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PUBLIC RECORD OFFICE

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C.O. 882

PUBLIC RECORD OFFICE, LONDON

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Subsequently (in 1-9), at the request of the Colony, the percentage rate of 17 per cent was altered to an inclusive rate of 20 per cent.. the additional 24 per bent representing a contimitation of charges for military works and lodging allow Sinh was renmended with a view to the avoidance of friction and the savier of correspondence

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1-99, in connection with the establishment of a public telephone system at Penang, if was proposed that the receipts of this and other new productive unedersakings such as railways &e, of a similar character should for the purpose of the military contribution be taken at their net and not their gross amount, and in the letter from the Colonial Office of 5th July, 1×99 (16×49-99),* submitting the drat at a proviso for addition to Section 3 of the Defence Contribution Ordinance, it was stated that the Secretary of State for the Colonies would instruct the Governor of the Straits Settlements that no new undertaking is to be deemed of a similar character to railways or telephones without previous reference to the Secretary of State, who will then submit the proposal to their Lordships (of On this understanding the the Treasury) and to the Secretary of State for War. proposal was agreed to and embodied in an amending Ordinance (Treasury letter of 17th August, 1×99). †

In the face of these arrangements my Lords are unable to understand how Section −6 (2) of the Liquors Revenue Ordinance, No. 22 of 1909, and Section 38 of the Petroleum Revenue Ordinance. No. 19 of 1909, can have been allowed by the Secretary of State to pass without reference either to the War Office or this Board

The exclusion from assessable revenue of the receipts for hospitals and schools is also, in their Lordships' opinion, clearly inconsistent with the terms of the It appears to my Lords that the obligation to carry out that agreement of 1895 agreement in such a way as to maintain unimpaired the proportion of the military contribution to the resources of the Colony was binding on the Colony, whatever administrative changes it might have been thought proper to make.

Subject to the observations of the Secretary of State for the Colonies on the case as dealt with in the letter from the War Office and the subsidiary state- ment, my Lords must hold that the amounts which have been deducted from the military contribution constitute a debt by the Colony to the Imperial Government, with regard to which a settlement must be arrived at before my Lords can undertake to give further consideration to the effect on the finances of the Colony of the restrictions imposed on the opium traffic by the policy of His Majesty's Government

As regards the contribution made by the taxpayer of the United Kingdom and of the Straits Settlements, respectively, to meet the cost of the garrison, to which reference is made in paragraph 14 of the letter under reply, my Lords desire to remind the Secretary of State for the Colonies that the security of the Straits Settlements from external attack depends mainly upon the fleet, towards the cost of which the Colony makes no contribution, and that the broad principle adopted in settling Colonial military contributions was that so long as a Colony makes no contribution towards the cost of its naval defence it may fairly be asked to bear the full cost of its garrison and of maintaining its land defences. In point of fact the contributions from the Eastern Colonies have always fallen short of this standard. My Lords are informed that for the year 1909/10 the cost of the Straits Settlements garrison was £298,385, and that the Colonial contribution was £177,877. Far from being a disproportionate burden, an expenditure for all defence purposes, naval and military, of less than 20 per cent. of the total expenditure of the Colony appears to my Lords to be a singularly advantageous arrangement to the Colony.

Enclosure 1 in No. 184.

I am, &c.,

G. H. MURRAY

War Office, London, S. W., 18th January, 1911.

SIR.

I AM commanded by the Army Council to inform you that they have had under consideration your letter of 12th August last, in which the Lords Commis- sioners of His Majesty's Treasury ask for the Council's observations on Colonial

• No. 16.

↑ No. 17.

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Office letter. No. 7307 dated 26th May last, dealing, inter alia, with the military contribution paid by the Straits Settlements.

2 The delay in replying is due to the fact that the matters in question are concerned largely with Ordinances and arrangements which, however familiarly they may be known elsewhere, had not been brought to the notice of this Office, though it appears on investigation that War Department interests are considerably affected by them. The following remarks refer, seriatim, to those paragraphs of the Colonial Office letter which concern this Department.

3. Paragraphs 7 and > With reference to the suggested application to the opam and spirits revenue of the principle of assessment to military contribution of net receipts only, their Lordships will remember that in War Office letter dated th October, 1909, the Council expressed their willingness to agree to the applica tion of this principle to the revenue derived from the opium factory. But the application of this principle appears, in the view of the Colonial Government, to involve more than this. Section 47 of the Chandu Revenue Ordinance (No. 21 of 1909) provides that all expenditure on the purchase of opium, on the preparation and distribution of chandu, all charges incurred in carrying out the provisions of this Ordinance, and all expenses incidental thereto, together with interest on all moneys advanced or capital expenditure from general revenue for the purposes of this Ordinance, shall be deducted from the proceeds of the sale of chandu and the percentage on account of the Defence Contribution struck on the balance."

4 It is understood that under the old system the chandu farmers themselves undertook any necessary measures to prevent the infringement of their monopoly, and that therefore the rents received from them by the Government represented net revenue, in the sense not only that the cost of manufacture had been already defrayed, but that the cost of a preventive service" had also been met by the farmers. Under the new régime, the Colonial Government has had to create a preventive service, and inasmuch as the institution of this service results from a policy initiated by the Imperial Government it is easy to understand the reluctance of the Colonial Government to consent to a loss on this account. It is gathered from Appendix G. of the Colonial Estimates, 1910, that the provision in the above- quoted Section 47 that all charges incurred in carrying out the provisions of this Ordinance and all expenses incidental thereto should be excluded from the ssessable revenue, refers to the cost of this preventive service, but the words them- selves are obviously capable of wider application, and the Army Council are unable to concur in the retention of this clause without further definition. Even as regards the preventive service, moreover, the Council must insist upon the importance of preserving intact the principle that, for the purposes of assessment to the military contribution, deductions from the revenue of productive undertakings should be limited to the actual working expenses of the undertaking, maintenance, interest, and sinking fund, and they would suggest that, should their Lordships decide to make an annual grant to the Straits Settlements as requested in the Colonial Office letter, a concession in regard to the preventive service would best be effected by the inclusion in the Imperial grant-in-aid of a sum equivalent to 20 per cent. of its cost, which they gather from the Estimates of 1911 is about £8,400.

5. The deduction from proceeds of sale of chandu of the interest on capital expenditure referred to in Section 47 has been made at 4 per cent. (see Appendix G. of the Colonial Estimates, 1910), in accordance with the general practice sanctioned in Treasury letter of 19th April, 1904, in connection with reproductive under- takings. That letter limited such deduction to 50 years, and the Council presume that, in the event of the manufacture of chandu being continued so long, the same limit would apply in this case. It will, of course, be understood that any sums received, subsequent to the introduction of the new system, in respect of rents outstanding under the old system should be dealt with under the old arrangements, i.e., should be assessed in the gross.

6. Turning to the spirit revenue, the remark in paragraph 7 of the Colonial Office letter that the Army Council agreed to the principle of assessment of net receipts is not quite correct. As pointed out in paragraph 3 above, the Council's concurrence was confined to revenue derived from the opium factory. It is observed that Section 86 (1) of the Liquors Revenue Ordinance (No. 22 of 1909) provides that" all charges incurred in carrying out the provisions of this Ordinance, and all expenses incidental thereto, together with interest on all monies advanced

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