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Finance Commission of India

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Last updated date: 16th Jul 2024
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What is Finance Commission of India?

The Finance Commission is a constitutionally mandated body established by the President of India to give recommendations on Centre-State Financial relations. Established under Article 280 of the Constitution, the core responsibility of the Finance Commission of India is to evaluate the state of finances of the Union and State Government, suggesting the share of taxes between them, formulating the principles determining the share of taxes between the States.


The working of the Finance Commission of India is characterized by the seizable and rigorous consultation with all levels of government, hence reinforcing the principle of corporate federalism. The suggestions given by the Finance Commission were also regulated towards improving the quality of public spending and promoting fiscal stability.


Who is the Finance Commission of India?

The Finance Commission of India is established by the President under Article 280 of the constitution, primarily to give its recommendations on the distribution of tax revenue between the Union and State and among the States themselves. Two different features of Commission work include redressing the vertical imbalance between the powers, and the responsibility of expenditure of the center and State respectively, and the equalization of all public service across all the states.


Related Articles

Article 280

  1. The President shall, within two years from the commencement of this Constitution and thereafter at the expiration of every fifth year or at such earlier time as the President considers necessary, by order constitute a Finance Commission which shall consist of a Chairman and four other members to be appointed by the President. 

  2. Parliament may by law determine the qualifications which shall be requisite for appointment as members of the Commission and the manner in which they shall be selected.

  3. It shall be the duty of the Commission to make recommendations to the President as to

  • The distribution between the Union and the States of the net proceeds of taxes which are to be, or may be, divided between them under this Chapter and the allocation between the States of the respective shares of such proceeds;

  • The principles which should govern the grants in aid of the revenues of the States out of the Consolidated Fund of India;

  • Any other matter referred to the Commission by the President in the interests of sound finance

  1. The Commission shall determine their procedure and shall have such powers in the performance of their functions as Parliament may by law confer on them.

Article 281

Recommendations of the Finance Commission The President shall cause every recommendation made by the Finance Commission under the provisions of this Constitution together with an explanatory memorandum as to the action taken thereon to be laid before each House of Parliament Miscellaneous Financial Provisions.


Composition of Finance Commission

The Finance Commission includes the Chairman and four other members appointed by the President itself. The qualification of the commissioner and the other four members is determined by the elected parliament and by formulating appropriate laws.


Composition of Fifteen Finance Commission

Chairman 

Shri N.K. Singh

Former Member of Parliament

Former Secretary To The Government of India.

Member

Shri Shaktikanta

Former Secretary To The Government of India.

Member 

Shri Anoop Singh

Adjunct Professor, Georgetown University

Member 

(Part TIme)

Dr. Ashok Lahiri

Chairman (Non-executive, Part Time)

Bandhan Bank

Member 

(Full Time)

Dr. Ramesh Chand

Member, NITI Aayog

Secretary

Shri Arvind Mehta

Finance Commission Members Qualification

The Finance Commission members qualification for appointment and way of selection of members of the commission includes the following:

  • The chairman of a member shall be selected from among the members who had experience in public affairs and four other members shall be selected from among the person who:

  1. Are, or have been, or are qualified to be appointed as Judges of a High Court

  2. Retains special knowledge of finance and accounts of Government

  3. Have broad experience in Financial matters and administration.

  4. Have special knowledge of Economics.

Disqualification for Being a Member of Finance Commission

Following are the conditions for a person to be disqualified for being appointed as, or for being a member of the Finance Commission. 

  • The person should be of unsound mind. 

  • If the person is an undischarged insolvent.

  • If the person has been convicted of an offence involving moral immorality.

  • If the person has such financial or other interest as is likely to affect the unlawfully his function as a member of the commission.

Functions of Finance Commission

Following are the different functions of the Finance Commission of India:

  • The distribution of net proceeds of tax between the Union and State, which are to be, or maybe, divided between them, and allocations between the states of the respective shares of such proceeds.

  • The standard of conduct should manage the grant-in-aid of the revenue of the state out of the Consolidated funds of India.

  • The measures required to build up the consolidated funds of a state to increase the resources of Panchayat in the state on the basis of the recommendations made by the Finance Commission of India.

  • The measures required to build up the consolidated funds of a state to increase the resources of Municipalities in the state on the basis of the recommendations made by the Finance Commission of India.

  • Any other transactions made by the President of India to the Commission in the interest of sound finance.

Role of Finance Commission In India

  • The important role of the Finance Commission of India is to act as an executor to split the process of divisible taxes between the State and Union Government or in the case of taxes that are collected by the center, but the proceeds of which are distributed between the states, to determine the principles of such allocations.

  • The Finance Commission distributes the proceeds of Income Tax between the Union and State. But the taxes on the payment of the Central Government are assigned only to the Union Territories.

  • The President under the Article formulates the recommendations of the Finance Commission before the two houses of Parliament namely Lok Sabha and Rajya Sabha with an explanatory note as to the action to be taken on recommendations.

  • The Finance Commission also regulates the rules governing the grants in support of the revenues of the state out of the consolidated fund of India. It is an important role of the Finance Commission in India. The Commission retains the responsibility of considering any issues referred to the Commission by the President in the interest of Sound Finance.

Legal Status of Finance Commission

The Finance Commission of India is elected by the President under Article 280 of the constitution. It has five other members including a chairperson. The recommendations of FC are implemented for five years. The recommendation of Union taxes and duties are executed by the order of the President while the orders (recommendations)including profit sharing, mode of central assistance, debt relief are executed by executive orders.

How are the Suggestions of the Finance Commission Executed?

The suggestions of the Finance Commission are executed as under:

  • Those to be executed by the President’s order:

The suggestions related to the allocation of Union Taxes and Duties and Grant - in- aid falls under this category.

  • Those to be executed by the Executive Orders

Other suggestions were made by the FC according to its term of reference.

Conclusion

Therefore, the finance commission is said to be an important Constitutional body that helps in defining the financial relations between the Union and the States. The key point that needs to be remembered is that the recommendations given by the Finance commission are not binding in nature. 

FAQs on Finance Commission of India

1. Who appoints the Finance Commission?

The Finance Commission is appointed by the President under Article 280 of the constitution.

2. When did the First Finance Commission of India Set up?

The first Finance Commission of India was set up in 1951 under the chairmanship of Shri K.C. Neogy on April 6, 1952, and there has been 15 Finance Commission of India so far. Each of them has experienced its unique set of challenges. It is set up by the President of the country after every five years. 

3. Who is the Current Finance Commission of India?

The current Finance Commission of India chairman is Nand Kishore Singh.

4. What is the role of the Fifteenth Finance Commission?

The Finance Commission is a constituent body that determines the procedure and formula for allocating the tax proceeds between the Centre and State and among the state as per the present needs and constitutional arrangements. Under Article 280 of the constitution,  the President of India is required to form a Finance Commission at an interval of 5 years or earlier. The Fifteenth Finance Commission was appointed by the President of India in November 2017, under the chairmanship of Nand Kishore Singh. The recommendation of the Fifteenth Finance Commission will cover a period of 5 years i.e. from the year 2021-22-2025-26.

5. What does the Finance Commission perform?

The Finance Commission records how returns from central taxes should be allocated between the Centre and States. The FC tackles only the revenue collected through tax by income tax, customs, excise, center-corporation tax, and service tax.