CHAPTER- III
Evolution of Fiscal Federalism in India and Canada
The chapter reviews the historical factors in which Indian and Canadian federal system has grown. It attempts to probe ancient Indian thoughts as a guide for resource transfer .Criteria for tax, social benefit theory, and non economic aims of taxation classification of revenue, in the ancient time has been discussed in this chapter. This chapter has taken care of the colonial past of some federation. After the first armed struggle for independence the power to rule over the country was shifted from the hands of East India Company to the British Crown and with this transfer came a sense of stability in the British Rule. In 1870 Lord Mayo took steps to organise the administration and finance in the country. Till now, all financial power was centralized. Lord Mayo initiated powers to facilitate administration. Lord Lytton (1877), Lord Ripon (1882), Lord Curzon (1904) and Lord Harding (1912) all contributed in expanding this trend of de –centralization of finance in the country. The reforms of 1919 were described as a half way house to federalism. But the evolution of federal financial system could get a sum what concrete shape only with the Government India Act, 1935. It analyses the evolution of the Constitutional provisions relating to fiscal federalism during drafting of the constitution and Finance Commission, commencing with the Government of India Act of 1935, the deliberations of the Constituent Assembly and their influence on the evolution of the Finance Commission and its role. Principles for sharing of receipts are also being discussed in this chapter. Financial emergencies and constitutional amendments in the direction of fiscal federalism are also elaborated.
As far as Canada is concerned, Federal and provincial roles and responsibilities have evolved throughout Canadian history in response to sometimes dramatic changes in circumstances. Many of the major events of the 20th century—the Great Depression of the 1930s, the two World Wars, the emergence of the post-war welfare state—all involved dramatic shifts in "fiscal balance" either vertical (between the federal and provincial governments) or horizontal (e.g. changing fiscal disparities among the different provinces). Fiscal relations have had to evolve alongside these shifts in roles and responsibilities—and corresponding shifts in fiscal balance. Throughout Canada’s history, federal and provincial-territorial governments have found a variety of ways of meeting these challenges.
Ancient Indian Thoughts and System of Resource Transfer
The ancient Indian literature provides instances, which can be seen as the basis to analyse the evolution of the transfer system and fiscal relations between centre and sub units of the empire. Arthshastra, Indica, Pali literature and regional scripts such as rajtarangini written by kalhan, and records of some foreigner travellers are the sources to know about the economic condition, tax system, etc.
The first principle of modern taxation is that it is compulsory in nature. In ancient Indian texts, there are abundant evidences to show that taxes as compulsory payments were well. Next is that, taxes should be moderate and not burdensome on its subjects. Manu opines that the king should "always fix in his realm the duties and taxes in such a manner that he, himself and the man who does the work receive their due reward"[1] He continues that "as the leach, the calf and the bee take their food little by little, even so must the king draw from his realm moderate annual taxes"19. Kulluka, in his commentary on Manu states that taxes should be realised from "what is in excess of the capital. The next principle of taxation as prescribed in ancient Indian scriptures is that if at all an increase in taxation is inevitable; it has to be gradual and not sudden and steep. The Mahabharata opines that little by little money should be extracted from prosperous subjects. The king should increase the burden of his subjects by and by like a person gradually increasing the load of a young bullock.[2]
In the Magadha Empire, the large long service army had to be fed by the state exchequer. Axe were assessed and collected by royal agents with the help of village head. The aim of individual and community life in the ancient period was the realization of dharma (Dharma pradhana) and not a purely material objective (Arthapradhana). In our theories of State finance the basic assumptions in addition to the hypothesis, that all human effort should be directed towards the goal set by Dharma, were the existence of government, and the maintenance of harmonious relation between the people and the government. In every one of our financial theories, the stress laid upon the necessity for the State involves a corresponding emphasis on the obligation of the people to support the sovereign authority, whatever, its form.[3]
Based on religious sanction, the ruler’s right to levy taxes and contributions, and the obligation of the people to pay them on an implied contract between the State and the subjects, had important corollaries. Imposition of taxes is not a matter of caprice. The duty to pay them is voluntary. The right to tax rests solely on the states discharging its appointed duties. In the medieval period, Akbar the Great[4] and his minister Todarmal evolve a system of economic regulations and taxation.[5]
Basis for Taxation
In India, the system of direct taxation as it is known today has been in force in one form or another even from ancient times. There are references both in Manu Smriti and Arthasastra to a variety of tax measures. Manu, the ancient sage and law-giver stated that the king could levy taxes, according to Sastras. The wise sage advised that taxes should be related to the income and expenditure of the subject. He, however, cautioned the king against excessive taxation and stated that both extremes should be avoided namely either complete absence of taxes or exorbitant taxation. According to him, the king should arrange the collection of taxes in such a manner that the subjects did not feel the pinch of paying taxes. He laid down that traders and artisans should pay 1/5th of their profits in silver and gold, while the agriculturists were to pay 1/6th, 1/8th and 1/10th of their produce depending upon their circumstances. The detailed analysis given by Manu on the subject clearly shows the existence of a well-planned taxation system, even in ancient times. Not only this, taxes were also levied on various classes of people like actors, dancers, singers and even dancing girls. Taxes were paid in the shape of gold-coins, cattle, grains, raw-materials and also by rendering personal service.[6]
The modern criterion of a tax is that it is a compulsory levy by the states. The old Indian ideas of taxation are implied in the very conception of a tax. It is due to the king, because its payment is divinely ordained, because it flows from an original contract, and also because it is the price for the security afforded to the subject by the existence of settled government. The states may not only levy its share from the owner’s own property, but it can compel even the property less person to contribute by his labour.[7]
Further , to our ancestors it seemed a reasonable deduction from their premises that the contributions made by a subject to the states should be deemed to be taxes only when they were collected for use in beneficial ways, and not for being squandered away by a tyrannical government . This attitude is reflected in the many exhortations to kings, in our political and economic literature, for the expenditures of the revenue of the state only in ways beneficial to the people[8].
Society is Prime
A further support to this view is found in the statements that the tax is simply the wage (vetanam) of the king, his reward for protecting his subjects, his remunerations for being the servant of the people, and his salary as a public functionary. These ideas are developed by extending the meaning of ‘protection, so as to make it comprehend internal security, including the maintenance of law and order, and the relief of indigence and unemployment. In a word many sections of the community were admitted to be contributing by its endeavour to the common welfare. Someone contributes by the work of his hands and someone by that of his brain.
It has already been pointed out that the right of the states to tax solely from the protection it gives the right ceasing when the capacity to protect disappears. ‘The social benefit theory’, which seeks to establish a relation between taxes and the benefits conferred to the tax- payers , may appear to be implied in this postulate , but it is not. For, if the principle of protection is applied to individuals , so as to make the contribution in taxes proportionate to the benefit derived by each tax-payer , the absurd position, that the members of society who receive most benefit from the state, should contribute most, is reached . This fallacy is escaped in the Indian proverb, ‘The right of the road is to be blind, the deaf, and the cripple’. This is the welfare state. Activities of the states are not to make money or to run the government, but it is for the wellbeing of the weakest person in the society, even if he has not contributed anything to the state in terms of economy. Social benefit is estimated by reference to the benefit to the community as a whole, and not to the individuals composing the community. The numerous customs, tolls and transit duties seem to have been imposed for revenue only.[9]
Aims of Taxation is non economic
Tax systems are often used to secure specific social and political objects. This possibility is not lost of sight by our authorities. The concentration in state workshops of the manufacture of spirituous liquors, poisons and drugs, whose unrestricted use would under-mine the health and morale of the people, is apparently dictated by this conviction. Consumption is controlled more by regulating the quantity produced than by raising prices to the consumer. Unrestricted production of liquor, side by side with its sale at high prices, invites evasion, illicit production and even excessive consumption, for as Adam Smith saw, the attraction of deleterious articles is often their high price as their intrinsic qualities. It was only for the good of the people that the king collected taxes from them, just as the sun drew moisture from the earth only to give it back a thousand fold.[10]
Kautilya’s work Arthshastras is the first mile stone on the subject. Although this work is directly not related with the economics, it has described statesmanship as a whole and maintenance of the treasury and collection of the taxes in specific terms. It is an authenticated work and adopted by the successors, in ancient, medieval and modern period also. In our old economic theory the recognition of the moral, political, and economic necessity for taxation goes side by side with the perception of the importance of fiscal part of it. The Treasury (Kosha) is one of the seventh elements (saptanga) of the State. A king with an empty treasury preys on his people; keep the treasury therefore full. All enterprises find their root in treasure; let kings and ministers, therefore, endeavour to keep the treasury full. Wastage, faulty collection, defalcation and inefficient management, reduce treasure; let them by therefore sternly repressed. Their detailed character suggests that they reflect practice. The uninterrupted vigilance, with which the interests of the exchequer were safeguarded, is also testified to by the available epigraphic records of both North and south India. The latter relate mainly to the period of the Great Chola Empire[11]. They show that even small exemptions from taxation were invariable brought on record, and that the rule requiring the countersignature of the chief financial authority of the kingdom (Cholainayakam) to grants was always out, in all their detail, in our old treatises, is itself proof of acute sensitiveness of an old Indian kingdom to the interests of the fiscal side.[12]
Kautilya has also described in great detail the system of tax administration in the Mauryan Empire. It is remarkable that the present day tax system is in many ways similar to the system of taxation in vogue about 2300 years ago. According to the Arthasastra, each tax was specific and there was no scope for arbitrariness. Precision determined the schedule of each payment, and its time, manner and quantity being all pre-determined. The land revenue was fixed at 1/6 share of the produce and import and export duties were determined on advalorem basis. The import duties on foreign goods were roughly 20 per cent of their value. Similarly, tolls, road cess, ferry charges and other levies were all fixed. Kautilya’s concept of taxation is more or less akin to the modern system of taxation. His overall emphasis was on equity and justice in taxation. The affluent had to pay higher taxes as compared to the not so fortunate. People who were suffering from diseases or were minor and students were exempted from tax or given suitable remissions. The revenue collectors maintained up-to-date records of collection and exemptions. The total revenue of the State was collected from a large number of sources as enumerated above. There were also other sources like profits from Stand land (Sita) religious taxes (Bali) and taxes paid in cash (Kara). Vanikpath was the income from roads and traffic paid as tolls.[13]
A consideration of the heads of income, in a well-developed ancient idea, and the principles of the assessments may now be attempted. For such a study, there is huge material in literature and in inscriptions. It will show that the tax system of ancient India was quite complex as it is now exit. The classification of taxes was deemed to be important. The Arthashastras differentiate between forms of revenue, not according to their incidence but according to their source. Revenue is either derived from land (prthivi), or derived from sources other than land (aprthivi). Under the former, come the contribution of the crown lands (bali), the land revenue paid by private owners (bhaga), the cesses collected on the supply of water from state sources, the tree-tax of one-sixth of the fruits of trees, medicinal herbs, etc, the profits of state mine and quarries, the sale produce of forests produce and the income from the royal herds, as well as the tax collected from owners of private cattle farms. All other revenues come under the head of aprthivi. In this rough classification, no attempt is made to distinguish direct and indirect taxes and fees and royalties, and tax and non-tax receipts. The last of the distinctions may have appeared unimportant to our ancient economists, as from their standpoint the only test of a tax was that it was due to the state. It does not, however, follow that the relative merits of direct and indirect taxation was not understood. In our ancient rules of taxation, we find that much store is set on the tax being directly levied from the tax-payer on account of its certainty, e.g. of the land tax, the toll tax, etc. We also find that the advantages which indirect taxation affords for quietly adding to the burdens of the community, while enabling the revenue to be collected conveniently and economically were also appreciated.
Miscellaneous Revenue
Kautilya divided revenue in seven classes, according to source. These are the following: Sita-The revenue from crown land, Bhaga-The revenue from private lands, Bali-The special tax demanded from land for religious purposes, Kara- Sundry collections in money, Tara- The dues on boats, ferries and ships, Vartam-Road cess and toll. The revenue derived from cities included items such as fines, license fees on weights and measures, fees for the issue of passports, income from the jail, mint, gambling houses and slaughter-house, the proceeds of salt monopoly, gate dues, Octroi and the Profession tax. Even the tax was imposed on leisure time activity. The revenues from monopolies and from the state mines, forests and cattle ranches come under another head. The main sources of revenue are the land tax (including forests), customs and excise, the proceeds of salt monopoly, property taxes, judicial and other fines, the profits from state factories, the revenue from the crown monopolies in gambling, the sale on intoxicants, the manufactures and sale of salt and saffron, the trade in horses and fine wool, the sale of elephants and miscellaneous items like Octroi and port dues.[14]
Principles of Taxation
The learned author K.B.Sarkar commends the system of taxation in ancient India in his book "Public Finance in Ancient India", (1978 Edition) as follows:-
"Most of the taxes of Ancient India were highly productive. The admixture of direct taxes with indirect Taxes secured elasticity in the tax system, although more emphasis was laid on direct tax. The tax-structure was a broad based one and covered most people within its fold. The taxes were varied and the large variety of taxes reflected the life of a large and composite population".