Finance Commission

Notes

The Finance Commission (Art. 280) is a quasi-judicial constitutional body constituted by the President every five years (or earlier) to review Centre-State financial relations. The first was set up in 1951 under K.C. Neogy.

Composition: a Chairman and four members, appointed by the President. Under the Finance Commission (Miscellaneous Provisions) Act, 1951, the Chairman must have experience of public affairs; the four members are chosen from: a High Court judge or a person qualified to be one; a person with knowledge of government finance and accounts; a person with financial experience or administration; a person with special knowledge of economics.

Functions (Art. 280(3))

Recommend the distribution of net proceeds of taxes between the Union and States (vertical devolution) and the allocation among States (horizontal devolution).
Recommend the principles governing grants-in-aid to States from the Consolidated Fund of India (Art. 275).
Recommend measures to augment the Consolidated Fund of a State to supplement resources of Panchayats and Municipalities, on the basis of State Finance Commissions' recommendations (73rd and 74th Amendments).
Any other matter referred by the President in the interest of sound finance.

Status: recommendations are advisory, not binding; the President lays them before Parliament with an explanatory memorandum on the action taken (Art. 281).

Recent Commissions

14th (Y.V. Reddy): raised the States' share to 42% (2015-20).
15th (N.K. Singh): 2021-26; States' share 41% (after Jammu and Kashmir became a Union Territory). Devolution criteria: income distance (45%), population 2011 (15%), area (15%), forest and ecology (10%), demographic performance (12.5%), tax effort (2.5%).
16th (Arvind Panagariya): constituted in December 2023; covers 2026-31.

State Finance Commissions: appointed by the Governor every five years under Art. 243-I (Panchayats) and 243-Y (Municipalities).

Key Points

Art. 280; every five years; Chairman and four members.
Recommends tax devolution, grants-in-aid, and measures to support local bodies.
Advisory; reports laid before Parliament (Art. 281).
14th: 42%; 15th: 41%; 16th: 2026-31.
State Finance Commissions: Art. 243-I and 243-Y.

MCQs

Q1. The Finance Commission is constituted under: (a) Art. 275 (b) Art. 280 (c) Art. 282 (d) Art. 293 Ans: (b).

Q2. The 14th Finance Commission recommended the States' share in the divisible pool as: (a) 32% (b) 38% (c) 41% (d) 42% Ans: (d). For 2015-20.

Q3. The recommendations of the Finance Commission are: (a) Binding on the Union (b) Binding on the States (c) Advisory (d) Binding if Parliament approves Ans: (c).