CO885-11 — Page 425

PUBLIC RECORD OFFICE

Reference :-

C.O.882/11

PUBLIC RECORD OFFICE, LONDON

ALLY WITHOUT PERMISSION OF THE BE REPRODUCED PHOTOGRAPHIC-

COPYRIGHT PHOTOGRAPH-NOT TO

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impossible for them to press now that they should be cancelled and the military contribu- tions for the past years adjusted accordingly. They wish, however, to urge that steps should be taken to annul Section 15 of the Ordinance in order to prevent any future deduction, and they trust that the Secretary of State for the Colonies will be prepared to take such action at the earliest possible opportunity.

A copy of this letter is being sent to the Treasury.

Enclosure in No. 70.

I am, &c.,

H. J. CREEDY.

MEMORANDUM BY THE WAR OFFICE ON THE CLAIMS OF THE GOVERNMENT OF HONG KONG FOR MODIFICATIONS OF THE REVENUE ASSESSABLE TO MILITARY CONTRIBUTION.

1. General Note on the Method of Calculating the Military Contributions.

1. The military contribution of the four Eastern Colonies is measured by a percentage, varying with the particular Colony, of that portion of the Colony's gross revenue that is held to be assessable to contribution. This system was introduced by the Haliburton Committee of 1895. The Committee excluded from the total gross revenue of the "because "the Colonies" revenue derived from the sale of Colonial Crown Lands Colonies had been directed not to deal with sums derived from land sales as ordinary revenue and the following percentages were fixed on the basis that this item was

"

excluded:-

Straits Settlements Hong Kong Ceylon

Mauritius...

171 17

5

They explained that the lowness of the percentage in the case of the last two Colonies was partly due to the fact that in these cases the revenue included the gross receipts from railways. They had at one time "contemplated readjusting the revenue accounts of these Colonies, with a view of bringing (the percentage) more nearly to a level with the percentages of the Colonies which have no railways.' They would have taken steps. to secure the same results" whether a low percentage on a large gross revenue, or a higher percentage on a net revenue is taken." "The matter, however, would be of great importance if the revenues were readjusted after the percentage were agreed upon, and therefore the Committee consider that it is better not to enter into any readjustments based on a distinction between gross and net revenue, as this might open a wide door to reclamations by the Colony after the percentage was agreed upon."

A proposal to construct a Government railway in the Straits, and a probable extension of the railway system in Ceylon, forced a reconsideration of this particular point, and the Committee was reassembled in 1896.

Their report of 1897 recommended that only such portion of the railway receipts should be included in the revenue as would, if the railway were a commercial speculation, and allowing for interest on capital expenditure, be available for the payment of dividend, subject to the following readjustment of the percentages:-

That for Ceylon to be altered to 91.

That for Mauritius to be altered to 5.

As the Straits Settlements and Hong Kong possessed no Government railways when the percentage was fixed, the Committee did not propose to disturb the percentage in their case.

The contribution, however, previously (1895) proposed for these two Colonies were exclusive of certain expenditure on lands and buildings borne by the Colony. The Straits subsequently pressed for an inclusive rate of 20 per cent to cover all military expenditure and this arrangement was agreed to, the same terms being applied to Hong Kong.

The settlement thus finally arrived at is that in force to-day.

2. The general principles governing the method of calculating the contribution are well indicated in the following terms:-"The use of a fixed percentage of revenue to determine the amount of the contribution is in itself merely a mode of calculation hot based upon considerations of equity in its application to this or that class of revenue, but designed to produce roughly a fair contribution in view of the cost of the garrison and the general financial capacity of the Colony, and to enable the sum payable annually to be readily arrived at. It follows that no change of principle can properly be made in the items which compose the revenue on which the percentage is calculated without raising

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the question of an increase (or decrease as the case may be) of the percentage itself." (War Office letter to Colonial Office of 13th March, 1908 (Hong Kong).) The point made in the last sentence quoted has been brought out on many occasions during the course of correspondence regarding the military contributions.

3. In the Appendix attached to this memorandum is a list of the modifications that have been agreed to or refused since the Settlement of 1895, complete to date as far as the War Office records show.

It will be seen that there are three main classes in which a modification of the basis of assessable revenue in the original settlement has been approved.

Class I allows of the inclusion in the total assessable revenue of the net receipts and not the gross receipts of certain forms of revenue.

Class II allows of the exclusion from the gross revenue of certain items which are not considered to be" revenue."

Class III allows of the exclusion from the gross revenue of certain items on account of special ad hoc circumstances.

4. Dealing with the principles underlying the three classes of modification, the most important is that relating to net receipts.

Class I. Inclusion of revenue on basis of net receipts.-This class is derived from the exemption made by the Haliburton Committee (Section XIII of 1897) (see para- graph 1 above) in the particular case of gross revenue derived from railways. The exemption was intended to assist the Colonies at a time when railway expansion was considerable, and to avoid burdening new construction with a heavy surcharge on account of the military contribution. It thereby promoted the development of the Colonial railways. It was agreed that only such portion of the railway receipts should be included in the assessable revenue as would, if the railways were a commercial speculation, and allowing for the interest on capital expenditure, be available for the payment of dividend. The Colonies in which this practice was approved were permitted to deduct from the gross railway revenue the charges for working expenses and maintenance and for interest and sinking fund on any sums borrowed for the construction of the railways. As explained above, the percentage of assessable revenue on which the contribution is calculated was raised from 7 to 9 in the case of Ceylon, and from 5 to 5 in the case of Mauritius, where railways existed at the time of the Settlement, to enable the yield of the percentage to be approximately the same in each case as it was before the special concession was introduced for railway receipts.

Subsequently in 1899 it was agreed at the suggestion of the Colonial Office that a similar arrangement to that for existing railways should be adopted in the case of new (i.e., they did not exist when the percentages were fixed) undertakings such as railways, tramways, gas or electric lighting, or other productive works, where such new commercial undertakings are not different in character and productiveness from railways. The appropriate Colonial Ordinances relating to military contributions were amended accord- ingly. It is important to note, however, that the Treasury when approving this concession stated that" each case as it arises should be considered on its merits by the three depart- ments concerned before Her Majesty's Government commits itself to the calculation of the percentage on net instead of gross receipts." (Treasury letter No. 9892/99 of 22nd June, 1899, to the Colonial Office (Straits Settlements).) (See also Treasury letter No. 15072/11 to the Colonial Office of 12th August, 1911 (Hong Kong).) This method of assessment has since been applied, without alteration of the relative percentage, to railways (Straits Settlements 1897, Hong Kong 1911), telephones and tramways (Straits Settlements 1899), and opium factory (Straits Settlements 1910), arrack distillerics (Ceylon 1912), wharves (Straits Settlements 1911), all of which undertakings were not in operation in 1895.

The method has never been applied to Post Offices, but these of course were in operation in 1895 and refusal has been based on the principle that treatment of postal receipts on the net basis would involve adjustment of the percentage.

5. Capital Expenditure. In addition, it has been agreed (Treasury letter No. 6103/04 of 19th April, 1904, to the War Office (Straits Settlements)), that where the revenue of the Government undertakings under consideration is dealt with on the basis of net receipts, if any capital expenditure thereon is provided from annual revenue (instead of being provided by a loan, see paragraph 2 of Colonial Office letter of 21st March, 1904, to the War Office (Straits Settlements)) a deduction of 4 per cent of such capital expendi- ture may be made for a period of 50 years from the gross receipts of such undertakings. The service of a loan, interest, and sinking fund is one of the expenses of an undertaking to be deducted from the gross total when netting receipts and the rebate represents a corresponding allowance. The rate of 4 per cent represents 3 per cent for interest and

(C-38051)

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