finace commission

2. The finance commission is an
autonomous body.
The commission is appointed every five
years.
It consists of a Chairman and Four other
members.

3. Background
Vertical and horizontal imbalances are common
features of most federations and India is no exception to
this. The Constitution assigned taxes with a nation-wide
base to the Union to make the country one common
economic space unhindered by internal barriers to the
extent possible. States being closer to people and more
sensitive to the local needs have been assigned functional
responsibilities involving expenditure disproportionate to
their assigned sources of revenue resulting in vertical
imbalances. Horizontal imbalances across States are on
account of factors, which include historical backgrounds,
differential endowment of resources, and capacity to raise
resources. Unlike in most other federations, differences in
the developmental levels in Indian States are very sharp.

4. In an explicit recognition of vertical and horizontal
imbalances, the Indian Constitution embodies the
following provisions for the transfer of resources from
the Centre to the States.
1. Levy of duties by the Centre but collected and retained
by the States (Article 268)
2. Taxes and duties levied and collected by the Centre
but assigned in whole to the States (Article 269).

5.  3. Sharing of the proceeds of all Union taxes between
the Centre and the States under Article 270. (Effective
from April 1, 1996, and permissive sharing of
Union excise duties under Article 272).
4. Statutory grants-in-aid of the revenues of States
(Article 275)
5. Grants for any public purpose (Article 282).
6. Loans for any public purpose (Article 293).

6. Objective of the Provision
That the quantum of such devolution of funds
and the principles of their distribution among the
States inter se should not be left entirely to the
discretion of the Central authorities, but should be
determined on the recommendations of an
independent and impartial agency, which would assess
the changing needs of the States, and take into
account the imbalances between the richer States and
the Poor ones, in making its recommendations.

7. The transfer of funds from the Central Government to
the regional governments:-
 try to safeguard the autonomy of the unit/State
Governmnents,
 promote political stability,
Facilitate rapid growth,
Bring about financial equalisation or foster a sense of
financial responsibility.

8. Article 280 of the Constitution of India
Article 280 of the Indian Constitution defines the
scope of the commission:
1. The President will constitute a finance commission
within two years from the commencement of the
Constitution and thereafter at the end of every fifth
year or earlier, as the deemed necessary by him/her,
which shall include a chairman and four other
members.
2. Parliament may by law determine the requisite
qualifications for appointment as members of the
commission and the procedure of selection.

9. About Finance Commission
The Finance Commission of India came into existence
in 1951.
It was established under Article 280 of the Indian
Constitution by the President of India.
It was formed to define the financial relations between
the centre and the State.
Till date, Fifteen Finance Commissions have submitted
their reports.

10. The Finance Commission
(Miscellaneous Provisions) Act, 1951
 The Finance Commission (Miscellaneous Provisions)
Act, 1951 was enacted to give a structured format to the
finance commission by laying down rules for the
qualification and disqualification of members of the
commission and for their appointment, term,
eligibility and powers.
 This Act was amended by the Finance Commission
(Miscellaneous Provisions) Amendment Act, 1955.

11. Qualifications of the Members
 The Chairman of a finance commission is selected from
people with experience of public affairs.
The other four members are selected from people who:
 Are, or have been, or are qualified, as judges of a High
Court,
 Have knowledge of Government finances or accounts, or
 Have experience in administration and financial expertise;
or
 Have special knowledge of Economics.

12. Disqualification from being
a member of the Commission
member may be disqualified if:
 He is mentally unsound;
 He is an undischarged insolvent;
 He has been convicted of an immoral offence;
 His financial and other interests are such that it
hinders the smooth functioning of the commission.

13. Terms of office of members and
eligibility for reappointment
Every member will be in office for the time period
as specified in the order of the President, but is eligible
for reappointment provided he has, by means of a
letter addressed to the president, resigned his office.

14. Duties & Functions of the Finance Commission
The Finance commission shall make recommendation to the
President as to-
a) The distribution of net proceeds of taxes between Center and the
States, to be divided between them and the allocation between the
States of the respective shares of such proceeds;
b) the principles which should govern the grants-in-aid of the revenue
of the States out of the Consolidated Fund of India;
c) the measures needed to augment the Fund of a State to supplement
the resources of the Panchayats in the State, on the basis of the
recommendations made by the Finance Commission of the state;
d) The measures needed to augment the Consolidated Fund of a State
to supplement the resources of the Municipalities in the State on the
basis of the recommendations made by the finance commission of
the State.
e) Any other matter referred to the Commission by the President in the
interest of sound finance.

15. Procedure and powers of the commission
1. The commission has the power to determine their own
procedure and:
2. Has all powers of a Civil Court as per the Civil Procedure
Code, 1908.
3. Can summon and enforce the attendance of any witness
or ask any person to deliver information or produce a
document, which it deems relevant.
4. Can ask for the production of any public record or
document from any court or office.
5. Shall be deemed to be a civil court for purposes of
Sections 480 and 482 of the Code of Criminal Procedure,
1898

16. Salaries and allowances of the members
 The members of the commission shall
provide full-time or part-time service to the
commission, as the President specifies in his order.
 The members shall be paid salaries and
allowances as per the provisions made by the Central
Government.

17. How are the recommendations of
Finance Commission implemented?
 Those to be implemented by an order of the President
 Those to be implemented by executive orders

18. List of Finance Commissions
Finance
Commission
Year of
establishment
Chairman
Operational
duration
First 1951 K. C. Neogy 1952–57
Second 1956 K. Santhanam 1957–62
Third 1960 A. K. Chanda 1962–66
Fourth 1964 P. V. Rajamannar 1966–69
Fifth 1968 Mahaveer Tyagi 1969–74
Sixth 1972
K. Brahmananda
Reddy
1974–79
Seventh 1977 J. M. Shelat 1979–84
Eighth 1983 Y. B. Chavan 1984–89
Ninth 1987 N. K. P. Salve 1989–95
Tenth 1992 K. C. Pant 1995–2000
Eleventh 1998 A. M. Khusro 2000–05

19. 15th Finance Commission
Constituted in : November 2017.
commission's chairman : Sh. Nand Kishore Singh
full-time members : Shaktikanta Das and Anoop Singh
part-time members : Ramesh Chand & Ashok Lahiri.
Commission set up to give recommendations for five
years commencing on 1 April 2020.
The main tasks of the commission :
 to strengthen cooperative federalism;
 To improve the quality of public spending;
 to protect fiscal stability”.

20. Fifteenth Finance Commission
Terms of Reference
Terms of Reference and the matters that shall be taken
into consideration by the Fifteenth Finance
Commission in making the recommendations are as
under:
(i) The distribution between the Union and the States of
the net proceeds of taxes which are to be, or may be,
divided between them and the allocation between the
States of the respective shares of such proceeds;

21. (ii) The principles which should govern the grants-in-aid
of the revenues of the States out of the Consolidated
Fund of India and the sums to be paid to the States by
way of grants-in-aid of their revenues under Article
275 of the Constitution for purposes other than those
specified in the provisos to clause (1) of that article;
and
(iii) The measures needed to augment the Consolidated
Fund of a State to supplement the resources of the
Panchayats and Municipalities in the State on the basis
of the recommendations made by the Finance
Commission of the State.

22.  2. The Commission shall review the current status of
the finance, deficit, debt levels, cash balances and
fiscal discipline efforts of the Union and the States,
and recommend a fiscal consolidation roadmap for
sound fiscal management, taking into account the
responsibility of the Central Government and State
Governments to adhere to appropriate levels of general
and consolidated government debt and deficit levels,
while fostering higher inclusive growth in the country,
guided by the principles of equity, efficiency and
transparency. The Commission may also examine
whether revenue deficit grants be provided at all.

23. 3. While making its recommendations, the Commission
shall have regard, among other considerations, to:
(i) The resources of the Central Government and the
State Governments for the five years commencing on
1st April 2020 on the basis of the levels of tax and the
non-tax revenues likely to be reached by 2024-25. In
the context of both tax and non-tax revenues, the
Commission will also take into consideration their
potential and fiscal capacity;

24. (ii) The demand on the resources of the Central
Government particularly on account of defence,
internal security, infrastructure, railways, climate
change, commitments towards administration of UTs
without legislature, and other committed expenditure
and liabilities;
(iii) The demand on the resources of the State
Governments, particularly on account of financing
socioeconomic development and critical
infrastructure, assets maintenance expenditure,
balanced regional development and impact of the debt
and liabilities of their public utilities;

25. (iv) The impact on the fiscal situation of the Union
Government of substantially enhanced tax devolution
to States following recommendations of the 14th
Finance Commission, coupled with the continuing
imperative of the national development programme
including New India – 2022;
(v) The impact of the GST, including payment of
compensation for possible loss of revenues for 5 years,
and abolition of a number of cesses, earmarking
thereof for compensation and other structural reforms
programme, on the finances of Centre and States; and
(vi) The conditions that GoI may impose on the States
while providing consent under Article 293(3) of the
Constitution.

26. 4. The Commission may consider proposing
measurable performance-based incentives
for States, at the appropriate level of government, in
following areas:
(i) Efforts made by the States in expansion and
deepening of tax net under GST;
(ii) Efforts and Progress made in moving towards
replacement rate of population growth;

27. (iii) Achievements in implementation of flagship
schemes of Government of India, disaster resilient
infrastructure, sustainable development goals, and
quality of expenditure;
(iv) Progress made in increasing capital expenditure,
eliminating losses of power sector, and improving the
quality of such expenditure in generating future
income streams;

28. (v) Progress made in increasing tax/non-tax revenues,
promoting savings by adoption of Direct Benefit
Transfers and Public Finance Management System,
promoting digital economy and removing layers
between the government and the beneficiaries;
(vi) Progress made in promoting ease of doing business
by effecting related policy and regulatory changes and
promoting labour intensive growth;

29. (vii) Provision of grants in aid to local bodies for basic
services, including quality human resources, and
implementation of performance grant system in
improving delivery of services;
(viii) Control or lack of it in incurring expenditure on
populist measures; and
(ix) Progress made in sanitation, solid waste
management and bringing in behavioural change to
end open defecation.

30. 5. The Commission shall use the population data of 2011
while making its recommendations.
6. The Commission may review the present
arrangements on financing Disaster Management
initiatives, with reference to the funds constituted
under the Disaster Management Act, 2005 (53 of
2005), and make appropriate recommendations
thereon.

31. A Retrospect
 There is a general consensus that the institution of the Finance
Commission has acquitted itself well. There has been
considerable expansion in the role of the Commissions from
mainly being an arbitrator between the Centre and the States to
being an architect of fiscal restructuring. There has been near
stability in the share of States’ in the combined revenue
expenditure at about 57 per cent. Centralisation of economic
policy did not show up in any reduction in the share of States. It
may be true that States’ expenditure has come to be more
influenced by the Centre. There has been a decline in the
revenue expenditure financed by own resources from 80 per cent
in the early fifties to around 60 per cent now. This could be partly
on account of the higher buoyancy of Central taxes and increase
in their coverage. Finance Commission transfers still account for
the bulk of the Central transfers.

32.  Despite the changing fiscal environment and considerable
expansion in its functions, the institution of the Finance
Commission has ensured smooth functioning of Centre-State
fiscal relations. If there has been no breakdown in the Centre-
State relations, the credit for this entirely goes to the Finance
Commissions. It also goes to the credit of the framers of the
Indian Constitution that the provisions relating to Central- State
fiscal relations have stood the test of time. They proved adequate
even in meeting the changing environment. Fiscal federalism
will always remain a work in progress and the institution of the
Finance Commission, as in the past, will continue to deal with
the changing environment and emerging challenges. The recent
improvement in the fiscal situation can also be partly attributed
to the focus that the recent Finance Commissions laid on fiscal
restructuring.