QUES. Describe the constitutional provisions regarding the Finance Commission of India and explain its functions. UPSC IES/ISS EXAM 2024 General Studies. 200 Words. 5 Marks
HINTS:
Article 280 of the Constitution of India provides for a Finance Commission as a quasi judicial body. It is constituted by the president of India every fifth year or at such earlier time as he considers necessary.
Composition of the Finance Commission
The Finance Commission consists of a chairman and four other members to be appointed by the president. They hold office for such period as specified by the president in his order. They are eligible for reappointment.
Qualifications of Chairman and Members of the Finance Commission
The Constitution authorises the Parliament to determine the qualifications of members of the commission and the manner in which they should be selected. Accordingly, the Parliament has specified the qualifications of the chairman and members of the commission.
The chairman should be a person having experience in public affairs and the four other members should be selected from amongst the following:
1. A judge of high court or one qualified to be appointed as one.
2. A person who has specialised knowledge of finance and accounts of the government.
3. A person who has wide experience in financial matters and in administration.
4. A person who has special knowledge of economics.
Functions of the Finance Commission
The Finance Commission is required to make recommendations to the president of India on the following matters:
1. The distribution of the net proceeds of taxes to be shared between the Centre and the states, and the allocation between the states of the respective shares of such proceeds.
2. The principles that should govern the grants-in-aid to the states by the Centre (i.e., out of the consolidated fund of India).
3. The measures needed to augment the consolidated fund of a state to supplement the resources of the panchayats and the municipalities in the state on the basis of the recommendations made by the state finance commission.
4. Any other matter referred to it by the president in the interests of sound finance.
The commission submits its report to the president. He lays it before both the Houses of Parliament along with an explanatory memorandum as to the action taken on its recommendations.
Advisory role of the Finance Commission
The recommendations made by the Finance Commission are only of advisory nature and hence, not binding on the government. It is up to the Union government to implement its recommendations on granting money to the states.
It is nowhere laid down in the Constitution that the recommendations of the commission shall be binding upon the Government of India or that it would give rise to a legal right in favour of the beneficiary states to receive the money recommended to be offered to them by the Commission.
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However, since the Finance Commission is a constitutional body expected to be quasijudicial, its recommendations should not be turned down by the Government of India unless there are very compelling reasons.
The Constitution of India envisages the Finance commission as the balancing wheel of fiscal federalism in India.
How does the Commission decide?
The Finance Commission decides what proportion of the Centre’s net tax revenue goes to the States overall (vertical devolution) and how this share for the States is distributed among various States (horizontal devolution).
The horizontal devolution of funds between States is usually decided based on a formula created by the Commission that takes into account a State’s population, fertility level, income level, geography, etc.
The vertical devolution of funds, however, is not based on any such objective formula. Nevertheless, the last few Finance Commissions have recommended greater vertical devolution of tax revenues to States. The 13th, 14th and 15th Finance Commissions recommended that the Centre share 32%, 42% and 41% of funds, respectively, from the divisible pool with States.
It should be noted that the Centre may also aid States through additional grants for certain schemes that are jointly funded by the Centre and the States.
Sixteenth Finance Commission
The sixteenth Finance Commission, which consists of five members including the chairman Arvind Panagariya, was constituted in December 2023 and is expected to submit its recommendations by October, 2025. Its recommendations will be valid for five years starting from April 1, 2026.
External link: https://fincomindia.nic.in/archive/ShowContentOne.aspx?id=8&Section=1#:~:text=Ans.,and%20amongst%20the%20States%20themselves.
