Finance Commission (Article 280)

At a Glance

• What it is Quasi-judicial body on Centre-state financial relations
• Article Article 280 (recommendations: Article 281)
• Constituted Every fifth year or earlier by the President
• Members Chairman and four other members
• Exam link UPSC Prelims, Polity: Constitutional Bodies

Where Does It Fit?

This is the third topic of the category on Constitutional Bodies. Article 280 provides for a Finance Commission as a quasi-judicial body, constituted by the President every fifth year or at such earlier time as the President considers necessary. It is the balancing wheel of fiscal federalism in India.

Composition and Qualifications

The Commission consists of a chairman and four other members appointed by the President. They hold office for the period specified in the President’s order and are eligible for reappointment. The Constitution authorises Parliament to determine their qualifications and manner of selection, and Parliament has done so through the Finance Commission Act, 1951. The chairman should have experience in public affairs. The four other members are chosen from among: a high court judge or a person qualified to be one; a person with specialised knowledge of finance and accounts of the government; a person with wide experience in financial matters and administration; and a person with special knowledge of economics.

Functions

The Commission makes recommendations to the President on these matters:

1. The distribution of the net proceeds of taxes to be shared between the Centre and the states, and the allocation between the states of their respective shares.
2. The principles that should govern grants-in-aid to the states by the Centre out of the Consolidated Fund of India.
3. The measures needed to augment the Consolidated Fund of a state to supplement the resources of the panchayats and municipalities in the state, on the basis of the recommendations of the State Finance Commission. This function was added by the 73rd and 74th Amendment Acts of 1992.
4. Any other matter referred to it by the President in the interests of sound finance.

Till 1960 the Commission also suggested grants to Assam, Bihar, Odisha and West Bengal in lieu of a share of the export duty on jute and jute products, given for a temporary period of ten years from the commencement of the Constitution. The Commission submits its report to the President, who lays it before both Houses of Parliament with an explanatory memorandum on the action taken.

Advisory Role

The recommendations are only advisory and not binding on the government, and it is for the Union government to implement them on granting money to the states. D.D. Basu wrote that nowhere does the Constitution say the recommendations shall be binding or create a legal right in the beneficiary states to receive the money. Dr. P.V. Rajamannar, chairman of the Fourth Finance Commission, observed that since it is a constitutional body expected to be quasi-judicial, its recommendations should not be turned down unless there are very compelling reasons.

Until 2014 the Commission’s role in Centre-state fiscal relations was undermined by the Planning Commission, a non-constitutional and non-statutory body, and Rajamannar had also observed an overlap between the two in federal fiscal transfers. In 2015 the Planning Commission was replaced by NITI Aayog.

Finance Commissions So Far

The Fifteenth Commission submitted its first report on 5 December 2019 covering 2020-21 and its second on 9 November 2020 covering 2021-22 to 2025-26.

Related Articles

The Finance Commission is distinct from the State Finance Commission of the panchayat and municipal system, which is appointed by the Governor every five years and whose recommendations feed into the Finance Commission’s function on local bodies. It is also distinct from the GST Council, which recommends on the goods and services tax.

Why Is This Topic Important?

• Core body Prelims facts on composition and functions
• Fiscal federalism Important for Mains in Centre-state relations
• Chairman list Names are asked

What Came Next?

The next topic covers the Comptroller and Auditor-General of India.

Key People and Terms

• Net proceeds Tax proceeds minus cost of collection
• Grants-in-aid Central grants to states
• Quasi-judicial Body with judicial-like role
• Fiscal federalism Division of resources between Centre and states
• State Finance Commission Local body finance review

Exam Corner

Mains Angle

Questions on this topic usually ask about the role of the Commission in fiscal federalism. Use these points to add depth.

• Vertical and horizontal devolution Sharing taxes and allocating among states
• Advisory nature Rajamannar observation
• Planning Commission overlap Until 2014
• Local bodies Supplementing panchayat and municipal resources