Finance Commission of India [Article 280] Analysis [UPSC]

There are different types of commissions working in India, one of the most important commissions is the Finance Commission, you will understand why this is so.

In this article, we will discuss the Finance Commission in a simple and easy way and try to understand its various important aspects. After reading and understanding this article, definitely solve the practice questions and check your understanding.

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Finance Commission

Under Article 280 of the Constitution, the Finance Commission has been provided as a quasi-judicial body. The main function of which is to explain the modalities of management of financial resources of the Center and the states and the principles governing the divisible resources.

In other words, its main task is to tell the principle of how the money will be divided between the center and the state. It is constituted by the President every fifth year or earlier as required.

Article 280(1) provides that the President shall, within two years from the commencement of this Constitution and thereafter at the end of every fifth year or at such earlier time as the President considers necessary, by order, constitute a Finance Commission.

It had happened, on November 22, 1951, the first Finance Commission was constituted under whose chairmanship Mr. KC Niyogi was entrusted. Since then, 15 Finance Commissions have been constituted. The 15th Finance Commission has also submitted its report for the year 2021-26 to the President. You can know about all the Finance Commission till date from this list;

Commission constituted so far

Commission	year of appointment	President	implementation year
first	1951	KC Neogy	1952–57
another	1956	K. Santhanam	1957–62
third	1960	AK Chanda	1962–66
fourth	1964	PV Rajamannar	1966–69
Fifth	1968	Mahaveer Tyagi	1969–74
sixth	1972	K. Brahmananda Reddy	1974–79
seventh	1977	JM Shelat	1979–84
eighth	1983	YB Chavan	1984–89
ninth	1987	NKP Salve	1989–95
tenth	1992	KC Pant	1995–00
eleventh	1998	AM Khusro	2000–05
twelfth	2002	C. Rangarajan	2005–10
thirteenth	2007	Dr. Vijay L. Kelkar	2010–15
fourteenth	2013	Dr. Y. V Reddy	2015–20
fifteenth	2017	NK Singh	2020–26

So let’s understand what is the structure of the Finance Commission and what they do, apart from this we have 15th Finance Commission which was headed by NK Singh; Let’s also know some special things of the report.

Composition of Finance Commission

According to Article 280(1), the Finance Commission consists of a Chairman and four other members, who are appointed by the President.

His tenure is fixed by the order of the President and he can also be reappointed.

According to Article 280(2) , Parliament has the right to determine the qualifications and method of selection of these members. Under this, the Parliament has determined the special qualifications of the chairman and members of the commission, which are as follows;

The Chairman of the Finance Commission shall be experienced in public affairs and the other four members shall be chosen from amongst the following—
(1) a Judge of a High Court or a person qualified for the post,
(2) a person known to be responsible for the Accounts and Finance matters of India.
(3) a person having extensive experience in administration and financial matters, and
(4) a person having special knowledge of economics.

Functions of Finance Commission

Article 280(3) lays down the duties of the Commission under which the Finance Commission makes recommendations to the President of India on the following matters;

(a) The distribution of the net revenue of taxes between the Union and the States and the allocation of such revenues between the States.

The distribution of taxes between the center and the state is done in two ways, one is vertical distribution and the other is horizontal distribution . Under vertical distribution, the 14th Finance Commission had recommended 42 per cent transfer to the states. which was also accepted. But since Jammu and Kashmir and Ladakh were made Union Territories in 2019, it is obvious that the Center has to manage these two Union Territories. Keeping this fact in mind, the 15th Finance Commission reduced the transfer to the states to 41 per cent.

Talking about the horizontal distribution, it means that out of the 41 percent that the states have got, how much will every single state get. This is a very challenging task as many states get annoyed that they have reduced the population, instead of getting financial incentives for it, they get discouraged because the states with more population usually get more share. .

In order to make the horizontal distribution fair and rational, the 15th Finance Commission adopted 6 norms, while in the 14th Finance Commission, they adopted only 4 criteria. You can see this in the table below;

Norms suggested by 15th Finance Commission for horizontal devolution of taxes

Criteria	Significance (in percentage)
Population	15
region	15
Forest and Ecology	10
income gap	45
Taxes and Fiscal Efforts	2.5
demographic performance	12.5
gross	100 percent

Norms suggested by 14th Finance Commission for horizontal devolution of taxes

Criteria	Significance (in percentage)
Population	27.5
region	15
forest area	7.5
revenue	50
gross	100 percent

Overall, a comparative study of both the tables shows how the 15th Finance Commission has tried to keep all the states happy.

(b) The principles governing grants-in-aid to the revenue of the states out of the Consolidated Fund of India.

Grants-in-aid are given keeping in mind certain goals. It is given to the states from the Consolidated Fund of India on the recommendation of the Commission. The 15th Finance Commission has mainly recommended five grants, which you can see in the table below –

No. No.	components of the grant	2021 -26 (in crore)
1.	revenue deficit grant	294514
2.	local government grants	436361
3.	disaster management grant	122601
4.	Sector specific grants	129987
(I)	– Regional grants for health	31755
(II)	– school education	4800
(III)	– Higher education	6143
(IV)	– Implementation of agricultural reforms	45000
(V)	– maintenance of roads	27539
(VI)	– judicial	10425
(VII)	– Statistics	1175
(VIII)	– Aspirational Districts and Blocks	3150
5.	state-specific	49599
	gross	1033062

(c) Measures necessary for augmentation of the Consolidated Fund of the State to supplement the resources of the Municipalities and Panchayats in the State on the basis of the recommendations made by the State Finance Commission.

Note – This provision was added through the 73rd and 74th Constitutional Amendments. Read from here – 73rd Constitutional Amendment and 74th Constitutional Amendment

We know that Article 243 (I) talks about the State Finance Commission which is appointed by the Governor. This commission mainly makes recommendations to the Governor regarding the financial transfer of local rural governance and local urban governance. (Exactly like Central Finance Commission)

Under this provision, the Central Finance Commission, based on the recommendations of the State Finance Commission, suggests necessary measures with a view to augment the resources of Panchayats and Municipalities . This provision is considered good from the point of view of establishment of financial federalism.

(d) any other matter referred to the Commission by the President in the interest of sound finance.

For example, the 15th Finance Commission was assigned some additional responsibility. He was specifically asked to review and comment on the fiscal principles of the different types of grant-in-aid being made available. In addition, the Commission was asked to consider performance-based incentives so that the State and Local Governments could be encouraged to support their efforts at appropriate levels in various policy areas.

Overall, in this way the commission submits its report to the President, who places it in both the houses of the Parliament. The report is accompanied by a memorandum of assessment and details about the steps that can be taken in this regard.

Some facts related to the commission

The recommendations of the commission are advisory in nature and the government is not bound to accept them. It is for the Central Government to implement the recommendations of the Commission with regard to the assistance given to the State Governments or not.

In this regard, Dr. PV Rajamannar (Chairman of the Fourth Finance Commission) has rightly said that, since the Finance Commission is a constitutional body, it performs quasi-judicial functions. The Government of India is not bound to accept its advice unless there is a compelling reason.

The population scale for the 15th Finance Commission has been kept as of 2011, whereas before that, recommendations for financial transfer were made on the basis of population of 1971.

Finance Commission uses Article 280 as well as Article 270 and Article 275 for money transfer . Both these articles are well explained in the Centre-State financial relationship.

Overall, this is the Finance Commission and its functioning, hopefully you will understand. A link to some other articles is being given below, do read it too.

Finance commission Practice quiz – upsc

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