Finance Commission

The Finance Commission of India came into existence in 1951. It was established under Article 280 of the Indian Constitution by the President of India. It was formed to define the financial relations between the centre and the state. Finance Commission is a statuary, independent, semi judicious non-political body to be set up by President of India for every five years (or earlier) under Article 280 of the Commission.

The most Crucial problems in a federation is that of balancing powers and resources between the governments. That is why our constitution makers were quite cautious on the count and provided for a finance commission under Article 280, to recommend mainly the financial transfers from the union to the states with a view to reducing vertical as well as horizontal federal fiscal imbalances.

Functions of the Finance Commission

The Finance Commission consists of a Chairman and four other members to be appointed by the President of India. The Constitution has not mentioned the qualifications of either the Chairman or its member; they are to be determined by the Parliament.

The Parliament can also lay down the manner in which they shall be selected. That is the reason why the Chairmen of the Finance Commissions have been reputed politicians, former justices, economists, technocrats and reputed public personalities.

Article 280 (3) speaks about the functions of the Finance Commission. The Article states that it shall be the duty of the Commission to make the 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 among the states of the respective shares of such proceeds;
2. To determine the quantum of grants-in-aid to be given by the Centre to states [Article 275 (1)] and to evolve the principles to govern the eligibility of the state for such grant-in-aid;
3. Any other matter referred to the Commission by the President of India in the interest of sound finance. Several issues like debt relief, financing of calamity relief of states, additional excise duties, etc. have been referred to the Commission invoking this clause.

The Commission shall determine its procedure and shall exercise such powers in the performance of its functions, as the Parliament may, confer on it by law. The President shall place the Report of the Commission together with an Explanatory Memorandum before each house of Parliament. In practice, the recommendations of Finance Commission are accepted by the Government of India for the distribution of shared tax revenue, as well as for grant-in-aid.

Recommendations of The Finance Commission

The recommendations of the finance commission will cover the following:

• distribution between the state government and Municipalities of the net proceeds of the taxes, duties, tolls and fee leviable by the state.
• allocation of share of such proceeds between the Municipalities at all levels in a state.
• determination of taxes, duties, tolls, and fees to be assigned or appropriated by the Municipalities.
• grant-in-aid to Municipalities from the consolidated fund of the state.
• measures needed to improve the financial position of the Municipalities.

The scope of The Commission

Article 280 of the Indian Constitution defines the scope of the commission:

1. The President will constitute a finance commission within two years from the commencement of the Constitution and thereafter at the end of every fifth year or earlier, as the deemed necessary by him/her, which shall include a chairman and four other members.
2. Parliament may by law determine the requisite qualifications for appointment as members of the commission and the procedure of selection.
3. The commission is constituted to make recommendations to the president about the distribution of the net proceeds of taxes between the Union and States and also the allocation of the same amongst the States themselves. It is also under the ambit of the finance commission to define the financial relations between the Union and the States. They also deal with the devolution of unplanned revenue resources.

Functions Of The Finance Commision

The following are the main functions of the Finance Commission of India:

1. The finance commission is responsible for the distribution of net proceeds of taxes between Center and the States. This distribution is made on the basis of the respective contributions of the States to the taxes. The greater the tax paid by a State, the greater is the share from the net proceeds of taxes.
2. It determines the factors governing grants that are made to the states in the form of aids to the states and it also fixes the amount that is given in the form of aid by the center to the state governments.
3. The Commission is responsible to make recommendations to the president as to the measures that are needed to augment the Fund of a State to supplement the resources of the Panchayats and Municipalities.

Grounds On Which A Member Of The Commission Can Be Disqualified

• He is mentally unsound; and as follows.
• He is an undischarged insolvent;
• He has been convicted of an immoral offence
• His financial and other interests are such that it hinders the smooth functioning of the commission.