Finance Commission also serves a constitutional body for the purpose of allocation of certain resources of revenue between the Union and the State Governments. 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 of India was formulated with the purpose of allocation of resources between the Union and the States. It is constituted by the President and all appointments to the commission are made by him as well. Finance Commission of India was formed in the year 1951 under Article 280 of the Constitution of India. The Commission was structured according to the world standards. The objective of forming the Finance Commission was to allocate resources of the revenue between the Union and the State Governments in India adequately.
Appointment: Formation of Finance Commission of India
The detailed set up and of the Finance Commission has been provided in Article 280 of the Constitution of India. The Article states:
• The President shall, within two years from the commencement of this Constitution and thereafter and at the expiration of every fifth year or at such time earlier time as the President considers necessary, by order constitute a Finance Commission which shall consist of a Chairman and four other members to be appointed by the President.
• Parliament may by law determine the qualification which shall be requisite for appointment as members of the Commission and the manner in which they shall be selected.
• It shall be the duty of the Commission to make recommendations to the President as to the distribution of the net proceeds of taxes which are to be, or may be divided between them under this chapter and the allocation between the States of the respective shares of such proceeds. It is also the duty of the Finance Commission to define the financial relations between the Union and the State and it also caters to the purpose of devolution of non-plan revenue resources.
Composition of Finance Commission of India
The Finance Commission of India has a Chairman along with four other members and a Secretary. The Chairman is the person who heads the Commission and presides over its activities. The Indian Parliament is authorised to determine by law the qualifications of the members of the Commission and method of their selection. The Chairman of the Finance Commission is selected among persons who have had the experience of public affairs, and four other members are selected among persons who- are, or have been, or are qualified as judges of High Courts of India, or have knowledge of finance, or have vast experience in financial matters and are in administration, or have knowledge of economics. All the appointments are made by the Indian President. A member can be disqualified on the following grounds- when a member is found to be of unsound mind, is involved in a vile act or if his interests are likely to affect the functioning of the Commission.
The tenure of the office of the Member of the Finance Commission is specified by the President of India and in some cases the members are also re-appointed. The members shall give part time or whole time service to the Commission as scheduled by the President. The salary of the members of the Finance Commission is according to the provisions led down by the Constitution of India.
Powers, Functions and Responsibilities
Under the Constitution, the basis for sharing of divisible taxes by the Centre and the States and the principles governing grants-in-aid to the states have to be decided by the Commission every five years. The President can refer to the Commission any other matter in the interest of sound finance. The recommendations of the Commission together with an explanatory memorandum as to the action taken by the Government on them are laid before each house of Parliament. The Commission has to evaluate the increase in the Consolidated Fund of a state to affix the resources of the Panchayat in the state. It also has to evaluate the increase in the Consolidated Fund of a state to affix the resources of the Municipalities in the state.
The Commission has been given adequate powers in the exercise of its function and within its area of activity. It has all the powers of the Civil Court as per the Code of Civil Procedure, 1908. It can call any witness, or can ask for the production of any public record or document from any court or office. It can ask any person to give information or document on matters as it may feel to be useful or relevant. It can function as a civil court in discharging its duties.
The Finance Commission is required to make recommendations to the president of India on the following matters:
• The distribution of the net proceeds of taxes to be shared between the Centre and the states, and the allocation between the states of the respective shares of such proceeds.
• The principles that should govern the grants-in-aid to the states by the Centre (i.e., 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 state finance commission.
• Any other matter referred to it by the president in the interests of sound finance.
Till 1960, the commission also suggested the grants given to the States of Assam Bihar Orissa 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.
The commission submits its report to the president. He lays it before both the Houses of Parliament along with an explanatory memorandum as to the action taken on its recommendations.
Impact of the Planning Commission
The Constitution of India envisages the Finance commission as the balancing wheel of fiscal federalism in India. However, its role in the Centre-state fiscal relations has been undermined by the emergence of the Planning Commission, a non-constitutional and a non-statutory body. Dr P V Rajamannar, the Chair¬man of the Fourth Finance commission, highlighted the overlapping of functions and responsibilities between the Finance Commission and the Planning Commission in federal fiscal transfers in the following way. The reference in Article 275 to grants-in¬ aid to the revenues of states is not confined to revenue expenditure only. There is no
legal warrant for excluding from the scope of the Finance Commission all capital grants; even the capital requirements of a state may be properly met by grants-in-aid under Article 275, made on the recommendations of the Finance Commission.
The legal position, therefore, is that there is nothing in the Constitution to prevent the finance commission from taking into consideration both capital and revenue requirements of the states in formulating a scheme of
devolution and in recommending grants under Article 275 of the Constitution. But the setting up of Planning Commission inevitably has led to a duplication and overlapping of functions, to avoid which a practice has grown which has resulted in the curtailment of the functions of the finance commission.
As the entire plan, with regard to both policy and programme, comes within the purview of the Planning Commission and as the assistance to be given by the Centre for plan projects either by way of grants or loans is practically dependent on the recommendations of the Planning Commission, it is obvious that a body like the Finance Commission cannot operate in the same field. The main functions of the Finance Commission now consist in determining the revenue gap of each state and providing for filling up the gap by a scheme of devolution, partly by a distribution of taxes and duties and partly by grants-in-aid.
It must be clarified here that the recommendations made by the Finance Commission are only of advisory nature and hence, not binding on the government. It is up to the Union government to implement its recommendations on granting money to the states. To put it in other words, ‘It is nowhere laid down in the Constitution that the recommendations of the commission shall be binding upon the Government of India or that it would give rise to a legal right in favour of the beneficiary states to receive the money recommended to be offered to them by the Commission. 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.