FINANCE COMMISSION

The Finance Commission is a Constitutional Body under Article 280 of our Constitution. Finance Commission is Constituted by President after every 5 years.

India is a Union of 28 States. We have federal Constitution having two types of Governments—

1) Union Government and,

2) State Governments

Union Government have its own Sources of Income and Similarly State Governments have their own Sources of Income. Some Taxes such as Income Tax, Corporate Tax i.e. Income Tax on Companies, Custom Duty etc are imposed and Collected by Union Government only. Some taxes such as VAT, Excise duty on liquor for human consumption etc are imposed & Collected by States. We have started GST system w.e.f. 1-7-2017 and under this we have clubbed more than 18 indirect taxes under one tax Goods & Service Tax (GST).

Income Tax, Corporation Tax (Income Tax on Companies), Custom Duty etc. are imposed by Union Government and collected by Union Government are shared with States on the recommendations of Finance Commission. Finance Commission define the financial relations between Centre and States and among states. Finance Commission is at the Centre of Fiscal Federalism. Its core responsibility is to evaluate the state of finances of Union and State Governments, recommend the sharing of taxes between them, lays down the principles to determine the distribution of these taxes between Centre & States & among states.

First Finance Commission was formed on 2nd November, 1951 by President. Till date 15 Finance Commissions has been formed. 15th Finance Commission has been formed for a period 01.04.2020 to 31.03.2025 under the Chairmanship of Mr. N.K. Singh and has four members.

The main tasks of the Commission are to strengthen cooperative federalism, improve the quality of Public spending and help to protect fiscal stability. 14th Finance Commission recommended an increase in share of States in the Centre’s tax revenue from 32% to 42%. This was indeed the single largest increase ever recommended by a Finance Commission. Higher allocation to States was recommended to reassure them that the States need not to worry due to implementation of GST. The other recommendations were revenue deficit to be progressively reduce and eliminated, initiative to reduce the number of Central sponsored schemes, States need to address the problem of losses in power sector in a time bound manner etc.

The recommendation of Finance Commission are advisory in nature and therefore not binding on the Union Government. The Chairperson and members of Finance Commission are appointed by President and have the tenure of 5 years.

State Finance Commission (Article 243 I)

Our Constitution states about establishment of State Finance Commission for each State. Governor of a State constitute State Finance Commission after every 5 years. The Chairperson and members of State Finance Commission are appointed by Governor for a tenure 5 years. The main functions of State Finance Commission are—

1) (a) To recommend distribution of state taxes to panchayats.

(b) Determination of taxes which can be imposed by Panchayats and,

(c) Grant-in-Aid to the Panchayats by the State Government.

2) Measures needed to improve the financial position of Panchayats

3) Any other matter referred to Finance Commission by the State Governor in the interest of Sound Finance of Panchayats.

Note: Article 243 (Y) of the Constitution further provides that State Finance Commission shall make similar recommendations for Municipalities.