The Finance Commission of India is a constitutional body that has survived
for over 50 years on Indian soil. Formed under Article 280 of the Indian
Constitution, the Finance Commission of India functions as a quasi-judicial
body. The purpose behind the formation of this Commission is to determine the
methods and formulas necessary for distributing the tax proceeds between the
Centre and states.
As well as among the states as per the arrangement provided by
the Constitution of India and current requirements. Along with this, the taxes
and grants that are to be provided to the local bodies in states for their
functioning are also determined by the Finance Commission of India.
It is to be noted that Article 281 of the Constitution provides that it is the
President of India who is required to lay the Finance Commission report before
each House of Parliament along with a note that explains the actions taken by
the government on the basis of the recommendations given by the Commission. In
this article, the Finance Commission of India has been explained with a detailed
analysis of its composition, functions, and roles.
History Of The Finance Commission:
The Finance Commission was established in 1951 by Dr B.R. Ambedkar, the then
incumbent law minister, to address these imbalances. Several provisions to
bridge the fiscal gap between the Centre and the States were already enshrined
in the Constitution of India, including Article 268, which facilitates levy of
duties by the Centre but equips the States to collect and retain the same.
Similarly, Articles 269, 270, 275, 282 and 293, among others, specify ways and
means of sharing resources between the Union and States
Composition Of The Finance Commission:
The Finance Commission of India is composed of five members which include one
Chairman, and four other members of the Commission. All of these members are
appointed by the President of India who also determines the term of their
office. These members are anyway subjected to reappointment as per requirement.
The responsibility of determining the qualification, and the manner of
appointment for the Finance Commission's members rest on the Parliament's
shoulder, as have been provided by the Indian Constitution. The qualification
that has been determined by the Parliament for the Chairman and the members of
the Commission have been presented hereunder;
The Chairman of the Commission must be an individual with expertise in public
affairs. The current Chairman of the Commission is Mr. N.K. Singh, who has been
a member of the Planning Commission alongside being an IAS officer.
The four members of the Commission are selected from the following list:
- A high court judge, or an individual who has been qualified to hold such
- A person who has his or her expertise in finance and accounts of the
- Any person having divergent experience in financial matters and in
- Any person possessing special knowledge of economics, and related
Grounds On Which A Member Of The Commission Can Be Disqualified:
A member may be disqualified if:
- He is mentally unsound; and as follows.
- He is an undischarged insolvent;
- He has been convicted of an immoral offence
- His financial and other interests are such that it hinders the smooth
functioning of the commission.
Functions Of The Finance Commission:
The Finance Commission of India has been vested with certain functions that are
determined by the President of India. The majority of these functions surround
the recommendations that are supposed to be delivered by the Commission to the
President of the nation. The functions of the Finance Commission have been
It is the responsibility of the Finance Commission to recommend the distribution
of the net proceeds of taxes that are supposed to be shared between the Union,
and the states, along with the inter-state distribution.
The Finance Commission recommends the principles that are applied to govern the
grants-in-aid to the states and the Union Territories by the Union from the
Consolidated Fund of India.
The Commission recommends the measures that need to be adopted to augment the
consolidated fund of a state in order to facilitate supplying of the required
resources to the panchayats and the local bodies of the state so as to avoid
hindrance in their functioning. The Commission has to carry out this function on
the basis of the recommendations made by the state finance commissions as per
As it is the President of India who carries out all the necessary formalities in
relation to the Finance Commission of India, any matter which the President
feels needs to be considered by the Finance Commission from time to time, will
be taken up by the Commission as a function only. A report is submitted by the
Commission to the President after delivering the necessary functions allotted to
it. This report is further presented before the Houses of the Parliament by the
President which accompanies a memorandum that explains the necessary actions
taken by the Commission to fulfill its functions.
It is interesting to note that till 1960, the Finance Commission used to provide
suggestions to the states of Assam, Bihar, Odisha, and West Bengal in relation
to the assignment of share of the net proceeds to the export duty on jute
products. Such grants were provided for a temporary period extending up to 10
years from the commencement of the Indian Constitution.
The Scope Of The Commission:
Article 280 of the Indian Constitution defines the scope of the commission:
The President will constitute a finance commission within two years from the
commencement of the Constitution and thereafter at the end of every fifth year
or earlier, as the deemed necessary by him/her, which shall include a chairman
and four other members.
Parliament may by law determine the requisite qualifications for appointment as
members of the commission and the procedure of selection.
The commission is constituted to make recommendations to the president about the
distribution of the net proceeds of taxes between the Union and States and also
the allocation of the same amongst the States themselves. It is also under the
ambit of the finance commission to define the financial relations between the
Union and the States. They also deal with the devolution of unplanned revenue
The Advisory Role Played By The Finance Commission:
The term 'advisory' symbolizes recommendations. Therefore, the Finance
Commission of India can be said to be a recommendatory body that gives advice to
the President of the nation, who after going through the same, applies it to
make decisions on financial matters.
This advisory role of the Finance Commission is in a way binding on the
President of India. The President can either accept the recommendations made or
reject them. Further, whether to implement the recommendations issued by the
Commission or not in matters of granting money to the states, rests on the Union
The advisory role is neither of a binding nature nor can give rise to a legal
beneficiary in the state's favor to receive money from the Union on the basis of
the recommendations made by the Commission. This has been clarified by the
Indian Constitution itself.
The Chairman of the Fourth Finance Commission, Dr. P.V. Rajamannar has rightly
pointed out the advisory role played by the Finance Commission during his term
of office. He said that "since the Finance Commission is a constitutional body
expected to be quasi-judicial, its recommendations should not be turned down by
the Government of India unless there are very compelling reasons".
The importance of the advisory role of the Finance Commission lies in its
balancing mechanism of fiscal federalism in India. Previously, the functions of
the Finance Commission used to overlap with the functions allotted to the
Planning Commission. This would create confusion in both the bodies, but the
same has been erased by the introduction of NITI Aayog.
The 15th Finance Commission Report:
The 15th Finance Commission Report was submitted on 9th November 2020 for the
period of 2021-22 to 2025-26 to the Hon'ble President of India. The Commission
prepared its report as per the terms of reference and majorly recommended the
Apart from the vertical and horizontal tax devolution, the Commission
recommended local government grants, and disaster management grants.
The Commission was asked to examine and recommend performance incentives for
States in many necessary areas like the power sector, adoption of DBT, solid
waste management, etc.
The 15th Finance Commission was also asked to examine the need for setting up a
separate, and independent mechanism for funding defence and internal security of
India, and determine the functioning procedure for the same.
The 15th Finance Commission Report was organized in four volumes with Volume I
and II, consisting of the main report and accompanying annexes, Volume III was
completely devoted to the Central Government as it addressed the challenges in
the future and possible ways of handling it and Volume IV was devoted to the
states where the Commission has analyzed the finances of each state and
addressed the key challenges that individual states come across.
The Finance Commission is perceived to be the supreme constitutional body
regulating finance in India, both between the Centre and the states, and among
the states. There are several prominent factors that have contributed to the
fall of this esteemed institution and the same is reflected in the 12th Finance
The Central government has noticed appointments made to the Commission simply on
the grounds of distribution of patronages to the individuals belonging to some
of the other regional parties. As India witnesses the emergence of coalition
parties, the detriment suffered by the Finance Commission cannot go unnoticed.
The Commission is supposed to be technical in its approach and logical in its
procedure, and recommendations provided to the President require members who are
experts in the subject matters related to the Commission. Ignorance of such a
necessity welcomes the decaying of this constitutional body. Actions must,
therefore, be taken in order to rule out the irregularities taking place within
and by the Commission.
Understanding Of Finance Commission And Its Constitution