Finance Commission of India

The Finance Commission (FC) of India is a constitutional body established under Article 280 of the Constitution. Its primary responsibility is to define the financial relations between the central government and the state governments. This includes recommending principles governing the distribution of tax revenues between the Union and the States (vertical devolution) and the allocation of the States’ share among the States themselves (horizontal devolution).

Establishment and Composition

The President of India constitutes the Finance Commission every five years, or earlier if deemed necessary. The Commission comprises a chairman and four other members. The qualifications for these members are determined by Parliament through law. Generally, the Chairman should have experience in public affairs, and the other members are selected from individuals who have expertise in economics, finance, administration, or accounting.

Functions and Mandate

The Finance Commission’s core function is to recommend the principles that should govern:

• The distribution between the Union and the States of the net proceeds of taxes which are to be, or may be, divided between them.
• The allocation among the States of the respective shares of such proceeds.
• The principles which should govern the grants-in-aid of the revenues of the States out of the Consolidated Fund of India.
• The measures needed to augment the Consolidated Fund of a State to supplement the resources of the Panchayats and the Municipalities in the State on the basis of the recommendations made by the Finance Commission of the State.

In addition to these core functions, the President may require the Finance Commission to make recommendations on any other matter referred to the Commission in the interest of sound finance.

Working Methodology

The Commission operates independently and adopts a consultative approach. It engages with the central and state governments, relevant ministries, and other stakeholders. The Commission examines the revenue and expenditure positions of the Union and the States, considers their developmental needs, and assesses their debt sustainability. It also takes into account the resource requirements for defense, internal security, and other essential services.

Reports and Implementation

The Finance Commission submits its report to the President, who then lays it before each House of Parliament, along with an Explanatory Memorandum as to the action taken thereon. The recommendations of the Finance Commission are advisory in nature, but they carry significant weight. The Union Government usually accepts and implements a large portion of the recommendations, often with minor modifications. These recommendations have a significant impact on the fiscal health of both the central and state governments.

Significance

The Finance Commission plays a vital role in promoting fiscal federalism in India. It ensures a fair and equitable distribution of resources between the Union and the States, contributing to balanced regional development. By recommending measures to augment the resources of local bodies, the Commission also strengthens decentralization and empowers local governance.