part of the business property of a permanent establishment which an enterprise of a Contracting State has in the other Contracting State or of movable property pertaining to a fixed base available to a resident of a Contracting State in the other Contracting State for the purpose of performing independent personal services, including such gains from the alienation of such a permanent establishment (alone or together with the whole enterprise) or of such fixed base, may be taxed in that other State.
3. Gains from the alienation of ships or aircraft operated in international traffic or movable property pertaining to the operation of such ships or aircraft shall be taxable only in the Contracting State of which the alienator is a resident.
1a[4. Gains derived by a resident of a Contracting State from the alienation of any property other than those mentioned in paragraphs 1, 2 and 3 of this Article shall be taxable only in that State.]
ARTICLE 14 : Independent personal services - 1. Income derived by an individual who is a resident of a Contracting State from the performance of professional services or other independent activities of a similar character shall be taxable only in that State except in the following circumstances when such income may also be taxed in the other Contracting State :
(a) if he has a fixed base regularly available to him in the other Contracting State for the purpose of performing his activities; in that case, only so much of the income as is attributable to that fixed base may be taxed in that other State ; or
(b) if his stay in the other Contracting State is for a period or periods amounting to or exceeding in the aggregate 90 days in the relevant fiscal year, in that case, only so much of the income, as is derived from his activities, performed in that other State may be taxed in that other State.
2. The term professional services includes independent scientific, literary, artistic, educational or teaching activities, as well as the independent activities of physicians, surgeons, lawyers, engineers, architects, dentists and accountants.
ARTICLE 15 : Dependent personal services - 1. Subject to the provisions of Articles 16, 18, 19, 20 and 21, salaries, wages and other similar remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that State unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration as is derived therefrom may be taxed in that other State.
2. Notwithstanding the provisions of paragraph 1, remuneration derived by a resident of a Contracting State in respect of an employment exercised in the other Contracting State shall be taxable only in the first-mentioned State, if :
(a) the recipient is present in the other State for a period or periods not exceeding in the aggregate 183 days in the relevant fiscal year ; and
(b) the remuneration is paid by, or on behalf of, an employer who is not a resident of the other State ; and
(c) the remuneration is not borne by a permanent establishment or a fixed base which the employer has in the other State.
3. In the case of a recipient who satisfies all the conditions under sub-paragraphs (a), (b) and (c) of paragraph 2, if his remuneration is deductible as an expense against fees for technical services (dealt with under Article 12) derived by his employer and the employer has no permanent establishment in the other Contracting State, the remuneration may, notwithstanding the provisions of paragraph 2, be taxed in that State. In such case, the tax so charged shall not exceed 15 per cent of the gross amount of the remuneration.
4. Notwithstanding the preceding provisions of this Article, remuneration derived in respect of an employment exercised aboard a ship or aircraft operated in international traffic by an enterprise of a Contracting State shall be taxable only in that State.
ARTICLE 16 : Directors fees - Directors fees and similar payments derived by a resident of a Contracting State in his capacity as a member of the board of directors of a company which is a resident of the other Contracting State may be taxed in that other State.
ARTICLE 17 : Artistes and sportspersons -1. Notwithstanding the provisions of Articles 14 and 15, income derived by a resident of a Contracting State as an artiste such as a theatre, motion picture, radio or television artiste or a musician or as a sportsperson, from his personal activities as such exercised in the other Contracting State may be taxed in that other State.
2. Where income in respect of or in connection with personal activities exercised by an artiste or a sportsperon accrues not to the artiste or sportsperson himself but to another person, that income may, notwithstanding the provisions of Articles 7, 14 and 15, be taxed in the Contracting State in which the activities of the artistes or sportspersons are exercised.
3. Notwithstanding the provisions of paragraph 1, income derived by an artiste or a sportsperson who is a resident of a Contracting State from his personal activities as such exercised in the other Contracting State, shall be taxable only in the first-mentioned State, if the activities in the other State are supported wholly or substantially from the public funds of the first-mentioned State, including any of its political sub-divisions, local authorities or statutory bodies.
4. Notwithstanding the provisions of paragraph 2 and Articles 7, 14 and 15, where income in respect of or in connection with personal activities exercised by an artiste or a sportsperson in a Contracting State accrues not to the artiste or sportsperson himself but to another person, that income shall be taxable only in the other Contracting State, if that other person is supported wholly or substantially from the public funds of that other State, including any of its political sub-divisions, local authorities or statutory bodies.
ARTICLE 18 : Remuneration and pensions in respect of Government service - 1. (a) Remuneration, other than a pension, paid by a Contracting State or a political sub-division, a local authority or a statutory body thereof to an individual in respect of services rendered to that State or sub-division or authority or body shall be taxable only in that State.
(b) However, such remuneration shall be taxable only in the other Contracting State if the services are rendered in that other State and the individual is a resident of that State who :
(i) is a national of that State ; or
(ii) did not become a resident of that State solely for the purpose of rendering the services.
2. (a) Any pension paid by, or out of funds created by a Contracting State or a political sub-division, a local authority or a statutory body thereof to an individual in respect of services rendered to that State or sub-division or authority or body shall be taxable only in that State.
(b) However, such pension shall be taxable only in the other Contracting State if the individual is a resident of, and a national of that other State.
3. The provisions of Articles 15, 16 and 19 shall apply to remuneration and pensions in respect of services rendered in connection with a business carried on by a Contracting State or a political sub-division or a local authority or a statutory body thereof.
ARTICLE 19 : Non-Government pensions and annuities - 1. Any pension, other than a pension referred to in Article 18, or any annuity derived by a resident of a Contracting State from sources within the other Contracting State may be taxed only in the first-mentioned State.
2. The term pension means a periodic payment made in consideration of past services or by way of compensation for injuries received in the course of performance of services.
3. The term annuity means a stated sum payable periodically at stated times during life or during a specified or ascertainable period of time, under an obligation to make the payments in return for adequate and full consideration in money or moneys worth.
ARTICLE 20 : Students and trainees - 1. An individual who is or was a resident of a Contracting State immediately before making a visit to the other Contracting State and is temporarily present in the other State solely :
(a) as a student at a recognised university, college, school or other similar recognised educational institution in that other State ;
(b) as a business or technical apprentice ; or
(c) as a recipient of a grant, allowance or award for the primary purpose of study, research or training from the Government of either State or from a scientific, educational, religious or charitable organisation or under a technical assistance programme entered into by the Government of either State ;
shall be exempt from tax in that other State on :
(i) all remittances from abroad for the purposes of his maintenance, education, study, research or training ;
(ii) the amount of such grant, allowance or award; and
(iii) any remuneration not exceeding United States Dollars five hundred per month or its equivalent in local currency in respect of services in that other State provided the services are performed in connection with his study, research or training or are necessary for the purposes of his maintenance.
2. The benefits of this Article shall extend only for such period of time as may be reasonable or customarily required to complete the education or training undertaken, but in no event shall any individual have the benefits of this Article for more than five consecutive years from the date of his first arrival in that other Contracting State.
ARTICLE 21 : Teachers and researchers - 1. An individual who is or was a resident of a Contracting State immediately before making a visit to the other Contracting State, and who, at the invitation of any university, college, school or other similar educational institution, visits that other State for a period not exceeding two years solely for the purpose of teaching or research or both at such educational institution shall be exempt from tax in that other State on any remuneration for such teaching or research.
2. This Article shall not apply to income from research if such research is undertaken primarily for the private benefit of a specific person or persons.
ARTICLE 22 : Income of Government - 1. The Government of a Contracting State shall be exempt from tax in the other Contracting State in respect of income derived by that Government from sources within the other State.
2. The types of income to which paragraph 1 applies are:
(a) dividends under Article 10 ;
(b) interest under Article 11 ; and
(c) any other income or gains derived from transactions not pursuant to the conduct of commercial activities.
3. For the purposes of paragraph 1, the term Government :
(a) in the case of Singapore means the Government of Singapore and shall include :
(i) the Monetary Authority of Singapore and the Board of Commissioners of Currency;
(ii) the Government of Singapore Investment Corporation Pvt. Ltd. to the extent it is not engaged in the conduct of commercial activities ;
(iii) a statutory body not engaged in the conduct of commercial activities ;
(iv) any other institution or body as may be agreed from time to time between the competent authorities of the Contracting States ;
(b) in the case of India means the Government of India and shall include :
(i) the Governments of the States and the Union Territories of India;
(ii) the Reserve Bank of India or any of its subsidiaries which is not engaged in the conduct of commercial activities;
(iii) a statutory body not engaged in the conduct of commercial activities;
(iv) any other institution or body as may be agreed from time to time between the competent authorities of the Contracting States.
ARTICLE 23 : Income not expressly mentioned - Items of income which are not expressly mentioned in the foregoing Articles of this Agreement may be taxed in accordance with the taxation laws of the respective Contracting States.
ARTICLE 24 : Limitation of relief - 1. Where this Agreement provides (with or without other conditions) that income from sources in a Contracting State shall be exempt from tax, or taxed at a reduced rate in that Contracting State and under the laws in force in the other Contracting State the said income is subject to tax by reference to the amount thereof which is remitted to or received in that other Contracting State and not by reference to the full amount thereof, then the exemption or reduction of tax to be allowed under this Agreement in the first-mentioned Contracting State shall apply to so much of the income as is remitted to or received in that other Contracting State.
2. However, this limitation does not apply to income derived by the Government of a Contracting State or any person approved by the competent authority of that State for the purpose of this paragraph. The term Government includes its agencies and statutory bodies.




ARTICLE 25 : Avoidance of double taxation - 1. The laws in force in either of the Contracting States shall continue to govern the taxation of income in the respective Contracting States except where express provision to the contrary is made in this Agreement.
2. Where a resident of India derives income which, in accordance with the provisions of this Agreement, may be taxed in Singapore, India shall allow as a deduction from the tax on the income of that resident an amount equal to the Singapore tax paid, whether directly or by deduction. Where the income is a dividend paid by a company which is a resident of Singapore to a company which is a resident of India and which owns directly or indirectly not less than 25 per cent of the share capital of the company paying the dividend, the deduction shall take into account the Singapore tax paid in respect of the profits out of which the dividend is paid. Such deduction in either case shall not, however, exceed that part of the tax (as computed before the deduction is given) which is attributable to the income which may be taxed in Singapore.
3. For the purposes of paragraph 2 of this Article, Singapore tax paid shall be deemed to include any amount of tax which would have been payable but for the reduction or exemption of Singapore tax granted under :
(a) the provisions of the Economic Expansion Incentives (Relief from Income-tax) Act and the provisions of sections 13(1)(t), 13(1)(u), 13(1)(v), 13(2), 13A, 13B, 13F, 14B, 14E, 43A, 43C, 43D, 43E, 43F, 43G, 43H, 43-I, 43J and 43K of the Income-tax Act, insofar as they were in force and have not been modified since the date of signature of this Agreement, or have been modified in minor respects so as not to affect their general character.
(b) any other provision which may subsequently be enacted granting an exemption or reduction of tax which is agreed by the competent authorities of the Contracting States to be of a substantially similar character to any provision referred to in sub-paragraph (a) of this paragraph, if such provision has not been modified thereafter or has been modified only in minor respects so as not to affect its general character.
4. Subject to the provisions of the laws of Singapore regarding the allowance as a credit against Singapore tax of tax paid in any country other than Singapore, Indian tax paid, whether directly or by deduction, in respect of income from sources within India shall be allowed as a credit against Singapore tax payable in respect of that income. Where such income is a dividend paid by a company which is a resident of India to a resident of Singapore which owns not less than 25 per cent of the share capital of the company paying the dividends, the credit shall take into account Indian tax paid in respect of its profits by the company paying the dividends.
5. For the purposes of paragraph 4 of this Article the term Indian tax paid shall be deemed to include any amount of tax which would have been payable in India but for a deduction allowed in computing the taxable income or an exemption or reduction of tax granted for that year in question :
(a) Sections 10(4), 10(4B), 10(5B), 10(15)(iv), 10A, 10B, 33AB, 80-I and 80-IA, insofar as these provisions were in force and have not been modified since the date of signature of this Agreement, or have been modified only in minor respects so as not to affect their general character,
(b) any other provision which may subsequently be enacted granting an exemption or reduction of tax which is agreed by the competent authorities of the Contracting States to be of a substantially similar character to a provision referred to in sub-paragraph (a) of this paragraph, if such provision has not been modified thereafter or has been modified only in minor respects so as not to affect its general character.
6. Income which, in accordance with the provisions of this Agreement, is not to be subjected to tax in a Contracting State, may be taken into account for calculating the rate of tax to be imposed in that Contracting State.
ARTICLE 26 : Non-discrimination - 1. The nationals of a Contracting State shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which nationals of that other State in the same circumstances and under the same conditions are or may be subjected.
2. The taxation on a permanent establishment which an enterprise of a Contracting State has in the other Contracting State shall not be less favourably levied in that other State than the taxation levied on enterprises of that other State carrying on the same activities in the same circumstances or under the same conditions. This provision shall not be construed as preventing a Contracting State from charging the profits of a permanent establishment which an enterprise of the other Contracting State has in the first-mentioned State at a rate of tax which is higher than that imposed on the profits of a similar enterprise of the first-mentioned Contracting State, nor as being in conflict with the provisions of paragraph 3 of Article 7 of this Agreement.
3. Enterprises of a Contracting State, the capital of which is wholly or partly owned or controlled, directly or indirectly, by one or more residents of the other Contracting State, shall not be subjected in the first-mentioned State to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which other similar enterprises of that first-mentioned State are or may be subjected in the same circumstances and under the same conditions.
4. Nothing contained in paragraphs 1, 2 and 3 of this Article shall be construed as
(a) obliging a Contracting State to grant to residents of the other Contracting State any personal allowances, reliefs, reductions and deductions which it grants to its own residents;
(b) affecting any provisions of the tax laws of the respective Contracting States regarding the imposition of tax on non-resident persons as such;
(c) obliging a Contracting State to grant to nationals of the other Contracting State those personal allowances, reliefs, reductions and deductions for tax purposes which it grants to its own citizens who are not resident in that State or to such other persons as may be specified in the taxation laws of that State; and
(d) affecting any provisions of the tax laws of the respective Contracting States regarding any tax concessions granted to persons fulfilling specified conditions.
5. In this Article, the term taxation means taxes which are the subject of this Agreement.
ARTICLE 27 : Mutual agreement procedure - 1. Where a resident of a Contracting State considers that the actions of one or both of the Contracting States result or will result for him in taxation not in accordance with this Agreement, he may, notwithstanding the remedies provided by the national laws of those States, present his case to the competent authority of the Contracting State of which he is a resident. This case must be presented within three years of the date of receipt of notice of the action which gives rise to taxation not in accordance with the Agreement.
2. The competent authority shall endeavour, if the objection appears to it to be justified and if it is not itself able to arrive at an appropriate solution, to resolve the case by mutual agreement with the competent authority of the other Contracting State, with a view to avoidance of taxation not in accordance with the Agreement. Any agreement reached shall be implemented notwithstanding any time limits in the national laws of the Contracting States.
3. The competent authorities of the Contracting States shall endeavour to resolve by mutual agreement any difficulties or doubts arising as to the interpretation or application of the Agreement. They may also consult together for the elimination of double taxation in cases not provided for in the Agreement.
4. The competent authorities of the Contracting States may communicate with each other directly for the purpose of reaching an agreement in the sense of the preceding paragraphs. When it seems advisable in order to reach agreement to have an oral exchange of opinions, such exchange may take place through a Commission consisting of representatives of the competent authorities of the Contracting States.
ARTICLE 28 : Exchange of information - 1. The competent authorities of the Contracting States shall exchange such information (including documents) as is necessary for carrying out the provisions of this Agreement or of the domestic laws of the Contracting States concerning taxes covered by the Agreement, insofar as the taxation thereunder is not contrary to the Agreement, in particular for the prevention of fraud or evasion of such taxes. Any information received by a Contracting State shall be treated as secret in the same manner as information obtained under the domestic laws of that State. However, if the information is originally regarded as secret in the transmitting State, it shall be disclosed only to persons or authorities (including courts and administrative bodies) involved in the assessment or collection of, the enforcement or prosecution in respect of, or the determination of appeals in relation to, the taxes which are the subject of the Agreement. Such persons or authorities shall use the information only for such purposes but may disclose the information in public court proceedings or in judicial decisions.
2. The exchange of information or documents shall be either on a routine basis or on request with reference to particular cases or both.
3. In no case shall the provisions of paragraph 1 be construed so as to impose on a Contracting State the obligation :
(a) to carry out administrative measures at variance with the laws or administrative practice of that or of the other Contracting State;
(b) to supply information or documents which are not obtainable under the laws or in the normal course of the administration of that or of the other Contracting State;
(c) to supply information or documents which would disclose any trade, business, industrial, commercial or professional secret or trade process or information the disclosure of which would be contrary to public policy.
ARTICLE 29 : Diplomatic and consular officials - Nothing in this Agreement shall affect the fiscal privileges of diplomatic or consular officials under the general rules of international law or under the provisions of special agreements.
ARTICLE 30 : Entry into force - 1. Each of the Contracting States shall notify the other the completion of the procedures requires by its law for the bringing into force of this Agreement. This Agreement shall enter into force on the date of the later of these notifications and shall thereupon have effect :
(a) in India, in respect of income arising in any fiscal year beginning on or after the first day of April, 1994;
(b) in Singapore, in respect of income arising in any fiscal year beginning on or after the first day of January, 1994.
2. The Agreement between the Government of the Republic of India and the Government of the Republic of Singapore for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income signed in Singapore on 20th April, 1981 shall terminate and cease to be effective from the date on which this Agreement comes into effect.
ARTICLE 31 : Termination - This Agreement shall remain in force indefinitely but either of the Contracting States may, on or before the thirtieth day of June in any calendar year beginning after the expiration of a period of five years from the date of its entry into force, give the other Contracting State through diplomatic channels, written notice of termination and, in such event, this Agreement shall cease to have effect :
(a) in India, in respect of income arising in any fiscal year beginning on or after the 1st day of April next following the date on which the notice of termination is given;
(b) in Singapore, in respect of income arising in any fiscal year beginning on or after the 1st day of January next following the date on which the notice of termination is given.
IN WITNESS WHEREOF the undersigned, being duly authorised thereto, have signed the present Agreement.
DONE in duplicate at India this twenty-fourth day of January, one thousand nine hundred and ninety-four in the Hindi and English languages, both texts being equally authentic. In the case of divergence between the two texts, the English text shall be the operative one.

Permanent Establishment-Morgan Stanley

Landmark ruling on permanent establishment

A recent ruling on the interpretation of provisions of Double Tax Avoidance Agreements is a landmark decision on the concept of a permanent establishment, which is the bedrock on which business profits can be taxed in a contracting state. When there is a close and continued relationship between a resident and non-resident business, the latter becomes liable to tax in India.

The Income-Tax Act, 1961 deals with the concept of a business connection between a resident and a non-resident. Where there is an intimate and a real relationship between the two on a continued basis, the non-resident becomes liable to tax in India in respect of income earned pertaining to a business connection that is deemed to accrue in India.

Section 9 of the Act, which deals with business connection, stands superseded where the non-resident is residing in a country with which India has entered into a Double Tax Avoidance Agreement (DTAA).

Under such an agreement, business profits are taxable under Article 7, provided such profits are attributable to the permanent establishment (PE), defined by Article 5 of the DTAA.
A reading of Article 5 of the DTAA shows that Para 1 thereof applies where an enterprise carries on a business, whether wholly or partly, through a fixed place of business.

The commentary of OECD on Article 5 states that there must be a fixed place of business which takes in not only fixed premises but also machinery or equipment. The expression "a fixed place" indicates a certain degree of permanence. It is necessary that the business of the enterprise be carried on through a fixed place. Para 2 of Article 5 of the DTAA is an inclusive provision that takes in various places and services enumerated in clauses (a) to (l). A number of places are specified in Clauses (a) to (k) whereas clause (l) postulates provision of services by an enterprise within a contracting state through employees or other personnel.

Landmark case

These points were considered in a landmark ruling in the case of Morgan Stanley and Co., US, (2006; 152 Taxman 1). The facts in this case were that the applicant, M group, a non-resident company incorporated in the US, provided financial advisory services, corporate lending and securities underwriting.
The diverse activities of the applicant were undertaken by various divisions.
One of the group companies, MSAS, incorporated in India, was set up by the applicant to manage the group members' front office and infrastructure functions of its global operations, including services such as IT support, account reconciliation and research.
MSAS entered into a service agreement with the applicant. Under the agreement, it undertook to provide M group the aforesaid support services. To enable MSAS provide those services it was agreed between the parties that the applicant would send staff to MSAS (India) for stewardship and similar activities.
The applicant group agreed to pay MSAS the actual sum of all costs, together with an appropriate mark-up, mutually agreed on.
From an employment perspective, the staff would continue to be employed or engaged and their salaries and fees would be paid directly by the applicant.
Net margin method
A company `E' conducted a transfer pricing study for MSAS. The transactional net margin method (TNNM) was selected as the most appropriate, with operating profit margins being the profit level indicator in respect of the services rendered by MSAS to the applicant.
The average margin earned by comparable companies providing similar services was worked out at 28.33 per cent and under the existing arrangement, MSAS charged the applicant a margin of 29 per cent on the costs it incurred.
MSAS agreed to develop computer software including customised electronic data or computer programmes of critical relevance for the various divisions of the applicant such as equity research, fixed income division, equity finance service divisions and investment banking divisions.
It also agreed to provide research reports, data analysis, industry- and company-specific analysis, earning models of companies as an on-going process so as to help various divisions of the applicant formulate their business strategies.
MSAS would use the brand name, trade name as well as computer hardware of M. Whatever was produced or developed by it would be passed on to the M group and the former would have no right or interest in the said products.
The staff deputed to MSAS would be on the payroll of the applicant and the remuneration paid by it would be reimbursed by MSAS.
According to the AAR, MSAS had a fixed place of business but there was nothing to show that the business of the applicant was carried on through the place of business of MSAS.
The contention that rendering of the aforementioned services by MSAS to the applicant and other group companies which may be utilised by them in running their business, amounts to carrying on business through the fixed place of business of MSAS was not accepted by the AAR.
The germane condition of carrying on business through a fixed place of business of MSAS, not being fulfilled, Article 5 (1) would not be attracted. Therefore, MSAS cannot be treated as the PE of the applicant.
According to the AAR, for the purpose of Para 4, it is not necessary that MSAS should be an agent of the applicant/M group. It is enough if it satisfies the two requirements which are cumulative.
So far as the first requirement is concerned, that was satisfied as MSAS would be acting in India on behalf of the applicant/M group. Regarding the second requirement, MSAS is not an agent and, according to the commissioner, it was not an agent of independent status. Thus, admittedly, this requirement is also satisfied.
Having considered the facts and contentions of the parties both oral and written, the AAR ruled that MSAS could not be held to be a PE of the applicant/M group.
As regards the question whether the applicant would be regarded as having a PE in India under Article 5(2)(1) if it were to send some of its employees to India for undertaking stewardship activities or on deputation in the employment of MSAS, the AAR ruled that the ingredients of Para (2)(1) of Article 5 have to be considered.
From the terms of agreement, it is clear that the employees of the applicant are to be sent to MSAS whether for stewardship activity or on deputation basis for more than 90 days.
The applicant's contention that the staff would be working for the applicant was not accepted by the AAR. It may be that the benefit of services of the staff would be ensured to the applicant but it would not be the same as working for the applicant.
Once employees are sent by the applicant on deputation for stewardship activities, they would be actively involved in the key managerial activities of MSAS.
It follows that the ingredients of para (2)(1) of Article 5 are satisfied. Therefore, the AAR ruled that MSAS would constitute a PE.
This ruling is a landmark decision on the interpretation of provisions of Double Tax Avoidance Agreements, on the concept of a permanent establishment, which is the bedrock on which business profits can be taxed in a contracting state

List of direct tax defaulters in the country

Stud farm owner Hassan Ali Khan tops the list of direct tax defaulters in the country. The outstanding demand against Khan as on March 31, 2009, is a whopping Rs 50,345 crore. In a written reply in the Rajya Sabha on Tuesday, minister of state for finance S S Palanimanickam gave the names of Top 100 defaulters of direct taxes worth Rs 1.41 lakh crore.
The list includes individuals as well as businesses ranging from banks to telecom companies to beverage firms to airlines.
Chandrika Tapuriah, wife of Kolkata-based businessman Kashinath Tapuriah, has the second highest tax outstanding at Rs 20,540 crore, followed by Big Bull (late) Harshad Mehta at Rs 12,719 crore.
Other members of Mehta’s family — Jyoti Mehta and Ashwin Mehta — are among the Top 10 defaulters. A D Narottam and Hiten Dalal are also in Top 10 list.
Among businesses, Sahara India Financial Corp leads at No 6 position in the list with a direct tax outstanding of Rs 3,063 crore.
Other corporates among the Top 20 defaulters include state-owned telco Bharat Sanchar Nigam Ltd which owes Rs 2,417 crore, Sahara India (Rs 1,945 crore), IDBI (Rs 964 crore), Sahara Airlines, now JetLite (Rs 850 crore) and Star (Rs 838 crore).
Maharashtra State Electricity Distribution Co is 21st with an outstanding tax of Rs 700 crore, while Maharashtra State Power Generation Co is 61st rank with an outstanding of Rs 251 crore.
Prominent companies in the defaulters’ list are NTPC (Rs 622 crore), Coca Cola India (Rs 600 crore), Oracle Corp (Rs 558 crore), Canara Bank (Rs 512 crore), Tata Communications (VSNL, Rs 507 crore), Allahabad Bank (Rs 487 crore), General Insurance Corp (Rs 473 crore), Nokia Corp (Rs 448 crore), Oil India Ltd (Rs 447 crore), State Bank of India (Rs 333 crore), Satyam Computer (Now Mahindra Satyam, Rs 290 crore), Tata Industries (Rs 251 crore), Bank of India (Rs 248 crore), Escorts Heart Institute (Rs 216 crore), IndianOil Corp (Rs 210 crore), IBM (Rs 208 crore), Tata Motors (Rs 206 crore), Shaw Wallace Breweries (Rs 181 crore), Uco Bank (Rs 179 crore), and Reliance Energy (Rs 176 crore).

First Budget of Independent India

SPEECH OF SHRI R.K. SHANMUKHAM CHETTY, MINISTER OF
FINANCE INTRODUCING THE BUDGET FOR THE YEAR 1947-1948
I rise to present the first Budget of a free and independent India. This occasion may well be considered an historic one and I count it a rare privilege that it has fallen to me to be the Finance Minister to present this Budget. While I am conscious of the honour that is implied in this position, I am even more conscious of the responsibilities that face the custodian of the finances of India at this critical juncture. I have no doubt that in the discharge of my responsibilities I may count on the sympathetic and
wholehearted co-operation of every Hon’ble Member in this House.
2. It is not necessary to dwell at any length on the political developments
which have led to the momentous changes that have taken place since the Budget for the current year was presented to the Legislative Assembly last February. The partition of the country has cut across its economic and cultural unity and the growth of centuries of common life to which all the communities have contributed. The long-term effects of the division of the country still remain to be assessed and we are too near the events
to take a dispassionate view. When the ashes of controversy have died down, it will be for the future historian to judge the wisdom of the step and its consequences on the destiny of one fifth of the human race. Whatever might be the immediate political justification of partition, its economic consequences must be fully appreciated if the two Dominions are to safeguard the interests of the ordinary man in both the new States. Regions which have functioned for centuries on a complementary basis have
been suddenly cut asunder. To have had as a single economic unit a subcontinent peopled by a fifth of the human race meant by itself a great advantage for the teeming millions of its population an advantage not fully realised, and perhaps not properly utilized while the unity was a fact. While it may be a comparatively easy matter to make the necessary political adjustments resulting from partition, it would require time, patience, goodwill and mutual understanding to effect the adjustments necessitated
by the economic consequences of partition. Economically India and Pakistan have each points of advantages and disadvantages. In general, it may be said that, while India is much the stronger at present in industrial production and mineral resources,
Pakistan has some advantage in agricultural resources, especially foodstuffs. But the
complementary character of their economies is even deeper than is indicated by this
generalisation. The compelling forces of economic necessity must create a friendly
and cooperative spirit between the two Dominions and I trust that, when the present
passions subside and normal conditions of life return, our people will work together to
secure that, notwithstanding the political division, the economic life of the common
man is not injured. So far as we are concerned, the Indian Union with its population
of nearly 300 millions will be the second largest country in the world next to China.
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Our economy is more balanced than that of most countries and, in spite of the setbacks
resulting from partition, our large natural resources and sound financial position will
enable us to launch a vigorous economic plan for substantially raising the living standard
of our people.
3. The Budget Statement that I am presenting today will cover a period of
71/2 months from the 15th August, 1947 to the 31st March, 1948. I may briefly explain
the circumstances in which it has been necessary to present a fresh Budget for this
period. With the division of the country and the emergence of two independent
Governments in place of the old Central Government, the Budget for the current year
1947-48 passed by the Legislature last March ceased to be operative. Although under
the transitional provisions of the constitution, Government could authorize the
expenditure necessary for the rest of the financial year, it was felt that it will be in
accordance with the public wish that a Budget should be placed before the
representatives of the people at the earliest possible moment. There is nothing
spectacular about my statement and there will be no surprises associated with a Budget.
I shall place before the House our estimate of revenue and expenditure for this period
and I shall try to indicate in broad outlines the pattern of the economic life of the
country and the problems that we will have to face in the immediate future.
PARTITION ARRANGEMENTS
4. Before I proceed to deal with the estimates for the year, the House would
doubtless wish to have a brief account of the broad details of the partition and its
immediate financial and economic results. As soon as the decision to divide the country
was taken, a Partition Council, consisting of the representatives of both the future
Governments, was set up to implement the decision. A number of Expert Committees,
on which both the future Governments were equally represented, were appointed under
the aegis of the Partition Council to work out the administrative and other consequences
of the partition. These Committees, some of which are assisted by a number of
departmental subcommittees, dealt with all aspects of the problems arising out of the
partition such as the transfer of staff and organisations, the division of assets and
liabilities, the arrangements for the coinage and currency In the two Dominions, the
trade and economic relations between them, the continuance of economic controls and
so on. These Committees had to complete their work in a matter of four to six weeks
and the House will appreciate that in the short time available to deal with these issues,
some of which were of the utmost complexity and importance, it was not possible to
reach an agreement on all matters before the 15th August 1947 when the two Dominions
came into existence and took over the Government of their respective territories. A
number of important points were accordingly left over for further consideration by the
two Dominions and, in the absence of an agreement between them, for reference to an
Arbitral Tribunal which has been set up. Among the important issues on which it has
not been possible to reach an agreement, I may mention the allocation of debt between
the two Dominions, the method of discharging the pensionary liability, the valuation
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of the Railways, the division of the assets of the Reserve Bank and the division of the
movable stores held by the Army. Some of these issues are likely to go before the
Arbitral Tribunal and the House will not expect me to say anything further about them
at this stage. It was also found impossible to reconstitute the Armed Forces between
the two Dominions and allocate the military stores, equipment and installations between
them before the 15th August 1947. For the completion of this work, and for clothing,
feeding and paying the Armed Forces till their reconstitution had been completed, a
Joint Defence Council representing the two Dominions with an independent Chairman
and with a Supreme Commander responsible to the Council, has been set up. This
Council was originally expected to complete its work by the 1st of April 1948 but it is
now hoped that this may be mostly achieved by the end of this month.
5. The long range fiscal, financial and economic relations between the two
Dominions still remain to be considered, but for the rest of the current year the
intention is to maintain, within the framework of the agreements arrived at, the
status quo before the partition. For the present both the Dominions will continue the
existing taxes and duties, there will be a free movement of trade between them
without any internal barriers and the import and exchange controls of the two
Dominions will be co-ordinated. It has also been agreed that till the end of September
1948 the two Dominions will remain under a common currency system managed by
the Reserve Bank, although from the 1st April next Pakistan will have its own
overprinted notes and coin. So far as revenue is concerned, each Dominion will
ordinarily retain what it collects but in respect of income tax on assessments for
.1946-47 and earlier years and uncollected demands ion the date of the partition an
arrangement for sharing the receipts arising in both the Dominions has been arrived
at. In the matter of the division of assets and liabilities, it has not been possible, as
I have explained earlier, to reach an agreement on a number of important points
including the allocation of debt and the discharge of the liability for pensions. But
the responsibility for the outstanding liabilities of the old Government could not,
obvious reasons, be left vague and undetermined and the only practicable course
was for one of the Dominions to accept the initial liability to the creditors and settle
with the other the contribution to be made by it. The initial liability for the outstanding
loans, guarantees and financial obligations of the late Central Government at the
time of the partition and for the pensions chargeable to it has been placed by law on
the Indian Dominion subject to an equitable contribution from Pakistan. I am sure
the House will welcome this decision because in the interests of the credit of both
the successor Governments it is obviously undesirable to leave those who had lent
money to the previous Government or had earned pensions under it in any doubt as
to the Government they should approach for their dues.
REVIEW OF ECONOMIC CONDITIONS
6. There has been a marked deterioration in the economic situation in the
country since March last. The situation has been aggravated by the large scale
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disturbances which burst out suddenly, more especially in the Punjab and the North-
West Frontier Province. Apart from the serious economic consequences arising out of
these disturbances, the human misery that it has caused cannot be measured in terms
of money. Thousands of innocent lives have been lost in the two Dominions and
migration on a scale unprecedented in history has taken place. The total number of
people involved in this mass migration of population has reached colossal figures on
either side giving rise to problems of great magnitude affecting the economy of the
country. The Immediate effect of these tragic developments has been to divert the
attention of the Government almost completely from normal activities. There has been
an almost total breakdown of the economy of the East and West Punjabs. While
Government have done and are doing everything possible to relieve the immediate
distress and suffering of the refugees, the formulation of long-range plans for their
rehabilitation raises formidable issues both in the financial and administrative fields.
These problems have imposed a heavy burden on the Central exchequer, the magnitude
of which it is not possible to assess at present. The budget of the Central Government
for the next few years will be materially affected by this unexpected development in
the country, Our whole programme of post-war development will have to be reviewed
in the light of this context.
7. The food position has continued to cause grave anxiety both to the
Provincial Governments and the Central Government. The country has just weathered
a serious threat of a breakdown of its rationing system. The results of the "Grow More
Food Campaign" have been on the whole disappointing. During the three years 1944-
45, 1945-46 and 1946-47 we had to import from abroad 43.80 lakhs of tons of
foodgrains at a cost of over 127 crores of rupees. Daring the current year from April
to September we have already imported 10.62 lakhs of tons of foodgrains at a cost of
over 42 crores of rupees. Apart from its being a constant source of anxiety, the reliance
on the import of foodgrains from abroad of such magnitude imposes a heavy strain on
the finances of the Government. In recent years our exchange difficulty is almost
entirely due to the import of foodgrains on such a large scale. The meagre exchange
resources available to us are consumed by the purchase of foodstuffs abroad with the
result that we have to impose the most stringent restrictions on the import of many
other essential articles. The various steps necessary for making the country selfsufficient
in foodgrains must now claim the highest priority. The implementation of
this policy must largely depend on the Provincial Governments though the Government
of India has been and will always be prepared to afford all possible help In this
direction. We have sent a mission to Australia for the purchase of the surplus wheat of
that country and we are hoping that we might be in a position to get from Australia a
substantial quantity of wheat during the next year. An expert committee under the
Chairmanship of Sir Purushottamdas Thakurdas has been examining the food position
in the country and the Committee has submitted an interim report which is receiving
the attention of the Government.
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8. The deterioration in the economic situation has been particularly noticed
in respect of prices which have shown an unchecked upward tendency. Between the
5th April and the 9th August this year the Economic Adviser’s index number of wholesale
prices rose by 7 points while the Bombay cost of living index advanced by 14 points.
Taking the Bombay cost of living index number, while it was 243 in August 1945 it
rose to 267 in August 1946 and reached 284 in August 1947. The chief factor which
has contributed to this development is the general decline in agricultural and industrial
production In the country due partly to the wide prevalence of communal disorders
and generally to the increasing Industrial unrest. While the supply position has been
deteriorating, increases in wages and salaries given by private employers and the
Government had the effect of augmenting the purchasing power of the people and
widening the gap between current money income and production of goods. The situation
would not have been so bad if the unbalance between money and goods was confined
to these factors only. The most disturbing factor which affects the situation today is
the unspent balances of Individuals and institutions accumulated during the peak years
of Inflation which are being spent on the deferred wants of individuals, repairs to
industry and on the building of trade inventory. In other words, the money demand for
goods Is colossal compared to their local production. While the inflation in war time
was due to the large increases in currency circulation (which rose from Rs. 172 crores
in 1939 to over Rs. 1200 crores at the end of 1945) without any tangible increase in
the supply of goods the present Inflation Is not due to further increase of currency but
to a steady fall in the supply of goods. Although the total available money, whether
currency or bank deposits, has slightly fallen It has spread out more among a wider
circle of people in the form of wages and salaries and thus the actual purchasing
power in the hands of those who spend it on ordinary goods has greatly increased. But
the supply of goods has meanwhile fallen and has resulted in an upward trend of
prices. To take only a few examples of the marked fall in internal production, it may
be mentioned that as against a production of 4, 600 million yards of mill made cloth
and 1, 500 million yards of handloom cloth in 1945 the production this year is estimated
at 3,900 million yards and 1,200 million yards respectively. The production of steel in
the current year is also expected to show a drop of nearly 400,000 tons compared with
the peak production of 1,200,000 tons during the war. The production of cement has
also grown steadily worse, the estimated production this year showing a drop of 700,
000 tons over the capacity of over 21/2 million tons. In recent months the production
of coal has shown some improvement. but so far as the consuming public is concerned,
this has been more than neutralised by difficulties in transport resulting in large
accumulation of coal at the pit heads. Transport and other difficulties explain the drop
in production to some extent, but this is also partly due to labour unrest and strikes.
9. If the economy of this country is to be placed on a sound footing and
maintained in a healthy condition, it is of the utmost importance to increase internal
production. The chances of increasing the supplies of commodities by imports are not
very bright. Until recently we had a fair chance of sizable imports of consumer goods
6
from the British Commonwealth countries from accumulated balances, but with the
blocking of the major part of these and the growing adverse balance resulting from the
large scale importation of foodgrains, the hope of procuring supplies from abroad is
growing weak. We have therefore to fall back on our own resources. Government
have recently announced their scheme for increasing the production of cotton textiles
which, if worked in a spirit of co-operation between industry and labour, will result in
the production of an additional 1,000 million yards over the estimated production of
the current year. It is intended to explore the possibilities of restoring the level of
production in other fields in a similar manner. I am fully conscious of the fact that any
policy of stabilisation must aim not merely at the increase of production of both
consumer and producer goods but also at the pegging of money incomes at an agreed
and accepted level so that the increased volume of trading resulting from the increase
of production may neutralise the inflationary effects of the large volume of uncovered
money income. If this policy is to be carried out successfully, it would require an
appreciation of the situation by labour and its wholehearted co-operation.
REVENUE
10. I shall now proceed to a brief review of the financial position for the rest
of the current year. But I must warn the House that the estimates now presented must
be treated as very tentative as it has not been possible to assess with any measure of
accuracy the effects of the partition on our revenue and expenditure. I hope it will be
possible to present a more accurate picture when the revised estimates are placed
before the House along with the budget for the next year..
11. I have budgeted for a revenue of Rs. 171.15 crores and a revenue
expenditure of Rs. 197.39 crores. The net deficit on revenue account in the period
covered by these estimates will be Rs. 26.24 crores. But the final figure may be higher
because the actual amount likely to be required for meeting the expenditure in
connection with the relief and rehabilitation of refugees is still very uncertain and
some help may also have to be given to the new Provinces of West Bengal and East
Punjab for which, in the absence of any reliable data, no provision has been included.
12. The revenue receipts, as I have said, are estimated at Rs. 171.15 crores.
Customs receipts have been placed at Rs. 50.5 crores and take into account the effect
of the recent restrictions on imports for conserving our foreign exchange resources.
Income tax is expected to yield Rs. 29.5 crores on account of E.P.T. and Rs. 88.5
crores on account of ordinary collections. Although the Niemeyer Award has now
ceased to have effect it is proposed to maintain the share of the Provinces in the
income tax revenue at approximately the same level as now after making an adjustment
in respect of the Provinces and parts of Provinces now included in Pakistan. The
Centre will retain Rs. 3 crores out of the Provincial moiety as provided in the original
budget. On this basis, the divisible pool of income tax is estimated at Rs. 66 crores
and the Provincial share at Rs. 30 crores.
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13. Revenue from the Posts and Telegraphs Department is expected to amount
to Rs. 15.9 crores and the working expenses and interest to 13.9 crores leaving a net
surplus of Rs. 2 crores. The outright contribution of the department to general revenues
will be three-fourths of the realised surplus, the department retaining the balance. The
department will get a rebate of interest on its share of the accumulated profits in the
past which, after allowing for the portion of the department transferred to Pakistan, is
expected to amount to Rs. 71 crores. As regards the contribution from Railways we do
not expect anything in the current year. The House is already aware of the reasons for
this from the Railway Budget.
EXPENDITURE
14. The total expenditure for the year is estimated at Rs. 197.39 crores, of
which Rs. 92.74 crores is on account of the Defence Services, the balance representing
Civil expenditure. Following the customary procedure, I shall first deal with the Defence
Estimates which remain, as in the past, the largest single item of expenditure.
DEFENCE SERVICES
15. The reconstitution of the Armed Forces in India into two Dominion forces
was an inevitable consequence of the partition of the country. This decision came at
a time when the Armed Forces were in the process of rapid demobilisation. While a
substantial measure of demobilisation had already been achieved, the process was
arrested as a consequence of the decision to divide the remaining forces between the
two Dominions on a communal cum optional basis. The strength of the Army at the
time stood roughly at 410,000 troops. After the completion of the reconstitution of the
Army, India will have roughly 260,000 troops. An organisation under a Supreme
Commander, acting under the direction of the Joint Defence Council, was set up and
made responsible for carrying out the reconstitution, and for general administrative
control of the entire Armed Forces until the completion of reconstitution. From the
15th August 1947, however, the operational control of the troops in each Dominion
was transferred to the Dominion Government. It was originally expected that the
reconstitution would be completed by the 31st March 1948. But the Armed Forces
Headquarters of each of the Dominion have been able to take over administrative
responsibilities in a greater measure and earlier than was originally anticipated and
the reconstitution of the Forces has in consequence been accelerated. It is now expected
that this will be completed in the more important fields by the end of this month when
the Supreme Commander’s organisation will be disbanded.
16. The future size and composition of the Armed Forces have been engaging
the attention of Government, as it is obvious that they must be related to the altered
strategic needs of the country as well as to its reduced financial resources. Under the
pre-partition demobilisation plan the Army was to be reduced to about 230,000 men
for undivided India by the 1st April, 1949 against which we shall have about 260,000
men for our share alone after the reconstitution of the Armed Forces. Due to the
8
widespread communal disturbances in the Punjab and the sporadic outbursts of disorder
in other parts of the country, there has been an unprecedented call on the Armed
Forces in aid of the civil power. Government have accordingly come to the conclusion
that the existing Forces should be retained until the 31st March 1948 but the position
will be reviewed next month. The financial effect of this is that in spite of a reduction
of revenue resources the expenditure on Defence Services will be running higher than
it normally should during this year. In the present fluid conditions it is impossible to
forecast the position in 1948-49.
17. India had never an adequate Navy or Air Force and the effect of the
partition has been to reduce them still further, so far as the Dominion of India is
concerned. It is obvious that even without the disturbances there could be no question
of an overall demobilisation in these services. The future development plans of these
services are under consideration.
18. The complete nationalisation of India’s Armed Forces in the shortest time
possible is the accepted policy of Government. Due, however, to various reasons
which are now a matter of history, we have had a shortage of Indian officers for filling
some of the posts in the technical services and the senior appointments, This holds
good to a varying degree for all the three services. It was therefore decided to employ
a number of British officers who volunteered to stay, for one year in the first instance,
from the 15th August 1947. As these officers hold the King’s Commission they were
transferred to a special list of the British Army and the Supreme Commander assumed
control over them. When subsequent developments indicated that the Supreme
Commander’s office may not continue beyond the 31st December 1947 it was decided
to terminate the services of these British officers by the same date, leaving it to the
two Dominions to offer fresh terms to any British officers they may wish to employ.
The British officers have, therefore, been served with three months’ notice, as laid
down in their present terms of service, with effect from the 1st October 1947. The
number of British officers whom it is essential for India to retain and the terms of
service to be offered are now under the active consideration of Government. It may,
however, be stated that the number of British officers to be retained will be relatively
small and it is hoped that all operational Commands, at least in the Army and the Air
Force, will be filled by Indian officers.
19. As has already been announced, an agreement was reached with the United
Kingdom Government that the withdrawal of the British Forces from India should
commence immediately after the transfer of power and completed as early as possible.
The first detachment of British troops actually left India on the 17th August 1947. It
was hoped at one time that the withdrawals would be completed before the end of
1947 but due to shipping difficulties it now appears that this may take up to April
1948. The British troops remaining in the country have, however, no operational
functions. Except two R.A.F. Transport Squadrons the rest are merely awaiting
repatriation.
9
20. The rapidly changing conditions this year have made it difficult to frame
a close estimate of Defence expenditure and the position is further complicated by the
fact that the proportion in which the joint expenditure incurred by the Supreme
Commander’s organisation should he allocated between the two Dominions is yet to
be decided. On the best estimate that can be made at this stage, the net expenditure on
Defence Services during the period 15th August 1947 to 31st March 1948 is estimated
at Rs. 92.74 crores. The following main factors have contributed to an increase in the
expenditure;
(1) The decision to suspend demobilisation and to withdraw troops from
overseas.
(2) The implementation of the Post-war Pay Committee’s recommendations
In respect of Defence Services personnel. No provision for this was
included in the original estimates.
(3) The movement of troops and stores in connection with the reconstitution
of the Armed Forces.
(4) The calling out of troops in aid of the civil power during the disturbances
in the Punjab and elsewhere.
The withdrawal of British troops from India earlier than was anticipated originally
has resulted in a saving but this has been to some extent counterbalanced by expenditure
in moving them to the United Kingdom and other destinations.
CIVIL ESTIMATES
21. Details of the estimates under individual heads are given in the Explanatory
Memorandum circulated with the Budget papers and I propose to draw the attention
of Hon’ble Members to only the more important items included In them. As I have
explained elsewhere, the initial liability in respect of the outstanding debt of the late
Central Government and the pensions chargeable to it has been placed on the Indian
Dominion subject to the levy of an equitable contribution from Pakistan. The
contribution still remains to be settled and, for the present, no credit has been taken in
these estimates for any recovery from Pakistan. The estimates also include Rs. 2221
crores on account of subsidies on imported foodgrains and a lump sum provision of
Rs. 22 crores for expenditure on the evacuation, relief and rehabilitation of refugees
from Western Pakistan. I have briefly referred elsewhere to the problems raised by the
widespread communal disturbances In the Punjab and the North West Frontier Province
and the mass migration of refugees between the two Dominions. There are two aspects
to this problem viz., the short term one of giving immediate relief to the refugees
pouring into this country from Pakistan, practically destitute, and the long term one of
resettling them in India. All the resources at the disposal of the Government of India
have been mobilised in arranging the evacuation and relief of these refugees and the
railways and the Armed Forces have been utilised to the maximum extent possible on
10
this work. It Is not possible to estimate the expenditure likely to fall on Central revenues
on account of these developments and I have provisionally included a sum of Rs. 22
crores on this account In the Revenue Budget. In addition, a sum of Rs. 5 crores is
being Included in the ways and means budget for advances to the East Punjab
Government. But I must mention that this does not give any idea of the magnitude of
the burden that may be placed on Central revenues by these developments. Indeed, the
basis on which the expenditure on relief and rehabilitation should be shared between
the Centre and the East Punjab, the province most vitally affected, still remains to be
decided and may take some time to decide. Whatever the final arrangement in this
behalf may be, I have no doubt that it is the desire of all sections of the House that
financial considerations should not stand in the way of affording relief to these
unfortunate people and in alleviating their sufferings in one of the most poignant
human tragedies that could take place outside a war.
22. Before I leave this subject I should like to give a brief analysis of the total
provision included for civil expenditure, so that a balanced view of the position may
be obtained. Of the total provision of Rs. 1041/2 crores, Rs. 441/2 crores are accounted
for by the expenditure on refugees and the subsidising of imported foodgrains, leaving
Rs. 60 crores for normal expenditure. This includes Rs. 5 crores for tax collection,
obligatory expenditure of Rs. 221 crores on payment of interest and pensions and
provision for debt redemption, Rs. 2 crores on planning and resettlement and Rs. 12
crores for expenditure on nation building activities such as education, medical, public
health, the running of scientific institutions and scientific surveys, aviation, broadcasting
etc. in which the Centre largely supplements the work of the Provincial Governments
by providing valuable assistance by way of specialised services and research, leaving
a balance of Rs. 181/2 crores for the ordinary expenditure on administration, civil
works etc.. This expenditure only constitutes 18 per cent of the total civil expenditure
included in the budget. In addition to the expenditure of Rs. 12 crores on nation
building activities mentioned above, provision has been made in the Capital Budget
for a grant of Rs. 20.39 crores to Provincial Governments for development and Rs. 15
crores for loans.
WAYS AND MEANS
23. I shall now turn to give a brief account of the ways and means position.
The budget for the current year provided for a borrowing of Rs. 150 crores but this
target will not be reached. Owing to the communal disturbances In the country and the
uncertainties of the political situation, the securities market was very unsettled in the
opening months of the year and no loan was actually floated before the 15th August
1947. After the doubts about the political future had been cleared by the decision to
partition the country, there was some improvement in the position and although the
market has been fairly steady in recent weeks, there is not as yet any large sustained
demand for investment. Government issued early this month a fifteen year loan for
Rs. 40 crores carrying interest at two and three quarter per cent with facilities for
11
holders of the 31 per cent. Loan 1947-50, falling due for discharge on the 15th of that
month to convert their holdings. The loan was issued at the beginning of the busy
season and was not expected to be oversubscribed. But the public still seem to be
hesitant in taking up Government loans and if their holding off is due to any lingering
doubts about the responsibility for the repayment of the outstanding debt, I hope they
will be reassured by what I have stated elsewhere that the Indian Dominion remains
responsible to the bondholder. The need for money is now as urgent as ever if
Government are to finance their own development plans and assist the Provincial
Governments to implement their plans for development. There is also the short-term
aspect to this problem, viz. the urgent necessity to counter the inflationary forces
which are still present by withdrawing from the public as much surplus purchasing
power as possible through Government loans.
24. Hon’ble Members must have noticed that in recent months there has been
some criticism in certain quarters of the cheap money policy of the Government. At
the last Annual General Meeting of the shareholders of the Reserve Bank the Governor
of the Bank made some observations on this question. Under the influence of that
eminent economist the late Lord Keynes, cheap money has been the cardinal feature
of the monetary policy In many countries. It is no wonder that the Government of
India fell in line with this trend in monetary policy. The House will realise that there
is no absolute criterion by which to judge the propriety of rates at which Government
borrow in the market. In the long run it is mainly a question of keeping a balance
between the demands of Government on the market and the demands of Industry so
that the available funds in the country are used to the best advantage. In the United
Kingdom where the pursuit of this policy culminated in the issue of a 21 per cent
irredeemable loan last year, attempts are being made to consolidate the progress made
so far and not to proceed further in the same direction. I realise that if there is the need
for such a cautious policy in a country where the economy is mature and the money
and capital markets are highly developed, it is all the more necessary in the case of an
economically backward country like India. Our efforts will now be directed towards
consolidating and stabilising the position so far gained. There is no intention on the
part of the Government to reverse the policy and thereby jeopardize the interests of
those who have trusted the Government with their money. Our borrowing programme
will be such as will enable us to obtain the funds required by Government as cheaply
as possible without in any way affecting the flow of investment into industry. It is also
my intention to reorganise the small savings movement which was considerably
expanded during the war years, so that it might be retained as a peacetime organisation
with the primary purpose of encouraging savings among the middle classes. In cooperation
with the Provincial Governments, steps will be taken to place the movement
on a permanent footing. I take this opportunity of appealing to the chosen representatives
of the people in this House to co-operate with Government fully in their borrowing
programme. If the standard of living of our people is to be substantially raised by
undertaking large schemes of development, both the rich and the middle classes should
come forward to place their savings at the disposal of the Government.
12
STERLING BALANCES
25. The House will, I am sure, be interested to get some information on the
subject of the sterling balances, the recent agreement regarding which between ourselves
and His Majesty’s Government in the United Kingdom I placed on the table of the
House a few days ago. The peak figure which the sterling balances reached was Rs.
1,733 crores on the 5th April 1946. Thereafter, they have declined very rapidly. At the
end of March 1947 they stood at Rs. 1,612 crores showing a reduction of Rs. 121
crores in twelve months. In the middle of July 1947, from when our new agreement
became effective, they stood at about Rs. 1, 547 crores. We had thus drawn as much
as Rs. 65 crores in a little over six months. These large decreases were due largely to
heavy imports mainly of food grains and of consumer goods, of which the country had
been starved during the period of the war. They also reflected some movement of
capital from India, largely British..
26. This rapid depletion of the sterling balances caused some anxiety to the
Government of India. These balances represent the entire foreign exchange reserves
of this country and it is of the utmost importance that they should not be lightly
frittered away on the import of unessential and luxury articles or on luxury living in
foreign countries for they thereby reduce pro tanto the capacity of this country to
finance capital and developmental expenditure abroad.. The view of the Government
of India is that these reserves should not be used to finance deficits in the balances of
payments on what may be called normal current account. Our aim should be to meet
our normal day-to-day requirements from abroad through the earnings of our current
exports and we should draw upon these accumulated reserves, broadly speaking, only
for the purpose of purchasing capital goods, the import of which is necessary for
developing the agricultural and industrial productivity of the country.
27. With this aim in view, the Government of India decided to follow a more
restrictive import policy from the second half of the calendar year 1947. Broadly
speaking, that policy consists of dividing imports into three categories: free, restricted
and prohibited. Imports of food, capital goods, the raw materials of industry and
certain essential consumer goods are free and no exchange restrictions are placed
upon their import. Consumer goods which are not absolutely essential are licensed on
a quota basis, while others which in the context of the economy of this country must
be regarded as totally unessential and luxury imports have been altogether prohibited.
Together with the restrictions on imports were introduced certain restrictions on
remittances abroad, in particular on the transference of Indian capital. These new
policies are now showing the effects which they were calculated to have and the
reduction in the sterling balances between the middle of July and the beginning of
November 1947 has only been Rs. 21 crores. I should like to point out, however, that
in one substantial respect the import policy now in force differs from that in force
previously, in that in the licences issued for the licensing period June to December
1947 no discrimination has been made between currencies and imports from the dollar
13
area have been allowed on the same basis as imports from the sterling area. This
position, which the House will no doubt welcome, has been brought about by the
terms obtained by us in our interim negotiations on the sterling balances. The main
features of this agreement, which holds good to the 31st December 1947, are that the
Indian sterling balances have been divided into two accounts which may well be
likened to a deposit account and a current account. The current account has been
opened with a credit of £65 millions. All fresh earnings of foreign exchange are
credited to the current account and all balances in the current account are available for
expenditure in any part of the world including the United States of America. The
deposit account is not available for ordinary current transactions but can be drawn
upon only for certain limited purposes such as the repatriation of British capital from
India, the payments of pensions, provident funds and gratuities outside India and
certain other defined categories of payments.
28. Shortly after this agreement had been signed there arose the dollar crisis.
The strain on the dollar reserves of the United Kingdom Government was felt by them
to be so great that they were compelled to break their agreement with various countries
regarding the free convertibility of sterling into dollars. I am glad to be able to report
to the House that our agreement stands unaltered and intact and that as long as we
have any balance to our credit in the current account we shall be able to spend it
without question in any currency area. The United Kingdom Government have,
however, appealed to us for our co-operation in the matter of saving dollars and we
have promised them this co-operation. We are now engaged on a review of our import
policy and are investigating other means to save dollar expenditure and we may have,
I fear, to reintroduce in the next licensing period the discrimination in favour of imports
from the sterling area which we removed only so short a time ago. We trust, however,
that it will be possible so to arrange this discrimination as not to injure the vital needs
of the country’s economy.
EMPIRE DOLLAR POOL
29. The country has always displayed an interest in the arrangement commonly
known as the Empire Dollar Pool. As has been explained before, the arrangement is
that the countries of the sterling area hold all their foreign exchange reserve in sterling,
selling currencies which they do not need to the Bank of England and buying from the
Bank of England currencies of which they are in short supply. As a consequence, there
is always in the custody of the Bank of England a pool of foreign exchange from
which members of the sterling area can buy for sterling the currencies which they
need. A more correct name for this arrangement would be "the Sterling Area Pool of
Foreign Exchange". It has come to be known as the Empire Dollar Pool only because
the most important of the foreign exchanges in the pool is the United States dollar.
30. Figures have been published by, Government from time to time of India’s
earnings of dollars and other hard currencies and of her expenditure of these currencies
and I shall now bring these figures up to date. From September 1939 up to the 31st
14
March 1946 we earned Rs. 405 crores worth of United States dollars and spent Rs. 240
crores worth of United States dollars, leaving a surplus of Rs. 165 crores. On the other
hand, in the same period we spent net Rs. 51 crores worth of other hard currencies,
namely those of Canada, Switzerland, Sweden and Portugal so that our net surplus on
hard currency account was Rs. 114 crores. Daring the year 1946-47 we had a deficit
in the balance of payments with the United States of Rs. 15 crores, having earned Rs.
83crores and spent Rs. 98 crores, and a deficit in the balance of payments with other
hard currency countries of Rs. 7 crores. It may therefore be assumed that we contributed
net to the pool between September 1939 and March 1947 Rs. 92 crores worth of hard
currencies, which is the equivalent of 275 million dollars. During the quarter April to
June 1947 we have had a net deficit on hard currency account of Rs. 15 crores. It will
be observed, therefore, that since the financial year 1946-47 we have been consistently
drawing on the pool for our dollar requirements and that we are at the moment also in
heavy deficit with the United States and other hard currency countries. Generally
speaking, however, I would say that, thanks to our policy of foreign exchange restriction,
we hope to end the year in a fairly comfortable financial position externally. What
definite policy we will follow from the next year I am not now in a position to say
because our agreement terminates at the end of this year and we do not yet know what
kind of agreement will replace it. I fear, however, that in view of the dollar crisis
which has threatened not only the United Kingdom but the entire world, we may be in
somewhat greater difficulty in the matter of dollar exchange than we are now. We
hope to enter shortly into further discussions with the United Kingdom Government
on the subject of the sterling balances.
POSTWAR PLANNING AND DEVELOPMENT
31. The House will remember that In the budget for the current year provision
of Rs. 100 crores was made for development expenditure, Including a provision of Rs.
45 crores for grants to Provinces. The partition of the country has naturally affected
the scale of this expenditure as the Government of India are no longer concerned with
the expenditure on development in the Provinces and areas now included in Pakistan.
When the partition of the country was decided upon, Provincial Governments were
informed last July that so far as the period upto the 15th August 1947 was concerned,
the Government of India would make advance payments to cover expenditure on
approved schemes upto the maximum of the proportion of the budget grant for this
period. The Provinces were also advised not to enter into any major commitments that
were likely to embarrass either of the successor Governments. It has since been decided
that for the remainder of the year grants will be available to the Provinces now remaining
in the Indian Dominion on the same scale as was originally planned subject to a
proportionate adjustment on account of the division of the Punjab and Bengal and the
transfer of most of the Sylhet district to East Bengal. In the estimates now placed
before the House a provision of Rs. 20.39 crores has been included for grants to
Provinces and a sum of Rs. 15 crores for loans to them.
15
32. In the last budget speech my predecessor drew attention to the fact that
the resources available to the then Central Government for planning and development
were likely to be less than was originally estimated. What he said then for the then
Central Government is equally applicable to the present Government and in the light
of the reduced resources likely to be available it may be necessary to redraw the
development plans and rearrange their priorities. This does not however mean that
there has been any change In the Government’s policy of giving all the assistance in
their power to the Provincial Governments for implementing their development
schemes. It merely emphasises the need for the Provinces mobilising all the resources
for this purpose and I have no doubt that this is recognised by the Provinces themselves.
The House will appreciate that there is a large measure of uncertainty about the future
allocation of resources between the Centre and the Provinces and till this in decided
it will be difficult to make any forecast of Central resources or determine the extent to
which they will be available for development and I hope to take this question of reexamining
the development schemes with the Provincial Governments shortly.
Meanwhile, all the approved schemes of development will be continued and the
necessary funds will be made available for them. Having given this assurance on
behalf of the Central Government,, I would earnestly urge on the Provinces the need
for conserving all their resources and securing the most rigid economy in expenditure.
As I have stated, the whole basis on which post-war development plans were conceived
has now been upset. The substantial revenue surpluses which were anticipated in the
Central budget will now be turned into substantial deficits. In the context of this new
development, the need for utilizing all the available funds in the most effective manner
possible should be appreciated by the Provincial Governments.
33. In the Central field the progress on development schemes is being
maintained and we are going forward with all the sanctioned schemes particularly
those schemes of river development with long range benefits to the country. In this
connection, the House will be interested to know that an agreement has been reached
between the Central Government and the Provincial Governments concerned regarding
the setting up of the Damodar Valley Authority. Another scheme which is likely to be
taken up very shortly is the construction of the Hirakud Dam in Orissa at an estimated
cost of Rs. 48 crores, the benefits from which will include irrigation for over a million
acres, 350, 000 kilowatts of power and a considerable degree of protection from floods
to the coastal districts of Orissa. It is hoped shortly to reach an agreement on this
project with the Orissa Government and the Orissa States after which the actual work
of construction would begin early in 1948. It is also proposed to concentrate on the
construction of the Bhakra Dam in the East Punjab.
THE DEFICIT
34. I have carefully considered if any part of the deficit for this year should be
covered by additional taxation and I have come to the conclusion that it should be
left largely uncovered. If, for any reason, our ordinary expenditure threatens to
16
outrun our revenue there will be a clear case for either reducing the expenditure to
within the available revenue or raising additional revenue to meet the expenditure.
But the circumstances during the period under review have been abnormal and the
deficit is entirely due to these abnormal factors. The expenditure estimates include
Rs. 22 crores for the evacuation and relief of refugees while subsidies for imported
food grains are expected to cost Rs. 221/2 crores. Defence expenditure is also
considerably inflated due to the slowing down of demobilisation following the
partition of the country and the necessity to maintain larger forces than would
normally be necessary. It must also be remembered that no credit has been taken in
the estimates for Pakistan’s share of the expenditure on pensions and interest. If
these factors are allowed for the budgeted deficit of Rs. 26.24 crores will be converted
into a surplus. Notwithstanding this I feel justified in tapping any available source
of income if it could be done without adding to the burden of the ordinary man.
After a careful consideration of all the available sources I have decided to replace
the existing export duty of three per cent on cotton cloth and yarn by a duty of four
annas per square yard on cotton cloth and six annas a pound on cotton yarn. In a full
year this will yield Rs. 8 crores but in the current year the net additional revenue
will amount to only Rs. 165 lakhs leaving a final deficit of Rs. 24.59 crores. A bill
to give effect to this proposal will be introduced at the end of my speech.
GENERAL FINANCIAL POSITION
35. This is the eighth consecutive deficit budget and the House may well ask
itself if our revenue position is sound. I have myself no hesitation in answering that
question with an emphatic ‘yes’. The years covered by these budgets have been
overshadowed by the greatest war in history and no country, whether neutral or
belligerent, has been able to escape its economic effects or its aftermath. The deficits
in the war years were wholly due to the high level of Defence expenditure and were
met as far as possible by raising additional taxation. The return to peace time conditions
has been slower than we anticipated and even this tardy progress has been retarded by
the recent partition of the country and the unhappy developments in the Punjab. I have
just mentioned the large burden thrown on this year’s budget by the unavoidable
expenditure on refugees and the payment of subsidies for foodgrains. In addition, the
expenditure on Defence is much higher than it would be in a normal year. If these
special factors are taken into account it will be seen that we have not been living
beyond our means or heading towards bankruptcy. I do not wish in any way to minimise
our present difficulties or to underrate the effort required to surmount them but I have
no doubt that once we reach fairly normal conditions and are able to reduce our
Defence expenditure to peacetime proportions and curtail our reliance upon import of
foodgrains we should be able to balance the budget. It will be too optimistic to expect
normal conditions for the next year but I feel that with a determined all round effort
we should be able to achieve this result in 1949-50.
36. And what about the general financial position of the country? Here again
while there is no room for complacency there is equally no reason to take a pessimistic
17
view. There is no doubt that economically and strategically the partition of the country
has weakened both the Dominions created by it and It to a truism that an undivided
India would have been In every way a stronger State than either. But the Indian
Dominion with its acceding States would still cover the larger part of the country, with
immense resources in men, material and industrial potential. Our debt position is also
intrinsically sound and for a country of its size, India carries only a relatively small
burden of unproductive debt. Our external debt is negligible and we have considerable
external resources in the accumulated sterling balances. At the beginning of this year
the total public debt and interest bearing obligations of undivided India stood at roughly
Rs. 2,531 crores of which only Rs. 864 crores represented unproductive debt and Rs.
36 crores. external debt, while her external reserves amounted to over Rs. 1,600 crores.
The share of Pakistan in these has not yet been determined but it is unlikely to affect
the broad proportions of this picture.
37. The only disturbing features in the position are the persistence of
inflationary trends and the unsatisfactory food position to both of which I have drawn
attention elsewhere. The only real answer to inflation is to increase our internal
production and thereby close the gap between the available supplies and the purchasing
power in the hands of the community which in present circumstances imports cannot
bridge. Till this position is reached the community must conserve its purchasing power
by lending it to Government. As regards food, I am sure the House will agree that the
country cannot depend indefinitely on imports. For one thing this places us at the
mercy of foreign countries for our vital necessities and for another large scale Imports
of foodgrains seriously affect our foreign exchange position and threaten to consume
the bulk of the available resources which are badly required for the industrialisation
and development of the country. We must concentrate our energies on producing as
much food as possible within the country. I suggest that this to not an impossible task,
for after all the total Imports from abroad, which have never touched more than 21
million tons in any year so far, represent only a fraction of the total foodgrains
amounting to 45 million tons we produce, although they make a large hole in our
available foreign exchange.
38. I should like to make a few observations on the criticism made in certain
quarters that the level of taxation introduced in the last Budget has seriously affected
the incentive for Investment. In their last Annual Report the Central Board of Directors
of the Reserve Bank of India have observed "There seems little doubt now that the
severity of the last Budget is defeating its own purpose and is hindering the formation
of capital for productive purposes. Unless correctives are applied without delay, there
is a danger of the very foundations of society and economic life of the country being
undermined by deepening penury and despair". A pronouncement of this kind coming
from such an authoritative source must receive serious notice. I have no doubt in my
mind that it was not the intention of the Government to so arrange its taxation policy
as to stifle the growth of Industry in the country. On the contrary, it is of the utmost
18
importance that the country should be industrialised rapidly so as to secure increased
production and a widening range of employment for the people. There is no need for
any serious difference of opinion based on more ideological differences. Whatever
might be the ultimate pattern of our economic structure, I hold the belief that for many
years to come there is need and scope for private enterprise in industry. We cannot
afford to lose the benefit of the long years of experience which private enterprise has
gained in the building up of our industrial economy. I believe that the general pattern
of our economy must be a mixed economy in which there is scope both for private
enterprise and for State enterprise. Before I present the annual Budget to this House
next February. I shall make a careful examination of the consequences of our taxation
policy and endeavour to make any adjustments that may be necessary to instil
confidence in private enterprise. In the meantime, I may assure the House that it is not
the policy of the Government to hamper in any way the expansion of business enterprise
or the accumulation of savings likely to flow into investment.
CONCLUSION
39. I would conclude the Speech with an appeal to this House and through the
House to the country at large. For the first time in two centuries we have a Government
of our own answerable to the people for its actions. A to the duty and the privilege of
such a Government to render an account of its stewardship to the representatives of
the people, but it has also the right to ask for the co-operation of the entire community
in the carrying out of the accepted policies. Events of the last few weeks have
unmistakably shown that the political problems arising out of our status have not yet
been fully solved.. While we have secured freedom from foreign yoke, mainly through
the operation of world vents and partly through a unique act of enlightened self
abnegation on behalf of the erstwhile rulers f the country, we have yet to consolidate
into one unified whole the many discordant elements in our national life. This can be
achieved only by the rigorous establishment of the rule of law which is the only
durable foundation on which the fabric of any democratic State can be raised. Respect
for law is essentially a matter of political training and tradition and transition from a
dependent to an independent status always makes it difficult In the initial stages to
secure that unflinching obedience to the rule of law which always acquires a new
meaning in a new political context. If the fabric of the State is not built on durable
foundations, it will be futile to try and fill it with the material and moral contents of
a good life. If India, just risen from bondage, is to realise her destiny as the leader of
Asia and take her place in the front rank of free nations, she would require all the
disciplined effort her sons can put forth in the years immediately ahead. The willing
help and co-operation of all sections of the community is required in maintaining
peace and order, in increasing production and in avoiding internecine quarrels whether
between communities or between capital and labour. I am sure my appeal for this help
and co-operation will not go in vain.
(November 26, 1947)