Importance of the Finance Commission of India

Importance of the Finance Commission of India

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TheFinance Commission of India head is a constitutional body that was established by the orders of the President of India under Article 280 of the Constitution of the country. It is periodically constituted for a tenure of five years and the first commission came into existence in 1951. The body consists of a Chairman and four other members. The terms of qualification, disqualification, appointment, eligibility, terms and powers of the body are clearly defined by The Finance Commission Act of 1951. On a broader scale, the function of the body is to define the financial relations between the states and the Center. However, it also performs many other subsidiary roles and provides answers and suggestions to the President of India on queries related to financial matters.

The Finance Commission questions some of the most important ways in which tax revenue can be distributed between the Center and the states. It suggests the distribution of net proceeds of taxes between the states and the Center and their division as per their respective contribution. It determines the factors that govern Grants-in-Aid to the states along with their value. It is also supposed to work with the State Finance commissions and give suggestions to them. This can improve the Consolidated Fund of the states so they can develop additional resources for the Municipalities and Panchayats. The commission plays an advisory role so that its recommendations are not binding upon the government.

However, the first Finance Commission in Indiawhich worked under the chairmanship of K. C. Neogy from 1952-57 made some startling recommendations and all of them were accepted by the Union Government. The major recommendations included the share of states from the proceeds of income tax should be 55 percent, for horizontal distribution 80 percent weightage be given to population and 20 percent to contribution and Grants-in-Aid be provided to West Bengal, Assam, Bihar and Orissa. Apart from these major recommendations, many other recommendations were also made.

The Finance Commission at present in its 15th outing was established in 2017 and its operational duration is from 2020-25. Among the major recommendations, it has suggested maintaining the states’ share to 41% in the divisible pool of taxes. For horizontal devolution, it has recommended 45% weightage to income, 15% each to area and population, 12.5% to demographic performance and 2.5% to taxes.