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FINANCE COMMISSION

Introduction

• The Finance Commission in India is a constitutional body responsible for allocating financial resources between the central government and the States. It promotes fiscal stability, fiscal autonomy for States, and the equalization of public services. Established under Article 280 of the Indian Constitution, it operates on a five-year cycle, impacting fiscal relations significantly and upholding federal principles and economic fairness.

Historical Background

• Origins in the 1920s: The foundations for the provisions related to the Finance Commission in India can be traced back to the early 1920s when efforts were made to consolidate the economic and fiscal dominance of the British colonial rule in India. These efforts aimed to create a more centralized fiscal system.
• Establishment in 1952: The first Finance Commission was established in 1952 under the leadership of Dr. B.R. Ambedkar, who was the Law Minister at that time. The commission was created to rectify fiscal inequalities and disparities that had existed under colonial rule.
• Drafted Acts and Rules: The establishment and functioning of the Finance Commission are based on specific Acts and Rules that were drafted to define its scope, responsibilities, and procedures. These legal provisions ensure that the commission operates within a defined framework.
• Constitutional Measures: To address the fiscal divide between the central government (Centre) and the States, the Indian Constitution incorporates several measures. For example, Article 268 empowers the Centre to impose duties while allowing the States to collect and retain these duties. Such constitutional provisions are aimed at balancing the financial relationships between the Union and the States.

Role of Finance Commission

• The role of the Finance Commission in India is to make recommendations on the distribution of tax revenues between the central government (Union) and the States, as well as among the States themselves, in accordance with Article 281 of the Indian Constitution. Two distinctive features of the Finance Commission are:
• Redressing Vertical Imbalances: The Finance Commission aims to address vertical imbalances between the taxation powers and expenditure responsibilities of the Union and the States. It strives to ensure that the resources required to meet the expenditure needs of the States are fairly allocated.
• Equalization of Public Services: The Finance Commission also works towards the equalization of public services across the States. It endeavors to ensure that citizens across different States have access to comparable levels of public services and infrastructure, promoting equitable development.

Composition

• The Finance Commission in India is composed of a chairman and four additional members, all appointed by the President. They serve for the duration specified in the President’s order and are eligible for reappointment. The qualifications of the chairman and members, as well as the method of their selection, are determined by Parliament, as authorized by the Constitution. The qualifications set by Parliament are as follows:
• Chairperson: The chairperson of the Finance Commission should possess expertise in public affairs.
• Other Members: The four additional members can be selected from the following categories:
  • A judge of the high court or an individual qualified for such an appointment.
  • A person with specialized knowledge in government finance and accounts.
  • An individual with extensive experience in financial matters and administration.
  • A person with special knowledge in economics.
• Disqualification: Members of the Finance Commission can be disqualified if they are found to be of unsound mind, have committed a heinous act, or have a conflict of interest. These provisions are in place to ensure that members are qualified, impartial, and capable of making sound recommendations regarding the distribution of financial resources among the Union and the States, and among the States themselves.

Tenure

• Members of the Finance Commission in India are appointed by the President for specified terms, typically set at five years, and reappointments are possible in some cases. These members are expected to serve part-time or on a voluntary basis, as directed by the President. Furthermore, if necessary, the President can appoint a Finance Commission before the expiration of the standard five-year term. This flexibility allows for adjustments in the commission’s composition and tenure based on the evolving financial needs and circumstances of the country.

Functions

• The Finance Commission in India has several important duties and responsibilities, including:
• Distribution of Tax Proceeds: The commission is tasked with making recommendations to the President regarding the distribution between the Union (central government) and the States of the net proceeds of certain taxes that are shared between them, as well as the allocation of these proceeds among the States themselves.
• Principles for Grants-in-Aid: It determines the principles that should govern grants-in-aid to the revenues of the States from the Consolidated Fund of India. These grants are financial assistance provided by the central government to the States.
• Supplementing Panchayat Resources: The commission recommends measures to augment the Consolidated Fund of a State to supplement the resources of the Panchayats (local self-government institutions at the village and district levels) in the State. These recommendations are based on the advice of the State’s respective State Finance Commission.
• Supplementing Municipal Resources: Similarly, the commission advises on measures to augment the Consolidated Fund of a State to supplement the resources of the Municipalities (local self-government bodies at the urban level) in the State, based on the recommendations of the respective State Finance Commission.
• Referral by the President: The Finance Commission addresses any other matters referred to it by the President in the interests of sound finance. This means the commission can provide recommendations on various fiscal and financial matters that are deemed necessary.
• Procedure and Powers: The Finance Commission determines its own procedure and is empowered with such powers in the performance of its functions as Parliament may confer on it through legislation.

Implementation of the Recommendations of Finance Commission

• The Finance Commission in India follows a specific process for the implementation of its recommendations as mentioned below:
• Submission of Report: The Finance Commission submits its report to the President of India, outlining its recommendations.
• Presentation to Parliament: The President presents the report of the Finance Commission before both Houses of Parliament for their consideration. This is a crucial step to ensure transparency and parliamentary scrutiny.
• Implementation by Presidential Order: Some recommendations of the Finance Commission, such as those related to the distribution of union taxes and duties and grants-in-aid to States, are implemented by an order of the President. These orders have the force of law.
• Implementation by Executive Orders: Certain other recommendations, like those pertaining to sharing of profits from petroleum, debt relief, and the mode of central assistance, are implemented through executive orders. These orders are issued by the executive branch of the government.
• Advisory Nature: It’s important to note that the recommendations made by the Finance Commission are of an advisory nature. While the government gives careful consideration to these recommendations, they are not binding upon the government. The decision to implement the recommendations and allocate financial resources to the States ultimately rests with the government.

List of the Finance Commissions in India

15^th Finance Commission

The Fifteenth Finance Commission (15^th FC) was appointed by the President of India on 27 November 2017, with the following terms of reference:

• To recommend the basis of distribution of net proceeds of taxes between the Union and the States and among the States themselves, in addition to the matters set out in clause (1) of article 280 of the Constitution.
• To recommend measures to improve the quality of fiscal management through effective, transparent and accountable use of public funds, reduction in wasteful and unproductive expenditure, and enhanced revenue mobilization.
• To recommend the principles that should govern the grants-in-aid of the Union to the States.
• To examine the state of finances of the Union and the States and make recommendations to improve their financial position.
• To recommend measures to augment the consolidated fund of a State to supplement the resources of the panchayats and the municipalities in the State.

The 15^th FC submitted its report to the President of India on 30 November 2019. The report made a number of recommendations, including:

• Distribution of tax revenue: The 15^th FC recommended a 41% share of net tax revenue for the states, which is higher than the 41.27% share recommended by the previous Finance Commission.
• Grants-in-aid: The 15^th FC recommended a number of performance-linked grants to states to encourage them to improve their performance in key areas such as health, education, and fiscal management.
• Fiscal management reforms: The 15^th FC recommended a number of measures to improve the quality of fiscal management, such as the adoption of a medium-term fiscal framework, the implementation of a performance management system, and the strengthening of public financial management systems.
• Resources for panchayats and municipalities: The 15^th FC recommended a number of measures to augment the resources of panchayats and municipalities, such as the increase in the share of local bodies in the state tax revenue and the devolution of more functions to local bodies.

UPSC PREVIOUS YEAR QUESTIONS

1.  Which of the following is/are among the noticeable features of the recommendations of the Thirteenth Finance Commission? (2012)

1.  A design for the Goods and Services Tax, and a compensation package linked to adherence to the proposed design.
2.  A design for the creation of lakhs of jobs in the next ten years in consonance with India’s demographic dividend.
3.  Devolution of a specified share of central taxes to local bodies as grants.

Select the correct answer using the codes given below:

(a) 1 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3

2.  With reference to the Finance Commission of India, which of the following statements is correct? (2011)

1.  It encourages the inflow of foreign capital for infrastructure development
2.  It facilitates the proper distribution of finances among the Public Sector Undertakings
3.  It ensures transparency in financial administration
4.  None of the statements (a), (b) and (c) given above is correct in this context

3.  Which of the following are associated with ‘Planning’ in India? (2014)

1.  The Finance Commission
2.  The National Development Council
3.  The Union Ministry of Rural Development
4.  The Union Ministry of Urban Development
5.  The Parliament

Select the correct answer using the code given below:

(a) 1, 2 and 5 only
(b) 1, 3 and 4 only
(c) 2 and 5 only
(d) 1, 2, 3, 4 and 5