Recommendations of the Finance Commission

Recommendations of the Finance Commission

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In layman’s language, Finance Commission means a constitutional body that is tasked with the allocation of revenue resources between the center and the state governments. The body was established through Article 280 of the constitution by the President of the country. Article 280 clearly states that a commission has to be set up within two years of the Indian constitution coming into effect and thereafter every five years. It is supposed to make its recommendations to the President on fiscal matters and the distribution of net tax proceeds between the union and the states. The President can also constitute a Finance Commission before five years, if necessary.

Thus, Finance Commission is constituted by the President and it consists of a Chairman and four other members. The Chairman and members are selected according to The Finance Commission (Miscellaneous Provisions) Act, 1951. Apart from the distribution of net tax proceeds, their allocation and the principles governing Grants-in Aid to states, it also decides the basis of sharing the divisible taxes, evaluates the increase in the Consolidated Fund of a state so that its resources can be affixed to the Municipalities and panchayats. According to the Code of Civil procedure, 1908, the commission has the powers of a civil court and it can call witnesses or ask for a public record or document from any court or office.

The Finance Commission of India has enough powers to use its functions within the activity domain but it also must be mentioned here that the recommendation of the body is not binding upon the government. In other words, the recommendation made by it is up to the government to implement because the Constitution of the country does not make it binding for the government to implement the recommendations of the commission. Hence, the advisory role of the commission is marked but most governments abide by them.

In recent times, Finance Commission recommendations have been highly significant because the 15th commission has recommended maintaining vertical devolution at 41 percent. The share of states in central taxes from 2015 to 2020 was 42 percent and the one percent decrease is recommended for the newly formed union territories of Ladakh and Jammu and Kashmir. A major initiative by the body is a call for incentives to the states that have shown better performance in population control measures.