What is Finance Commission?

Finance Commission is a constitutional body, that determines the method and formula for distributing the tax proceeds between the Centre and states...

Finance Commission and its functions, finance commission membersFinance Commission need; Under Article 280 of the Constitution, the President of India is required to constitute a Finance Commission at an interval of five years or earlier.

Finance Commission of India: The Finance Commission is a constitutional body, that determines the method and formula for distributing the tax proceeds between the Centre and states, and among the states as per the constitutional arrangement and present requirements.

What is Finance Commission and its functions?

The constitution makers were aware of the financial requirements of the Centre and the states. They devised an elaborate method, clearly demarcating the duties and responsibilities of the units of the Union and of the Union itself while allocating resources to perform those duties. To meet these requirements, the Finance Commission came into being.

Is Finance Commission a constitutional body?

Under Article 280 of the Constitution, the President of India is required to constitute a Finance Commission at an interval of five years or earlier.

How many members are there in the Finance Commission?

The Finance Commission has a chairman and four members appointed by the President. The government of India provides necessary support and manpower including a secretary to the commission to facilitate its work.

Finance Commission Chairman

In November 2017, President of India constituted the 15th Finance Commission and appointed former Planning Commission member NK Singh as its chairman. The Commission had former economic affairs secretary Shaktikanta Das as its member but he resigned from the post in December 2018 following his appointment as RBI Governor. The Union government appointed former Finance Secretary Ajay Narayan Jha in his place in March 2019.

Are Finance Commission recommendations binding?

While constituting the commission, the central government decides the terms of reference. This includes the reference points to be used for formulating recommendations such as which census will be used as a reference point for factoring in the population of states.

After holding consultations with all the stakeholders that include the ministries and departments of the Union government, state governments, trade bodies, banks and industry, the Commission finalizes the formula for dividing the tax pie for a period of five years.

The Finance Commission also decides the share of taxes and grants to be given to the local bodies in states. This part of tax proceeds is called Finance Commission Grants, which is a part of the Union budget.

Finance Commission and its functions

The Finance Commission has the following functions or duties:

  • The Commission makes recommendations to the President of India on the distribution of tax proceeds between the Union and the States and the share of each state.
  • The Commission also decides the principles that govern the payment of grants-in-aid to states from the Consolidated Fund of India.
  • The President of India can also refer any other matter to the Finance Commission in the interest of building a sound financial system.

Reports of Finance Commission

Under Article 281 of the Constitution, the President of India is required to cause laying of the Finance Commission report before each House of Parliament along with an explanatory note and the action taken by the government on the Commission’s recommendations.

The 12th Finance Commission

The 12th Finance Commission was constituted by the President of India, in November 2002 under the chairmanship of former RBI governor and noted economist Dr C Rangarajan. The Commission submitted its recommendation in November 2004 and recommended states’ share to be kept at 30.5% of the divisible pool of central taxes. Its recommendations covered the period of April 2005 to March 2010.

The 13th Finance Commission

The 13th Finance Commission was appointed by the President of India on November 13, 2007, under the chairmanship of Dr Vijay Kelkar. It recommended an increase in states’ share in the divisible pool of central taxes to 32%, an increase of 1.5% over the previous Commission’s recommendation and its recommendation covered the period of April 2010 to March 2015.

The 14th Finance Commission

The 14th Finance Commission was constituted by the President of India on January 02, 2013 under the chairmanship of former RBI governor Dr YV Reddy. The Commission submitted its report in December 2014. The Commission increased the share of states in the divisible pool (central taxes) from 32% to 42% which was accepted by the Union government. Recommendations are applicable for a period of five years from April 2015 to March 2020.

The 15th Finance Commission

The 15th Finance Commission was constituted by the President of India in November 2017, under the chairmanship of NK Singh, a former member of the Planning Commission. This Commission is expected to submit its report by October 2019. Its recommendations will cover a period of five years from April 2020 to March 2025.

State Finance Commissions

The 73rd Constitutional Amendment Act of 1992 created the Panchayati Raj institutions as the third level of a three-tier democratic governance system at the village level, intermediate level and district level. It also mandated the constitution of a Finance Commission every five years by state governments to decide the division of resources (tax proceeds) between a state government and Panchayati Raj institutions at all levels.

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