- It deals with Article 280 of Indian constitution
- It is a quasi judicial body.
- Constituted by the President every fifth year or earlier as he considers necessary.
- Finance Commission consists of a Chairman and four other members
- Constitution authorises the Parliament to determine the qualifications . Accordingly, Parliament has specified
- Chairman: person having experience in public affairs
- Four other members should be selected from amongst the following:
- A judge of High Court or one qualified to be appointed as one.
- A person who has specialised knowledge of accounts of the government.
- A person who has wide experience in financial matters .
- A person who has special knowledge of economics.
Finance Commission is required to make recommendations to the President of India on the following matters:
- Distribution of the net proceeds of divisible pool of taxes to be shared between Center and states (Vertical Distribution) , and the allocation between states (Horizontal Distribution)
- Principles that should govern the grants-in-aid to the states by the Center
- Measures needed to augment the consolidated fund of a state to supplement the resources of Panchayats and municipalities
- Any other matter referred to it by the President in the interests of sound finance.
Constitution also allows Finance Commission to make broader recommendations in the interests of sound finance.
The commission submits its report to President. He lays it before both the Houses of Parliament along with an explanatory memorandum as to the action taken on its recommendations.
Till 1960, the commission also suggested the grants given to the States of Assam, Bihar, Odisha and West Bengal in lieu of assignment of any share of the net proceeds in each year of export duty on jute and jute products. These grants were to be given for a temporary period of ten years from the commencement of the Constitution.
- Recommendations made by Finance Commission are only of advisory nature and hence, not binding
- As rightly observed by Dr. P.V. Rajamannar, the Chairman of the Fourth Finance Commission, “Since the Finance Commission is a constitutional body expected to be quasi-judicial, its recommendations should not be turned down by the Government of India unless there are very compelling reasons”
Finance Commission & Fiscal Federalism
- Constitution envisages the Finance Commission as the balancing wheel of the Fiscal federalism in India.
- Every successive Finance Commission has to
do a political balancing
giving more resources to the states given the growing importance of
sub-national governments in the Indian political economy.
- 1st Finance Commission ( K.C. Neogy) recommended – 10% Share
- 14th Finance Commission (Y. V. Reddy) recommended – 42%.
- But at the same time, it also ensures that center is not fiscally constrained given its role in key national public goods such as defence.
15th Finance Commission
Nov 2017 : Government had approved the setting up of 15th Finance Commission with N.K. Singh as its Chairman. It has been asked to submit its report by 30 October 2019.
Terms of Reference
- Above Terms of References which are same for all Finance Commissions
- Commission is to finalise its tax-devolution formula after factoring in the impact on the Union’s fiscal situation, keeping in mind “the continuing imperative of the national development programme including New India – 2022” and government’s commitment to compensate states’ loss due to GST.
- Finance Commission will also propose performance-based incentives (PBI) in areas such as
- Efforts made by the states in expansion and deepening of the tax net under GST
- Efforts and progress made in moving towards replacement rate of population growth
- Improvement in ease of doing business
- Reign in populist measures
- Promoting savings through adoption of direct benefit transfers
- Promoting a digital economy; etc.
South Indian States vs 15th Finance Commission
- 14th Finance Commission had used both Census 1971 and 2011 for horizontal distribution of taxes among states. Census-1971 population was given 17% weight and 2011 given 10%
- 15th Finance Commission is ordered to use the Census 2011 data only.
Issue : Southern states believe that the recommendations will not recognise their effort to check population growth, and will impact the transfer of resources.
Southern States allege that Center is funding Northern States from their taxes. For every 1 ₹ that North Indian States give , they get 3₹ back and for every 1 ₹ that Southern States give , they get 50 paisa .