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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.

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Check out the Finance commission notes for UPSC Mains

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