Finance Commission of India

Topics Discussed: -

·       Introduction

·       Key Role

·       What is the force of its Recommendations?

·       Finance Commission and Fiscal Federalism

·       Introduction

ü The Finance Commission of India was established on 22nd November, 1951.

ü It was established under Article 280 of the Indian Constitution by the President of India.

ü It was formed to describe the financial relations between the centre and the state.

ü The Finance Commission has been provided for the Indian constitution as part of the scheme of division of financial resources between the two different sets of governments.

ü Finance Commission also serves as a constitutional body for the purpose of allocation of certain resources of income between the Union and the State Governments.

ü The 15th FC was constituted on November 27, 2017 and is headed by Mr. N.K. Singh.

ü The recommendations, to be observed for a period of five years, will kick in from April 1, 2020.

·       Key Role

ü The key role Finance Commission in India is to act as an instrument to divide proceeds of divisible taxes between the states and the Union government or in cases of taxes that are collected by the centre but the proceeds of which are allocated between the states, to determine the principles of such allocation.

ü The Finance Commission of India also determines the principles of governing the grants in aids of the revenues of states out of the consolidated fund of India. It is an important function of the Indian Finance Commission. The commission has the responsibility of considering any matter referred to the commission by the President in the interest of sound finance.

ü The President under Article 280 lays the recommendations of the finance commission before each House of the Parliament with an explanatory note as to the action to be taken on the recommendations.

ü The Finance Commission distributes of proceeds of Income-tax between the union and the states. But taxes on the payments of the central government are attributable only to the union territories.

ü So its main function is to recommend how the Union government should share taxes levied by it with the states. These recommendations cover a period of five years. The commission also lays down rules by which the centre should provide grants-in-aid to states out of the Consolidated Fund of India. It is also required to suggest measures to augment the resources of states and ways to supplement the resources of Panchayats and Municipalities.

·       What is the force of its Recommendations?

Ø The Constitution does not make the recommendations of the Finance Commission binding on the government of the day.

Ø However, there is a strong precedent that governments generally go by the suggestions as far as sharing of revenues is concerned.

Ø These recommendations relating to distribution of Union taxes and duties and grants-in-aid are usually implemented by a presidential order.

·       Finance Commission and Fiscal Federalism

       I.            Under the federal structure envisaged in the Constitution, most of the taxation powers are with the Centre but the bulk of spending is done by the states.

    II.            Such a federal structure requires transfer of resources from the Centre, which levies and collects the big taxes such as income tax and indirect taxes like excise and customs, to the states. 

  III.            So with the help of proper allocation of resources among the different states on the basis of population of the state, fiscal condition of the state, forest cover of the states, income distance and area of the states. So by this proper bifurcation the finance commission avoids the confrontation between the states and center.