Finance Commission is a constitutional body for the purpose of allocation of certain revenue resources between the Union and the State Governments. It was established under Article 280 of the Indian Constitution by the Indian President. It was created to define the financial relations between the Centre and the states. It was formed in 1951. Below is an article on the details of the FC, which is an important topic in polity and current affairs for IAS exam. It is also a part of the polity section of the UPSC syllabus.
Finance Commission UPSC
Appointment: Formation of Finance Commission of India
As per Article 280:
- 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 IAS
- Chairman: Heads the Commission and presides over the activities. He should have had public affairs experience.
- One Secretary and four Members.
- The Parliament determines legally the qualifications of the members of the Commission and their selection methods.
- The 4 members should be or have been qualified as High Court judges, or be knowledgeable in finance or experienced in financial matters and are in administration, or possess knowledge in economics.
- All the appointments are made by the President of the country.
- Grounds of disqualification of members:
- found to be of unsound mind, involved in a vile act, if there is a conflict of interest
- 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 is as per the provisions laid down by the Constitution.
Powers, Functions and Responsibilities
- The Commission decides the basis for sharing the divisible taxes by the centre and the states, and the principles that govern the grants-in-aid to the states every five years.
- Any matter in the interest of sound finance may be referred to the Commission by the President.
- The Commission’s recommendations along with an explanatory memorandum with regard to the actions done by the government on them are laid before the Houses of the Parliament.
- The FC evaluates the rise in the Consolidated Fund of a state in order to affix the resources of the state Panchayats and Municipalities.
- The FC has sufficient powers to exercise its functions within its activity domain.
- As per the Code of Civil Procedure 1908, the FC has all the powers of a Civil Court. It can call witnesses, ask for the production of a public document or record from any office or court.
Functions of Finance Commission
The Finance Commission makes recommendations to the president of India on the following issues:
- The net tax proceeds distribution to be divided between the Centre and the states, and the allocation of the same between states.
- The principles governing the grants-in-aid to the states by the Centre out of the consolidated fund of India.
- The steps required to extend the consolidated fund of a state to boost the resources of the panchayats and the municipalities of 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.
Impact of the Planning Commission
The Constitution envisions the Finance Commission as the balancing wheel of fiscal federalism in India. However, its role in the Centre-state fiscal relations has been undercut by the emergence of the Planning Commission which is a non-statutory and non-constitutional body. Dr P V Rajamannar, the Chairman of the Fourth Finance commission, threw light on the concurrence of functions and responsibilities between the FC and the Planning Commission in federal fiscal transfers in the way described below.
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.
The recommendations made by the Finance Commission are of an advisory nature only and therfore, not binding upon the government. It is up to the GOI 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 amount to a legal right favouring the recipient states to receive the money recommended to be provided to them by the Commission.