Finance Commission

Constitutional Status of Finance Commission

• The Finance Commission is a Constitutional Body established under Article 280 of the Constitution.
• It is constituted by the President of India.
• It recommends the distribution of financial resources between the Union and the States, thereby strengthening Fiscal Federalism.

Establishment of Finance Commission

• Constituted by: President of India
• Constitutional Provision: Article 280
• First Finance Commission: 1951
• First Chairman: K.C. Neogy

Objective of Finance Commission

The Finance Commission aims to:

• Ensure equitable distribution of revenues.
• Reduce vertical and horizontal fiscal imbalances.
• Strengthen Cooperative Fiscal Federalism.
• Promote financial stability of States.

Composition of Finance Commission

The Finance Commission consists of:

• Chairman
• Four Other Members

Total Members: 5

Qualifications

Chairman

The Chairman should be a person having experience in Public Affairs.

Other Members

Members are selected from persons having:

Judicial Experience

• Have been, or are qualified to be appointed as, a Judge of a High Court.

Financial Expertise

• Special knowledge of Government Finance and Accounts.

Administrative Experience

• Wide experience in Financial Administration.

Economic Expertise

• Special knowledge of Economics.

Appointment & Tenure

Appointment

• Members are appointed by the President of India.

Tenure

• Hold office for the period specified by the President.
• Members are eligible for reappointment.

Functions of the Finance Commission

Distribution of Tax Revenue

Recommends the principles governing:

• Distribution of the Net Proceeds of Taxes between:
  
  • Union and States (Vertical Devolution)
  • Among the States (Horizontal Devolution)

Grants-in-Aid

Recommends the principles governing Grants-in-Aid from the Consolidated Fund of India under Article 275.

Strengthening Local Bodies

Recommends measures required to augment the resources of:

• • Panchayats
  • Municipalities

based on the recommendations of the State Finance Commission.

(Added through the 73rd & 74th Constitutional Amendments.)

Other Matters

The President may refer any matter relating to sound public finance to the Commission.

Earlier Special Function (Historical)

Earlier, the Finance Commission recommended the amounts payable to:

• • Assam
  • Bihar
  • Odisha
  • West Bengal

in lieu of Export Duty on Jute and Jute Products.

Exam Note: This provision has now become historically insignificant because Export Duty on Jute is no longer a major constitutional issue.

Working Procedure of Finance Commission

• The Commission submits its Report to the President.
• The President lays the Report before Parliament along with:
  
  • Action Taken Report (ATR)
  • Explanatory Memorandum

Note: The recommendations are Advisory and not legally binding, though they are generally accepted by the Government.

Criteria Used for Horizontal Tax Devolution (16th Finance Commission)

Key Changes in the 16th Finance Commission compared to 15th Finance Commission

• Income Distance remains the largest criterion (42.5%).
• Population (2011 Census) continues to receive 17.5% weight.
• Demographic Performance, Area, and Forest & Ecology continue with 10% each.
• Tax & Fiscal Effort has been replaced by Contribution to GDP (10%) as a criterion for horizontal devolution.

List of Finance Commissions of India

Finance Commission vs State Finance Commission

Important Constitutional Articles