Ah, I see. Could you elaborate on your opinion re: puppets?
Without getting too political, colonial governments had a minimal degree of legitimacy amongst local populations that a government such as that in Manchuria, or the Nanjing government in China-proper lacked as they were ruled by people that the majority of the population regarded as traitors (since that's what they were, basically). Colonial governments, on the other had, were just foreign imposed and appointed governments in a system that, whilst unstable and not popular, had at least been around for many decades, long enough to have co-opted some of the local elite beyond a simple gang of traitors, and built up relatively loyal armed forces.
Colonial troops fought with distinction in almost every theatre and were in no noticeable fashion inferior to metropolitan troops - and were anyway brigaded with metropolitan troops (e.g., each brigade of the
19th Indian Division had one British battalion). An examination of the history of, say, the battle of Monte Cassino, shows no justification in treating Indian or Moroccan divisions as inferior to British or French divisions (or, say, Central Asian troops as inferior to Russian troops in the Soviet army, or treating different units in the then still-segregated US Army differently).
I think a morale malus might be justified for puppets, but not for colonial troops. Where the real difference should come in is that it should just not be possible to mobilise the economy of a colony to the extent that an independent state can mobilise - they should stay at something like a peace-time standing. Conscription shouldn't be possible either - it would have prompted a massive revolt had they tried to implement it.
i think the EU4 approach to the various colonies would work best in HOI: puppet with their own military and a color palette nearly identical to the parent country. like if France is 0 0 255, Indochina should be 0 0 245.
The problem with the EU4 model is that in a WW2 context you would have zero control over troops who, historically speaking, were totally under the control of the imperial state. EU4 colonies never deploy their troops out-of-area, but very obviously British, French, and Spanish colonial troops served in Europe, North Africa, Asia etc.
At the same time, there should be a real reason to defend your colonies. In MP it's common to see the players abandoning India, for example. Imagine a RL government doing that, i.e. they would move ALL military units out of India and transfer them to GB and France. It's inconceivable.
There should be major penalties for losing control of colonies, and maybe a special "You Lost The Jewel In The Crown!" event for British India. On the flip-side, as a puppet-state India should have great value if conquered by Japan or Germany - giving up on India just shouldn't be an option.
TL;DR -The British Empire, and colonial empires in general, are worthy of an expansion-type DLC.