Finance Commission (Article 280)

At a Glance

• What it is A quasi-judicial constitutional body that recommends the sharing of finances between the Centre and states
• Article Article 280
• Composition A chairman and four other members
• Constituted Every fifth year or earlier by the President
• Exam link UPSC Prelims, Polity: Funds with Government of India

Where Does It Fit?

This is the fifth topic of the category on Funds with the Government of India. The Constitution envisages the Finance Commission as the balancing wheel of fiscal federalism in India. Its advice shapes how national tax money is shared with the states.

Composition and Qualifications

The Finance Commission is a quasi-judicial body constituted by the President every fifth year or earlier. It consists of a chairman and four other members, appointed by the President, who hold office for the period specified in the order and are eligible for reappointment. The Constitution authorises Parliament to determine their qualifications, and Parliament has done so through the Finance Commission Act, 1951. The chairman should have experience in public affairs. The four other members are selected from: a high court judge or one qualified to be appointed; a person with specialised knowledge of government finance and accounts; 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:

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 shares;
2. the principles that should govern the 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 on the basis of the State Finance Commission’s recommendations (added by the 73rd and 74th Amendments of 1992);
4. any other matter referred to it by the President in the interests of sound finance.

Till 1960 the Commission also suggested the grants to Assam, Bihar, Odisha and West Bengal in lieu of a share of export duty on jute. The report goes to the President, who lays it before both Houses of Parliament along with an explanatory memorandum on the action taken.

Advisory Role

The Commission’s recommendations are advisory and not binding on the government. It is nowhere laid down in the Constitution that they shall be binding or give rise to a legal right in the states to receive the money recommended. Dr P.V. Rajamannar, Chairman of the Fourth Finance Commission, said that since the Commission is a constitutional and quasi-judicial body, its recommendations should not be turned down unless there are very compelling reasons. Till 2014 its role was undermined by the Planning Commission, a non-constitutional and non-statutory body, and in 2015 the Planning Commission was replaced by the NITI Aayog.

Finance Commission and the Constitution’s Other Money Provisions

The Finance Commission works within the scheme of Articles 268 to 281. It recommends the distribution of the taxes covered by Article 270, the grants under Article 275 and the measures to supplement state and local resources. The President acts on its report to prescribe the sharing of net proceeds, and the explanatory memorandum on action taken must be laid before Parliament, as required by Article 281. For the Union, its work therefore covers both the vertical question of how much the states get and the horizontal question of how that share is divided among them.

Finance Commissions So Far

The Fifteenth Finance Commission submitted its first report on 5 December 2019 for 2020-21 and its second on 9 November 2020 for 2021-22 to 2025-26. Article 281 requires the President to lay every recommendation before Parliament with an explanatory memorandum.

Why Is This Topic Important?

• Table recall Chairmen and years are asked in Prelims
• Advisory role Frequently tested
• Link to 11.4 Revenue sharing is based on it

What Came Next?

The next topic covers the Goods and Services Tax Council under Article 279A.

Key People and Terms

• Quasi-judicial Body that follows judicial-like procedure
• Net proceeds Proceeds minus the cost of collection
• Grants-in-aid Union money to states
• State Finance Commission Counterpart for local bodies
• Fiscal federalism Sharing money in a federal system

Exam Corner

Mains Angle

Questions on this topic usually ask how effective the Commission is. Use these points to add depth.

• Balancing wheel Fiscal federalism
• Advisory Not binding on the Union
• Planning Commission overlap Reduced its role until 2014
• Local bodies Resources of panchayats and municipalities