Finance Commission

Established to give its recommendations on distribution of tax revenues between the Union and the States and amongst the States themselves.

Two distinctive features of the Commission’s work involve redressing the vertical imbalances between the taxation powers and expenditure responsibilities of the centre and the States respectively and equalization of all public services across the States.

Formed

22 November 1951

Formation

The Finance Commission is appointed every five years by the President under Article 280 of the Constitution.

Composition

Constituted with a chairman and four members.

Appointment of members

 Chairman of the Commission is selected from among persons who have had experience in public affairs, and the four other members are selected from among persons who;

1. are, or have been, or are qualified to be appointed as Judges of a High Court; or
2. have special knowledge of the finances and accounts of Government; or
3. have had wide experience in financial matters and in administration; or
4. have special knowledge of economics.

Functions

1. The distribution between the Union and the States of the net proceeds of taxes which are to be, or may be, divided between them and the allocation between the States of the respective shares of such proceeds;
2. The principles which should govern the grants-in-aid of the revenues of the States 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 in the State on the basis of the recommendations made by the Finance Commission of the State;
4. The measures needed to augment the Consolidated Fund of a State to supplement the resources of the Municipalities in the State on the basis of the recommendations made by the Finance Commission of the State;
5. Any other matter referred to the Commission by the President in the interests of sound finance.

List of Finance Commissions

FAQ

1. How are the recommendations of Finance Commission implemented?

The recommendations of the Finance Commission are implemented  as under:-

1. Those to be implemented by an order of the President:

The recommendations relating to distribution of Union Taxes and Duties and Grants-in-aid fall in this category.

2. Those to be implemented by executive orders: 

The recommendations in respect of sharing of Profit Petroleum, Debt Relief, Mode of Central Assistance, etc. are implemented by executive orders.

2. Is it mandatory for the Centre to accept all its recommendations?

The Constitution only requires the Centre to report to Parliament what action it has taken on the recommendations of the Finance Commission. However, normally the Centre accepts and implements all the recommendation of such panels. The Constitution requires the Centre to lay an "action taken report" in Parliament detailing implementation of the recommendations. A copy of the report is also required to be tabled.