(1) Taxes on income other than agricultural income shall be levied and collected by the Federation, but a prescribed percentage of the net proceeds in any financial year of any such tax, except in so far as those proceeds represent proceeds attributable to Chief Commissioners' Provinces or to taxes payable in respect of [Federal]¹emoluments, shall not form part of the revenues of the[Federation]¹, but shall be assigned to the Provinces and to the[Federated]²States, if any, within which that tax is livable in that year, and shall be distributed among the Provinces and those States in such manneras may be prescribed³:

Provided that--

(a) the percentage originally prescribed under this sub-section shall not be increased by any [subsequent Order in Council]⁴the [Federal]¹Legislature may at any time increase the said taxes by a surcharge for [Federal]¹purposes and the whole proceeds of any such surcharge shall form part of the revenues of the [Federation]¹.⁵[For the purposes of this sub-section, in each financial year⁶[one per cent., or] such⁶[other] percentage as may be prescribed, of so much of the net proceeds of taxes on income as does not represent the net proceeds of taxes payable in respect of [Federal]¹emoluments shall be deemed to represent proceeds attributable to the Chief Commissioners' Provinces].

(2) Notwithstanding anything in the preceding sub-section, the [Federation]¹may retain out of the moneys assigned by that sub-section to Province and States-

(a) in each year of a prescribed period such sum as may be prescribed [or⁵, if it is so prescribed, the whole of those moneys] ; and

(b) in each year of a further prescribed period a sum less than that retained in the preceding year by an amount, being the same amount in each year, so calculated that the sum to be retained in the last year of the period will be equal to the amount of each such annual reduction:

Provided that--

(i) neither of the periods originally prescribed shall be reduced by any subsequent Order in Council;

(ii) the Governor-General in his discretion may in any year of the second prescribed period direct that the sum to be retained by the [Federation]¹in that year shall be the sum retained in the preceding year, and that the second prescribed period shall be correspondingly extended, but he shall not give any such direction except after consultation with such representatives of [Federal]¹, Provincial and State interest as he may think desirable, nor shall be give any such direction unless he is satisfied that the maintenance of the financial stability of the [Federal]1b Government requires him so to do.

(3) Where an Act of the [Federal]¹Legislature imposes a surcharge for [Federal]¹purposes under this section, the Act shall provide for the payment by each [Federated]²State in which taxes on income are not leviable by such basis as may be prescribed with a view to securing that the contribution shall be the equivalent, as near as may be, of the net proceeds which it is estimated would result from the surcharge if it were leviable in that State, and the State shall become liable to pay that contribution accordingly.

(4) In this section--

"taxes on income" does not include a corporation tax;

"prescribed" means prescribed by [His Majesty in Council]⁷; and

"Federal emoluments" includes all emoluments and pensions payable out of the revenues of the [Federation]¹or of the Federal Railway Authority in respect of which income-tax is chargeable.

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1. Substituted, by the India (Provisional Constitution) Order, 1947., by the word 'Dominion'.

2. Substituted, by the India (Provisional Constitution) Order, 1947., by the word 'Acceding'.

3. See the Government of India (Distribution of Revenues) Order, 1936 [3-7-1936].

4. Substituted, by the Government of India (Distribution of Revenues) Order, 1936, by the words 'Order of the Governor-General'.

5. Inserted by the India and Burma (Miscellaneous Amendments) Act, 1940 (3 & 4 Geo. 6, Ch. 5), S. 1,

6. Omitted, by the India (Provisional Constitution) Order, 1947.

7. Substituted, by the India and Burma (Miscellaneous Amendments) Act, 1940 (3 & 4 Geo. 6, Ch. 5), S. 1., by the words 'Order of the Governor-General'.