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PUBLIC RECORD OFFICE

Reference :-

PELLIC.O. 882/11

ALLY WITHOUT PERMISSION OF THE BE REPRODUCED PHOTOGRAPHIC- COPYRIGHT PHOTOGRAPH-NOT TO

PUBLIC RECORD OFFICE. LONDON'

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Generally My Lords feel that no sufficient case is made out for overturning the present system, which has stood the test of time and has not worked unfairly, in favour of a scheme which is likely to cause the rent-tax percentage to be regarded in fact if not in theory as levied solely for the purpose of the military contribution and not as part of the Colony's general taxation system. With the best will in the world the Colonial Government might well find the pressure in favour of low valuation to be irresistible.

My Lords understand that the Governor contends that the proposed levy of 12. per cent on rateable value is roughly correct because, although it falls short of 20 per cent of present gross revenue, it is considerably in advance of 20 per cent of such revenue with the exemptions held in reserve by the Colony as an alternative claim. As regards this contention, My Lords are in entire agreement with the argument of the War Office that the 20 per cent figure has always been related to a particular interpretation of "' revenue "' and would fall to be greatly increased if exemptions on the scale indicated were made.

SIR,

I am, &c.,

R. V. NIND HOPKINS.

Enclosure in No. 66.

25th April, 1929.

I am commanded by the Army Council to inform you that they have had under consideration two letters from the Colonial Office, dated respectively 12th October, 1928, and 26th January, 1929, copies of which have been sent to the Treasury, relative to a despatch dated 24th June, 1926, proposal initiated by the Governor of Hong Kong in a

and developed in further despatches dated 28th July and 1st November, 1928, for changing the method of assessing the military contribution of Hong Kong. Hong Kong now pays the cost of its garrison or 20 per cent of gross revenue, whichever is less; the Governor of the Colony proposes to substitute, for the revenue limit to the amount of the Colony's military contribution, a 12 per cent levy on the rateable value. At the same time particulars have been received of various claims for the modification of the present system which the Governor would propose to put forward if the new proposal were not accepted.

2. The Council have had their provisional comments on these questions embodied in a memorandum, a copy of which is enclosed herewith. The position as it presents itself to the Council and as set forth in the memorandum may be summarized as follows:- (a) The existing system of assessing Colonial military contributions is substantially that proposed by the Eastern Colonies themselves and adopted in 1895 on the recommendations of the Haliburton Committee. It has not been shown that it fails to answer the original purpose of graduating the Colonies' payments towards their general defence as part of the Empire according to their capacity to pay. It has worked for 35 years, and Lord Peel's Committee, which recently reviewed Colonial military contributions, suggested no alternative system. (Paragraph 1.)

(b) The main criticism made against the existing system by the Governor of Hong Kong is that it offers scope for points of controversy; few such points, however, appear to have raised any difficulty between Hong Kong and the War Office for many years past. Only in the comparatively minor matter of making estimating easier does it appear that the proposed system would be an improvement on the present so far as the War Office is con- cerned. (Paragraphs 2-5.)

(c) The Ordinance No. 6 of 1901 which governs the valuation of Hong Kong leaves open for decision from time to time by the Colonial Authorities both the area of valuation and the minimum of rateability. Further the new proposal would deprive the Colonial Authorities of almost all financial interest in maintaining the rates. (Paragraphs 6-7.)

(d) The comparison of the amounts of contribution under the present system and those which the new system would have yielded for past years suffers from the disturbing factors of the war and rent restrictions, but it is not clear that a levy on rateable value would be as good a criterion of the Colony's capacity to pay as is a percentage of gross revenue. Valuation by an appointed assessor introduces elements of individual judgment. (Paragraphs 8-9.)

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(e) The claims for the amendment of the present system, reserved by the Governor in the event of the new proposal being rejected, are not fully stated, but they comprise claims for the assessment of net instead of gross receipts and for exemption from assessment of certain revenues hitherto assessed in gross. These claims, which are far-reaching in their financial effects, raise questions of the treatment of municipal revenues which were fully considered and decided against the Colony in 1895. More particularly the claims ignore the principle on which the War Office has always taken its stand, that modifications of the scope of the revenue assessable under the 1895 settlement can only be made if they are accompanied by a revision of the percentage limit on gross revenue. If, however, any individual claims for assessment of net instead of gross receipts are based on sound principles, the War Office is prepared to examine them. (Paragraphs 10-22.)

(f) The claim for concessions on hospital and education revenues calls for notice owing to the departure from the 1895 settlement made in 1909 in this matter by the Straits Settlements under protest from the War Office and the Treasury. (Paragraphs 23-24.)

(g) It does not appear that Army Funds are likely to gain from the proposed change

in system; on the other hand there seems some reason to apprehend that in future years the yield from the new system might be smaller than that under the present system of 20 per cent of revenue. (Paragraphs 25 and 26.)

3. The Army Council would not necessarily resist any proposal for the substitution of an entirely new system for the 1895 settlement if it were clear that the new system would avoid any important disadvantages without sacrificing the advantages of the old system and that Army Funds would not suffer in consequence of the change. The Council are not at present satisfied that these conditions are fulfilled by the proposed levy on rateable value. In any case the issues raised by the Colony's reserved claims under the existing system are so direct a challenge to the principles of the 1895 settlement that the Army Council are unable to agree that they constitute a genuine alternative to the proposed change of system.

4. I am to submit these provisional comments for Their Lordship's consideration in the first instance. Meanwhile, copies of this letter and enclosure have not been sent to the Colonial Office.

The Secretary,

The Treasury.

HONG KONG'S MILITARY CONTRIBUTION,

I am, &c.,

H. J. CREEDY.

Memorandum regarding the Method of Assessment. The Present Situation.

1. It is an accepted principle that a Colony should pay in proportion to its means towards the general defence afforded it as part of the Empire. Originally, Hong Kong paid a fixed contribution in sterling. It was calculated on an estimate of the amount of surplus revenue that the Colony might pay, having regard to the cost of its garrison, without undue strain on its own capital requirements (to which surpluses were customarily devoted) (a). The disadvantages to the Colony of this procedure were two-

(i) The contribution being fixed, it had to be paid without regard to fluctuations in

the prosperity of the Colony.

(ii) The contributions being fixed in sterling, the Colony had to meet losses (and

they were considerable) caused by the depreciation of silver currency.

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The proposal to overcome these difficulties by levying a percentage on local revenue assessed in local currency was discussed by the Haliburton Committee with reference to Hong Kong in 1894 (Section 10 of their Report), but not until the proposal was also put forward by the Straits Settlements did they seriously examine it (Section XI, 1895), and This principle has continued it was then adopted as a principle generally applicable. ever since, and it has not been essentially modified by various minor questions about the classes of revenue on which the percentage should be levied. At present, the military

a. Haliburton Committee Report, Section 4, Appendix B, dated 1888.

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