Finance Commission of India: Composition, Qualification, Tenure & Functions

Introduction

Article 280 under Part-XII of the Indian Constitution establishes the Finance Commission as a quasi-judicial body. The President of India forms this commission every five years or at an earlier time if deemed necessary.

Composition of Finance Commission of India

• Chairman + 4 other members. to be appointed by the president. 

Qualification of Finance Commission of India: 

• Determined by Parliament. Parliament has specified:
• Chairman: Should be a person having experience in public affairs, and the four other members should be selected from amongst the following:
• Judge of HC or one qualified to be appointed as one.
• A person having specialized knowledge of finance & accounts of the government.
• A person who has experience in financial matters & administration.
• A person who has special knowledge of economics.

Tenure of Finance Commission of India

• Constituted by the President of India every fifth year or at such earlier time as he considers necessary.
• Hold office for such a period as specified by the president in his order.
• Eligible for reappointment.

Functions of Finance Commission of India

• Distribution of the net proceeds of taxes between the Centre and the states, and the allocation between the states of the respective shares of such proceeds.
• Principles governing grants-in-aid to the states by the Centre (i.e., out of the consolidated fund of India). 
• Measures to augment the consolidated fund of a state based on the recommendations made by the state finance commission.
• Any other matter referred to it by the President in the interests of sound finance. 

Finance Commission of India other Aspects

• Recommendations of the Finance Commission are advisory in nature.
• Act as a ‘Balancing wheel’ of fiscal federalism.
• The Commission submits its report to the President. He lays it before both the Houses of Parliament.
• Article 280 of the Indian Constitution: The Indian President needs to set up a Finance Commission every five years, starting two years after the Constitution begins. This Commission has a few important jobs:
  • Deciding how to split taxes between the central government and the states, and figuring out how much each state gets.
  • Establishing rules for giving financial help to the states from the national funds.
  • Looking into any other money-related matters the President asks them to, for the sake of good financial management.
    • The Commission gets to decide how they work and what powers they have, as long as Parliament approves it by law.
• Article 281 of the Indian Constitution: In connection with the suggestions from the Finance Commission, the President is required to present the Commission’s recommendations along with an explanation to both houses of Parliament.

15th Finance Commission: 

• Criteria: For devolution of the 15th Finance Commission: 
• 12.5% weightage to demographic performance, 
• 45% to income.
• 15% each to population 
• 15% to the area.
• 10% to forest and ecology.
• 2.5% to tax and fiscal efforts. [UPSC 2023]
• Recommendation of 15th FC: The proposed allocation of central taxes to states for the 2021-26 period remains at 41%, consistent with the previous year’s allocation. 
  • Decrease in Share: This figure represents a decrease from the 42% share recommended by the 14th Finance Commission for the 2015-20 period. 
  • Rationale for 1% Adjustment: The adjustment of 1% aims to account for the inclusion of the newly formed union territories of Jammu and Kashmir and Ladakh, utilizing resources from the central government.
• Various Grants Recommended in 15th FC
  • These grants will be provided from the center’s resources over the 2021-26 period.
  • Revenue Deficit Grants: 17 states will receive these grants to eliminate the revenue deficit.
  • Sector-specific Grants: Sector-specific grants will be given to states for eight sectors. 
  • State-specific Grants: The Commission recommended state-specific grants in the areas of social needs, administrative governance and infrastructure, water and sanitation, preservation of culture and historical monuments, high-cost physical infrastructure, and tourism. 
  • Grants to Local Bodies: The grants to local bodies will be made available to all three tiers of Panchayat- village, block, and district. 
  • Disaster Risk Management:  The Commission suggested retaining the existing cost-sharing patterns between the centre and states for disaster management funds, i.e 90:10 for north-eastern and Himalayan states and 75:25 for all other states.
• State Finance Commission
  • The State Finance Commission (SFC) is formed because of changes made to the Indian Constitution called the 73rd and 74th Constitutional Amendments. 
    • These changes aimed to organise how money works between local governments in India.
  • Article 243I: Every five years, the State Governor must create a Finance Commission. 
  • Article 243Y: The Finance Commission, formed under Article 243I, should look at how well the Municipalities are doing financially and give suggestions to the Governor. But here’s the thing: States haven’t been forming their SFCs as often as the Constitution says they should.