What is Finance Commission Grants & Other Transfers?

Finance Commission Grants & Other Transfers definition: The Finance Commission is a constitutional body set up by the President of India.

Finance Commission Grants and Other Transfers meaning, 14th finance commission grants to statesFinance Commission Grants & Other Transfers components: The Finance Commission also decides the share of each state from the share of states in the divisible pool.

Finance Commission Grants & Other Transfers definition: The Finance Commission is a constitutional body set up by the President of India, every five years or earlier to decide the share of the Union government and state governments in the divisible pool of tax revenue. The Finance Commission also decides the share of each state from the share of states in the divisible pool. The Commission further recommends the share of funds and grants to be transferred to local bodies. In the Union Budget, these transfers are called ‘Finance Commission Grants’ and ‘Other Transfers’.

Finance Commission Grants

The 73rd Constitutional Amendment requires both the Centre and states to help Panchayati Raj institutions to evolve as a unit of self-governance by assigning them funds, functions and functionaries. The Finance Commission Grants, in the Union Budget, provides funds to local bodies, state disaster relief funds and compensates any revenue loss to states after devolution of taxes.

The Finance Commission Grants are primarily divided into four sub-heads.

1. Grants for rural local bodies: The three-tier model of governance envisioned in the Constitution assigns clear roles and responsibilities to Gram Panchayats. The Finance Commission recommendations ensure that these local bodies are adequately funded. In fact, nearly half of the Finance Commission Grants in Union Budget goes to village local bodies.

2. Grants for urban local bodies: In addition to units of self-governance at the village level, the Constitution also envisages cities as units of self-governance. Urban local bodies like municipal councils receive the largest chunk of Finance Commission Grants after Rural Local Bodies and Post Devolution Deficit Grants to states.

3. Assistance to SDRF: The central government also provides funds to State Disaster Relief Funds in addition to funding the National Disaster Management Authority (NDMA). The assistance to state government’s disaster relief authorities is provided as per the recommendations of the Finance Commission.

4. Post devolution revenue deficit grants: About a third of the total revenue collected by the Centre is directly transferred to states as their share in the divisible pool. However, the Finance Commission also provides a mechanism for compensation of any loss incurred by states, which is called post-devolution revenue deficit grants. This Finance Commission Grant forms the second largest chunk of Finance Commission transfers after the assistance to local rural bodies.

Other transfers to states

The 14th Finance Commission Grants to states is a well-known example. In addition to the four main transfers under the Finance Commission Grants, the Centre also transfers a considerable sum to states and vulnerable groups from its own resources. The role of Finance Commission in Centre-State financial relations is significant.

The four main transfers include:

  • Assistance to states from NDRF (separate from the grants given to state SDRF under Finance Commission Grants)
  • Central pool of resources for north-eastern region and Sikkim
  • Externally aided project grants
  • Externally aided project loans
  • Schemes for north-east council
  • Schemes under Article 275 (1) of the Constitution
  • Special assistance under the demand: Transfers to states.special central assistance to scheduled castes and special central assistance to tribal area.

In addition to devolution of taxes from the divisible pool and Finance Commission grants, the central government transfers over Rs 50,000 crore a year under the above-mentioned nine heads.

Get live Stock Prices from BSE and NSE and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.