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Finance Commission of India

Topics Covered:  Appointment to various Constitutional posts, powers, functions and responsibilities of various Constitutional Bodies.

Finance Commission of India

What to study?

For Prelims and Mains: About FC- roles, objectives, functions, criteria used and need for reforms.

Context: The report of the Fifteenth Finance Commission, along with an Action Taken Report, has been tabled in Parliament. The Commission, headed by N K Singh, had submitted its Report to the President in December 2019.

What is the Finance Commission?

The Finance Commission is constituted by the President under article 280 of the Constitution, mainly to give its recommendations on distribution of tax revenues between the Union and the States and amongst the States themselves.

Two distinctive features of the Commission’s work involve redressing the vertical imbalances between the taxation powers and expenditure responsibilities of the centre and the States respectively and equalization of all public services across the States.

What are the functions of the Finance Commission?

It is the duty of the Commission to make recommendations to the President as to:

  1. the distribution between the Union and the States of the net proceeds of taxes which are to be, or may be, divided between them and the allocation between the States of the respective shares of such proceeds;
  2. the principles which should govern the grants-in-aid of the revenues of the States out of the Consolidated Fund of India;
  3. the measures needed to augment the Consolidated Fund of a State to supplement the resources of the Panchayats and Municipalities in the State on the basis of the recommendations made by the Finance Commission of the State;
  4. any other matter referred to the Commission by the President in the interests of sound finance.

The Commission determines its procedure and have such powers in the performance of their functions as Parliament may by law confer on them.

Who appoints the Finance Commission and what are the qualifications for Members?

The Finance Commission is appointed by the President under Article 280 of the Constitution.

As per the provisions contained in the Finance Commission [Miscellaneous Provisions] Act, 1951 and The Finance Commission (Salaries & Allowances) Rules, 1951, the Chairman of the Commission is selected from among persons who have had experience in public affairs, and the four other members are selected from among persons who:

  1. are, or have been, or are qualified to be appointed as Judges of a High Court; or
  2. have special knowledge of the finances and accounts of Government; or
  3. have had wide experience in financial matters and in administration; or
  4. have special knowledge of economics.

When was the first Commission Constituted and how many Commissions have been Constituted so far?

The First Finance Commission was constituted vide Presidential Order dated 22.11.1951 under the chairmanship of Shri K.C. Neogy on 6th April, 1952.  Fifteenth Finance Commissions have been Constituted so far at intervals of every five years.

Why is there a need for a Finance Commission?

The Indian federal system allows for the division of power and responsibilities between the centre and states.  Correspondingly, the taxation powers are also broadly divided between the centre and states.  State legislatures may devolve some of their taxation powers to local bodies.

Need for permanent status:

Finance commissions have over the past several decades adopted different approaches with regard to principles of tax devolution, grants to be given to states and fiscal consolidation issues. In other words, there has to be continuity and change between finance commissions.

There is a need to ensure broad consistency between Finance Commissions so that there is some degree of certainty in the flow of funds, especially to the states. This has become even more critical in the post GST scenario.

If it is given permanent status, the Commission can function as a leaner entity in the intervening period till the next Finance Commission is set up in a full-fledged manner. During the intervening period, it can also address issues arising from implementation of the recommendations of the finance commission.

Sources: the Hindu.