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14. D Anti-Piracy Escorts.-The Colony provide anti-piracy escorts for ships proceeding from Singapore to Hong Kong and Shanghai and other China ports, for which shipowners pay a flat rate, calculated to cover the actual cost. In 1930, which was the first year of the service, disbursements and receipts were placed to a suspense account and the receipts were not therefore included in the assessable revenue. 1931, the receipts and expenditure are included in the estimates, and unless we concede the Colony's claim for the expenditure to be exempt, the gross receipts will be subject to assessment. (The Colony in calculating the military contribution for 1931 have assumed that their claim has been conceded.) Exemption would mean a loss to the contribution of about £1,400 annually.
This amounts to a claim to exemption under Class II or III (see paragraphs 6 and 7 above). The anti-piracy escorts could be regarded as being in the nature of Police Service Loans (except that the escorts are specially provided) for which the borrowers pay the pay and allowances of the officers loaned. The receipts (about $19,000) from these Police Service Loans are included in the revenue.
On the other hand, the escorts are a service specially undertaken by the Colony outside its normal functions, although of advantage in securing the peaceful trade of the Colony in so far as one of the ports of call of the steamers in Hong Kong.
16 E. House Service Account.-The Colony instals water supply and later (a matter of months), as the district develops, recover the cost of installation from the property owners. In the past the expenditure and receipts on account of this service appear to have been excluded from the general revenue and expenditure, but it is now proposed, for accounting reasons, to include them, and the Colony claim that the receipts should be exempt from assessment for military contribution. It is not clear what amount is involved and it would probably vary considerably, but it appears that in five or six months the receipts amounted to about $25,000. The gain to the con- tribution which would be lost if the receipts are exempted would be £500.
If this service has always been kept out of the general revenue account, which would appear to be the case, there is some ground for considering exemption, and regarding the item as a reimbursement of expenditure and not revenue in the ordinary sense (Class II above), particularly if the service existed when the percentage payable as military contribution was fixed, but we should ask the Colony to confirm this and whether there are any comparable services (e.g., roads). Incidentally, in connexion with the Colony's remarks about correct accounting, it should be observed that changes in the total of revenue due to " improvements in book-keeping have never been taken as necessarily carrying exemption of the effect of the changes from
assessment to contribution.
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The claim should presumably be for total exemption rather than for assessment on the basis of net receipts as the calculation of the net receipts would be difficult. the service account being a running one. But it should be remarked that in the memorandum from the Colony a reference is made to a profit next year, and it is not at all clear how any profit should arise on these transactions. The Colony might be asked to explain this.
16. F. Overpayments.-The Colony claim exemption for overpayments in previous years. What is meant by this is not at all clear, but it appears to be in cases where the Colony has paid sums out of revenue in one year and in the next, or later, years, found it has paid too much and has accordingly recovered some amount. Apparently it has been the custom in the past not to credit such sums to revenue, but for accounting reasons it has now been decided to do so, and therefore it is desired to secure that military contribution is not charged. No estimate of the amount of money involved is given, but presumably it cannot be large, and as the revenue repaid has already been subject to contribution there would appear to be a case for considera- tion of exemption. It would be well perhaps to ascertain exactly what the Colony is referring to before any final decision is given.
17. G Water Works. It is stated that $12,000,000 has been expended by the Colony out of revenue over a period of 20 to 30 years up to 1923, on waterworks, and no deduction in respect of interest and sinking fund has been made. The water- works are now financed from loan, but sinall items of a capital nature are still being financed from revenue.
The Colony claim that by law a 4 per cent. deduction from the waterworks receipts in respect of the capital expenditure financed from revenue should have been made in the past under the general ordinance admitting such a deduction in the case of pro- ductive undertakings, and should be allowed in the future, but they do not propose to claim arrears if the other claims referred to above are admitted. Presumably, how- ever, they would expect the deduction to run for 50 years from the date of the various
expenditures and to be applied in future to the whole body of prior expenditure. The amount involved is £4,800 in 1930 (which would be increased to £7,200 if the claim at A (3) is admitted), and a similar reduction in the contribution in subsequent years.
A rebate in respect of capital expenditure from revenue has in the past only been allowed in respect of productive undertakings assessable on net receipts (see para- graph 5 above), but the Colony apparently make no claim for the waterworks to be so assessed. The case for the deductions claimed obviously hinges on a case for treatment on net receipts and it is necessary therefore to examine the latter case first. In paragraph 17 the case for the deductions is examined on general principles and in paragraph 18 the Colonial statement that the deductions should have been made by law is criticized.
The question of the waterworks is not now. A reference to the correspondence in 1895 and 1896 immediately preceding the institution of a percentage of revenue as the basis of the military contributions, shows that attempts were then made to secure the exemption of the waterworks revenue, amongst other items, from assessment for anilitary contribution.
It is true that the basis of the claim for exemption was that such revenue was in the nature of municipal, as in the case of the Straits Settlements, rather than general revenue, but in a despatch to the Colonial Office dated 28th August, 1895, the Governor in support of the claim for exemption from assessment said: In this connexion it should be remembered as the unofficial members point out, that loans have been raised by this Government for the purpose of carrying out works of a purely municipal nature, such as waterworks, markets, &c., and it appears equitable that the revenue derived from such works, instead of being subjected to a charge of 17 per cent., should be applied to their upkeep, to defraying the interest on the monies raised by loan to construct them and to forming a sinking fund with a view to the ultimate liquidation of the debt incurred on their account.'
The Colonial Office reply, which was despatched on 1st November, 1895, after consultation with the War Office and the Treasury, refused to entertain the proposal to exclude the so-called municipal receipts from assessment. In April, 1896, the Governor forwarded a memorandum on the military contribution by the unofficial members of the Legislative Council in which it was urged that the fixing of 173 per cent. of the general revenue as the military contribution imposed an undue burden on the Colony as compared with the Straits Settlements in view of the fact that municipal revenue was not included in the general revenue of the Straits Settlements, whereas, owing to there being no municipality in Hong Kong, the like revenues was included in general revenue. It was pointed out in the memorandum that the assessed taxes which were distinctly municipal rather than general revenue and were levied as a percentage of the annual value of the houses included 2 per cent. in respect of water.
The Colonial Office, however, again refused to agree to the suggestions and pointed out that the 17 per cent. was fixed on the basis of the gross revenue less land sales, including all the items which had hitherto been accounted as revenue and that if any exemption were agreed to it would be necessary to reconsider the 17 per cent.
The gross revenue derived from the waterworks as expressed in the water rate has always been included in the revenue of the Colony without deduction, and the views expressed in 1895 and 1896 would appear to apply equally now.
The waterworks revenue should not therefore be treated on the basis of " net receipts unless the percentage paid for the contribution is varied to allow of the change. It follows that deductions for a rebate on capital expenditure met from revenue which would represent a partial netting of receipts cannot be permitted.
18. The Deputy Treasurer of the Colony in his memorandum of 9th December, 1930, suggests that the assessments made on the gross revenue of the waterworks in past years were contrary to the terms of Section 3 of the Defence Contribution Ordinance No. 1 of 1901, and that, by law, annual deductions of 4 per cent. of the capital expenditure met from revenue should be made for 50 years from the gross receipts. This suggestion, which is apparently accepted by Colonial Office letter of 27th February, 1931, covering the Governor's despatch, is unsupported by the historical circumstances associated with the section and ignores the correspondence between the Colonial Office and the Hong Kong Governments when the section was introduced into the Ordinance.
A section on the lines of Section 3 of the Hong Kong Defence Contribution Ordinance No. 1 of 1901 is common to all the Military Contribution Ordinances of the Eastern Colonies. The first portion of the section follows the lines of the sections drafted for the Ceylon and Mauritius Ordinances of 1897 and 1898 when
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