Finance Commission

Although, the Constitution of India very well provides for the mechanisms under which the resources of the states are to be supplemented by the central government say, in the form of tax sharing and grants in aid yet, the Constitution does not lay down in any rigid form, a formula that is to be followed while sharing the taxes or giving grants in aid to the states out of the central revenue. The rationale behind this is simple and clear from the fact that it is practically not only an unworkable proposition in any dynamic federation, but also impossible to predict for all times to come, what is the financial requirement of a particular state or states at a given point of time, given the quantum of responsibilities that the states have to incur from time to time due to the advent of the concept of a welfare state. Moreover, the Constitutional makers also noticed the frailties of a rigid scheme of such distribution of resources, as it came out before them glaringly in some of the then working federations like Australia and Canada.

Therefore, they left this entire task onto an independent commission that will work out such distribution of resources after assessing all the ground realities pertaining to the needs of the states from time to time without getting swayed under any political pressure so as to get biased in its working. To achieve this objective, the Constitution of India gives a special place of significance to this commission somewhere, on the lines of Commonwealth grants commission of Australia, created under the similar mandate in its own Constitution…

Article 280 of the Constitution of India provides for a Finance Commission as a quasi judicial body. It is constituted by the president of India every fifth year or at such earlier time or intervals, as he considers necessary.

Composition of the Commission

The Finance Commission consists of a chairman and four other members to be appointed by the president. They hold office for such period, which is conventionally not more than a year or as specified by the president in his order. They are eligible for reappointment.

The Constitution authorizes the Parliament to determine the qualifications of members of the commission and the manner in which they should be selected. Accordingly, the Parliament has specified the qualifications of the chairman and members of the commission vide the Finance Commission miscellaneous provisions Act of 1951. In pursuance of this, the chairman should be a person having experience in public affairs and the four other members should be selected from amongst the following:

1.      A judge of high court or one qualified to be appointed as one.

2.      A person who has specialized knowledge of finance and accounts of the government.

3.      A person who has wide experience in financial matters and in administration.

4.      A person who has special knowledge of economics.

Functions of the Commission

The Finance Commission is required to make recommendations to the President of India on the following matters:

a)      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.

b)      The principles that should govern the grants-in-aid to the states by the Centre (i.e., out of the consolidated fund of India).

c)      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.

d)      Any other matter referred to it by the president in the interests of sound finance.

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.

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.