Finance Commission (Article 280), Members, Power, and Functions

PWOnlyIAS May 27, 2024 02:50 6485 0

The Finance Commission of India, established under Article 280 of the Constitution, ensures equitable tax distribution between the Centre and states. The 16th Commission, chaired by Arvind Panagariya.

Finance Commission (Article 280), Members, Power, and Functions

Context

Recently, the Sixteenth Finance Commission (SFC) held its first meeting to discuss the terms of reference (ToR) and other matters. The Union Cabinet has approved the terms of reference for the 16th Finance Commission of India. The approval of ToR will play a crucial role in determining the financial distribution between the central and state governments for the period starting April 1, 2026.

About Sixteenth Finance Commission (SFC)

Sixteenth Finace Commission Chairman: Arvind Panagariya.
Full Time Members: A.N. Jha (Former expenditure secretary and member of the 15th Finance Commission)
- Annie George Mathew (Former special secretary of the department of expenditure).
- Niranjan Rajadhyaksha (executive director of Artha Global Niranjan Rajadhyaksha).
Part-Time Member: Soumya Kanti Ghosh (State Bank of India’s group chief economic adviser).
Sixteenth Finance Commission Chairman Duration: It is tasked with defining the distribution of the Centre’s tax revenue to states for five years starting FY27.
- It will make its recommendations available by 31 October 2025, covering an award period of five years beginning 1 April 2026.

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About Finance Commission

Constitutional Mandate: It is provided by Article 280 of the constitution as a quasi-judicial body.
Appointing Authority: The President of India constitutes a Finance Commission every fifth year or at such a time that is considered necessary.
Composition: The Finance commission composition consists of a chairman and four other members, all appointed by the president.
Tenure: The Members of finance commission are appointed for the duration specified in presidential order.
- Members are eligible for reappointment.
Qualifications: The Parliament has been authorized by the constitution to determine the qualifications of the members and the manner in which they are to be appointed.
- Based on these powers, the Parliament has given the following specifications for appointing the members.
- The chairman must have experience in public affairs while the other four members should be selected from amongst the following criteria:
  - A High Court judge or one qualified to become one;
  - An individual having specialized knowledge of finance and accounts of the government;
  - A person who possesses experience in financial matters and administration;
  - A person who has special knowledge of economics.
Removal: Finance commission removed by the local government with the approval of the president. The Removal of finance commission can happen as follows:
- If they are found to be of unsound mind;
- If they are involved in a vile act;
- If there is a conflict of interest.

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Powers of the Finance Commission

Powers of Finance Commission: Based on the Code of Civil Procedure 1908, the Finance Commission of India has all the powers of a Civil Court.
Evidence Demand: The commission has powers to call witnesses, and ask for the production of a public document or record from any office or court.

Also Read: Finance commission of india UPSC Notes

Functions of Finance Commission:

Existing Functions: It is tasked with making recommendations to the President on the following matters:
- Tax Distribution: Distributing shares of net proceeds of tax between the Union and the States and the allocation between the States of the respective shares of such proceeds;
- Rules for grants-in-aid: The rules that govern grant-in-aid to the states by the centre from Consolidated Fund of India;
- Tax Devolution at State Level: Augmenting the consolidated fund of the state to supply resources to panchayats and municipalities based on recommendations of the state finance commission;
- Miscellaneous Matter: Any other matter referred by the President to the Commission in the interests of sound finance.
- Submit Report: A report is submitted to the President, who lays it before both houses of the Parliament. The report is followed by an explanatory memorandum on the actions taken on its recommendations.
Previous Functions:
- Grants for Specific States: Previously the Finance Commission used to suggest grants to the states of Assam, Bihar, Odisha, and West Bengal regarding the sharing of net proceeds of export duties imposed on jute products. This was valid for only 10 years.

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Criticism of Finance Commission

Advisory Nature: The recommendations are only advisory in nature and not binding on the government.
- However, the government must have compelling reasons for turning down the recommendations of the commission.
Discretion of the Union Government: The union government has discretionary powers to implement its recommendations on granting money to states.

Also Read: 16th finance commission UPSC Notes

Recommendation of the 15th Finance Commission

Share of State in Central Tax (Vertical Devolution): The share of states in the central taxes for the 2021-26 period is recommended as 41%, which earlier was 42%. This is due to the creation of UT of Jammu and Kashmir, and Ladakh.
Distribution between States (Horizontal Devolution): For distribution, the commission has suggested 12.5% weightage to demographic performance, 45% to income, 15% each to population and area, 10% to forest and ecology, and 2.5% to tax and fiscal efforts.
Grants to States: The commission has recommended revenue deficit grants amounting to about Rs. 3 trillion over the five-year period ending FY26.
- It also suggested grants for local bodies such as municipalities and panchayats, which include performance-based grants for the incubation of new cities and health grants to local governments.
Performance-based Incentives: These cover four areas:
- The first is the social sector, which covers health and education.
- Second is the rural economy, which covers agriculture and the maintenance of rural roads.
- Third is based on governance and administrative reforms which include grants for judiciary, statistics, and aspirational districts and blocks.
- Fourth covers the power sector, which is not linked to grants but provides an important, additional borrowing window for States.

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State Finance Commission

Constitutional Position: It is a constitutional body set up after the 73rd Constitutional Amendment Act of 1992 under Article 280.
Appointment: The governors of the respective states appoint it under Article 243-I of the Constitution of India, every five years.
Functions: It performs all the functions of the Finance Commission at the state level. It includes distributing state funds to the Panchayati Raj and municipalities.

Finance Commission Chairman List

The Finance Commission of India, constituted under Article 280 of the Indian Constitution, has had 16 chairman since its establishment. The below table is the India’s finance commission chairman list, including the Current Chairman of Finance Commission:

S.No	Chairman of Finance Commission	Appointed On	Operational Duration
1	K. C. Neogy	1951	1952-1957
2	K. Santhanam	1956	1957-1962
3	Ashok K. Chanda	1960	1962-1966
4	P. V. Rajamannar	1964	1966-1969
5	Mahaveer Tyagi	1968	1969-1974
6	K Brahmananda Reddy	1972	1974-1979
7	J.M Shelat	1977	1979-1984
8	Y. B. Chavan	1982	1984-1989
9	N.K.P. Salve	1987	1989-1995
10	K.C. Pant	1992	1995-2000
11	A. M. Khusro	1998	2000-2005
12	C. Rangarajan	2002	2005-2010
13	Vijay Kelkar	2007	2010-2015
14	Y. V Reddy	2013	2015-2020
15	N. K. Singh	2017	2020-2026
16	Shri Arvind Panagariya	2023	From 2026

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Check out the Finance commission notes for UPSC Mains

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Frequently Asked Questions

Finance Commission is a quasi-judicial body provided by Article 280 of the constitution.

The President of India constitutes the Finance Commission by appointing members every fifth year or at such a time that is considered necessary.

The members of the commission are appointed for the duration as specified in presidential order. Members are eligible for reappointment.

The main function of the commission is to distribute the shares of net proceeds of tax between the Union and the States and the allocation between the States of the respective shares of such proceeds.

Arvind Panagariya is the chairman of the 16th Finance Commission.

For distribution, the commission has suggested 12.5% weightage to demographic performance, 45% to income, 15% each to population and area, 10% to forest and ecology, and 2.5% to tax and fiscal efforts.

According to Article 280, the President of India must appoint a Finance Commission every five years to propose policies for grants-in-aid, the allocation of taxes between the Union and the States, and strategies to increase state funding for local bodies.

Formed under Article 280 of the Indian Constitution, the Finance Commission is a constitutional body formed to divide up certain tax resources between the federal government and the state governments.

No, the Finance Commission is not a permanent authority. The President of India constitutes the finance commission every five years or earlier, if it requires establishment.

K.C. Neogy served as the first chairman of the Finance Commission of India when it was formed in 1951. The First Finance Commission was constituted on 22.11.1951

The current and Sixteenth Finance Commissioner of India is Shri Arvind Panagariya. The Sixteenth Finance Commission was constituted on 31.12.2023 and Shri Arvind Panagariya is a former Vice Chairman of NITI Aayog.

R.K. Shanmukham Chetty was India's first Finance Minister after independence. He served as the first Finance Minister of India from 1947 to 1949. He released India's first Union Budget after independence.

The Role of finance commission is to resolve budgetary imbalances, promote collaborative federalism in India, and guarantee a fair division of financial resources among the federal and state governments.

When it comes to fiscal federalism and income distribution, the Finance Commission is a constitutional authority. NITI Aayog is an advisory organisation that works to promote joint federalism and equitable development plans among governments.

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Finance Commission (Article 280), Members, Power, and Functions

Context

About Sixteenth Finance Commission (SFC)

About Finance Commission

Powers of the Finance Commission

Functions of Finance Commission:

Criticism of Finance Commission

Recommendation of the 15th Finance Commission

State Finance Commission

Finance Commission Chairman List

Frequently Asked Questions

What is the Finance Commission?

Who appoints the Finance Commission?

What is the Tenure of the Finance Commission?

What is the main Function of the Finance Commission?

Who is the Chairman of the 16th Finance Commission?

What are the Horizontal Devolution Criteria Suggested by the 15th Finance Commission?

What is Article 280 of the Indian Constitution?

Is the Finance Commission a statutory body or constitutional body?

Is the Finance Commission a permanent body?

Who was the First Finance Commission of India?

Who is the Finance Commission in India now?

Who was the first Finance Minister of Independent India?

What is the need of the Finance Commission?

What is the major difference between the finance commission and NITI Aayog?

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