The most populist of all budgets, by the man who would become first Pakistan PM

To make up for the revenue loss and to finance additional expenditure (such Rs 40.5 crore for a ‘Grow more Food’ scheme and Rs 17.35 crore on subsidisation of imported food), Khan proposed two new taxes.

First, a levy of 25% on business profits, including incomes from professions/ vocations, in excess of Rs 1 lakh. Second, a tax on capital gains above Rs 5,000 from the sale of assets whose prices had recorded substantial increases, particularly during the World War II period. The two imposts were estimated to annually yield Rs 30 crore and Rs 3.5 crore respectively.

Khan also doubled the rate of corporation tax from 6.25% to 12.5% (generating another Rs 4 crore), and proposed the “setting up of a Commission to investigate…the great private accumulations of wealth in recent years” from tax-evasion and “black-market operations”.

With all the giveaways and Robin Hood-effect redistributive taxes, Khan was able to contain the government’s total budgeted expenditure for 1947-48 to Rs 327.88 crore, as against the previous year’s Rs 365.35 crore (For an idea how much that has grown since, Nirmala Sitharaman’s budget for 2022-23 provided for a total expenditure of Rs 39.45 lakh crore!). Khan’s budget, the first by an Indian finance minister, was populist but not profligate.

While Khan, who was next only to Muhammad Ali Jinnah in the Muslim League hierarchy, defended his budget citing the “principles of social justice” and “the Quranic injunction that wealth should not be allowed to circulate only among the wealthy”, the trade and industry reaction was predictably hostile.

The Bombay Stock Exchange shut the very day after the budget, Calcutta closed on March 2, and the bourses in Madras and Delhi followed on March 4. Trading resumed only on March 18.

During this turbulent phase, leading lights of business mounted pressure on Congress ministers and legislators — through the Federation of Indian Chambers of Commerce and Industry, the Birlas-owned Hindustan Times, and the Ramkrishna Dalmia-acquired Times of India, among others — for rolling back the tax proposals.

On March 22, the viceroy, Lord Archibald Wavell, who was still the nominal head of His Majesty’s government in India, persuaded Khan to reduce the business profits tax rate from 25% to 16.25%. Khan was also forced to treble the exemption limit for capital gains tax from Rs 5,000 to Rs 15,000. The special commission for probing incomes alleged to have escaped taxation did not see the light of day.

There are multiple interpretations of the motives behind Khan’s radical proposals, which he claimed were based on the socialist ideals and declarations of Congress leaders against profiteering by big business.

One explanation was that the League was primarily a party of the Muslim landed gentry and professionals, with little stake in industry. Khan’s budget, it was not-so-subtly suggested, aimed at hurting capitalist interests that were overwhelmingly Hindu Marwari and Bania.

A second view was that the League had joined the interim coalition in order to demonstrate the impracticality of governing a united India — and that the budget was essentially a subversive exercise.

Whether or not these hypotheses were true, Liaquat Ali Khan’s budget may well have accelerated the formation of Pakistan. Many Hindu businessmen and even leaders hitherto seemingly committed to the sacred unity of India — the likes of Sardar Vallabhbhai Patel — were convinced to let go of the Muslim League and accede to the demand for a separate nation.

The capital gains tax that Khan introduced — which he described as a levy on profits in the nature of “unearned increment” as opposed to “ordinary income” — did not, however, go away. The sections in the Income-Tax Act providing for a tax in respect of any profits or gains arising from the sale, exchange, or transfer of a capital asset, remained on the statute book. It outlived the man who went on to become Pakistan’s first prime minister under Governor General Jinnah.