Finance Commission of India

A key component of India's fiscal federalism is the Finance Commission of India (FCI), a constitutional authority. It guarantees equitable growth throughout the nation by distributing financial resources between the Centre and the States fairly and rationally. For five years, they have offered suggestions about allocating financial resources both within and between the state legislature and the Union.

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This Story also Contains

1. What is the Finance Commission of India?
2. History of Finance Commission
3. Constitutional Mandate Related to the FCI
4. Composition of Finance Commission
5. Finance Commission of India Functions
6. Report of Finance Commission (FC)
7. Challenges of the Finance Commission of India
8. Way Forward
9. Finance Commission Chairman List
10. 16th Finance Commission of India
11. Conclusion

Additionally, FCs offer direction and counsel on a range of topics about public finance, governance, and development, including statistics systems, fiscal consolidation, debt management, local government, disaster relief, health, education, and justice delivery. FCs have significantly improved the Union and state governments' budgetary autonomy, equality, and efficiency as well as the nation's competitive and cooperative federalism. But to carry out their mandate, they also have to overcome several obstacles and constraints, particularly given the dynamic and intricate political and economic environment.

You may also read, about other Legal Services in India

• SPSC
• ECI
• UPSC

What is the Finance Commission of India?

• In accordance with the requirements of the Constitution of India, the President of India established the quasi-judicial Finance Commission.

• It was founded by the President of India in accordance with Article 280 of the Indian Constitution.

• It was established in 1951.

• It is a Constitutional Body since it was created immediately in accordance with the Constitution's requirements.

• The Finance Commission is a non-permanent entity, with its membership appointed by the President of India every five years or earlier if deemed essential.

• Making recommendations about the allocation of financial resources between the Union Government and the State Governments is the Finance Commission's main duty.

History of Finance Commission

• Early in 1920, the Finance Commission of India established a clause aimed at consolidating the British companies that held a dominant market share in India.

• In an attempt to address the disparities, Dr. BR Ambedkar, who was the minister of law at the time, formed the first Finance Commission in 1952, with K.C. Neogy serving as its chairman.

• The foundation for the commission's formation was the drafting of its statutes and regulations.

• Article 268 of the Indian constitution, which permits the central government to levy levies but gives the states the authority to collect and retain the taxes, is one of many measures meant to narrow the fiscal gap between the centre and the states.

• The Indian Constitution already had several measures to close the fiscal divide between the federal government and the states, such as Article 268 which permits the federal government to charge taxes while empowering the states to collect and keep the levies.

• Articles 269, 270, 275, 282, and 293 delineate several methods and approaches for resource sharing between the Union and its member states.

Constitutional Mandate Related to the FCI

The Finance Commission of India (FCI) is covered by provisions found in Articles 280 and 281 of the Indian Constitution.

Article 280: Finance Commission

The President of India is required to form the Finance Commission of India every five years starting two years after the Indian Constitution's ratification. The Commission will have the responsibility to advise the President on the following matters:

• The allocation of the respective parts of the net tax profits between the States and the Union, as well as the distribution of the proceeds between the Union and the States;

• The rules that should guide disbursements to the States from their income in the Consolidated Fund of India; any other issue that the President refers to the Commission in the interest of sound finance

• The Commission will set its procedures and use such authority in carrying out its duties as Parliament may grant it by legislation.

Note: If the President feels it is essential, he may also form the Finance Commission before the five years have passed.

Article 281: Recommendations of the Finance Commission

The Finance Commission's recommendations: The President is required to present any recommendations made by the Finance Commission in accordance with this Constitution's requirements, along with a memorandum explaining the actions taken in response, to each House of Parliament under the heading of Miscellaneous Financial requirements.

Composition of Finance Commission

• The President appoints the Chairman and the remaining four members of the Finance Commission.

• The President's decree specifies the term of office for the Chairman and the other members of the Commission.

• Reappointments are possible for the Chairman and the other Commission members.

Eligibility of Members of the Finance Commission

The Parliament is empowered under the Constitution to decide which candidates should be appointed to the Commission. As a result, the Finance Commission Act, of 1951 was passed by the Parliament, and it outlines the following requirements for the Finance Commission members:

1. The four members should be or have been qualified to serve as judges on the High Court, have expertise with financial concerns, have a background in administration, or have an understanding of economics.

2. The nation's president presides over all nominations.

Members' grounds for disqualification:

1. If there is a conflict of interest, discovered to be insane, or if they committed a horrible deed

2. The President of India sets the terms for each member of the Finance Commission's office, and in some situations, the members are also reappointed.

3. As the President designates, the members will provide part-time service to the Commission.

4. The members' salaries are determined by the guidelines outlined in the Constitution.

Terms of office for Finance Commission members:

• The President of India sets the terms for the members of the Finance Commission.

• Members are typically appointed for a term of five years, however, they may be reappointed in exceptional circumstances.

Finance Commission of India Functions

Its mandate is to provide the President with recommendations about the following:

1. Tax Distribution: Allocating the various parts of the net profits of taxes to the States and the Union, as well as between the States themselves.

2. Guidelines for grants-in-aid: The guidelines that control federal funds to states from the Consolidated Fund of India.

3. State-level tax devolution: increasing the state's consolidated fund to provide Panchayati Raj Institution (PRI) and municipalities with resources by the state finance commission's recommendations.

4. Miscellaneous Matter: Any other matter that the President refers to the Commission in the interest of sound finance.

5. Report Submission: A report is made to the President, who presents it to the Parliament's two chambers. An explanation of the steps done in response to the study's recommendations follows the report itself.

6. Previous Duties: Funding for Particular States: In the past, the Finance Commission proposed funding to the states of West Bengal, Assam, Bihar, and Odisha for the distribution of the net earnings from export taxes levied on jute goods. This was only good for ten years.

Legal Status of Finance Commission

In accordance with Article 280 of the Constitution, the President of India appoints members of the Finance Commission. In addition to the chairperson, there are five additional members. FC's suggestions are put into practice for five years. The President's orders carry out the proposals for Union taxes and duties, while executive orders carry out the suggestions for profit sharing, central aid, and debt reduction.

Report of Finance Commission (FC)

• The Finance Commission provides its report to the President of India.
• The President of India presents the Finance Commission's report to both Houses of Parliament, together with an explanatory statement outlining the actions done in response to its recommendations.

Challenges of the Finance Commission of India

Political Economy Factors

• FCs must strike a balance between the conflicting demands and interests of a wide range of stakeholders, including the federal government, state governments, local governments, and civil society organisations.

• They also need to consider how the global and national political and economic landscapes are evolving.

Evaluation Difficulties

• FCs are required to evaluate the effects and results of their recommendations on a range of development performance, governance quality, and fiscal health metrics.

• They have trouble establishing causation, separating effects, quantifying results, and valuing their treatments, though.

Data Gaps and Quality Issues

• FCs evaluate the Union's and the state's financial performance using official data sources, although these sources are sometimes inaccurate, inconsistent, or out-of-date.

• For example, trustworthy statistics on interstate commerce flows, public service unit costs, or the results of different initiatives and programmes are lacking.

Implementation Challenges

• FCs are required to guarantee that the suggestions they provide are workable, palatable, and efficient in accomplishing the intended goals.

• Nevertheless, they have little direct influence over how the federal government and state governments carry out or oversee their recommendations.

• In addition, they must handle problems like delays, deviations, non-compliance, or recipient abuse of money.

Way Forward

• The PV Rajamannar Committee's suggestion to make the Finance Commission permanent should be considered.
• Capacity Building - In order to be more effective, the Finance Commission should strengthen its analytical and advising capacities. This entails using credible data sources, applying strong techniques, and consulting with experts and stakeholders.
• Enhanced Consultation - The Commission should strengthen communication and outreach techniques to publish its reports broadly, collect input, and create stakeholder consensus.
• Promotion of Cooperative and Competitive Federalism - The Commission shall look into new ways to enhance cooperative and competitive federalism while successfully adjusting to changing circumstances.
  Addressing Emerging Issues - In response to changing economic and social dynamics, the Finance Commission must stay proactive and responsive. This includes tackling difficulties related to GST implementation, the Covid-19 Pandemic, climate change, and digital transformation.

Finance Commission Chairman List

16th Finance Commission of India

The Sixteenth Finance Commission was established on December 31, 2023, with Shri Arvind Panagariya as its Chairman. The Commission has been asked to submit its recommendations by October 31, 2025, covering a five-year award term beginning April 1, 2026. The Finance Commission will provide recommendations on the following matters:

• The distribution between the Union and the States of the net revenues of taxes that are to be, or may be shared between them, and the allocation between the States of the respective parts of such proceeds.

• The principles that 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.

• The actions required to replenish the Consolidated Fund of a State to supplement the resources of the State's Panchayats and Municipalities are based on the recommendations given by the State Finance Commission.

• The Commission may examine the present finance systems for disaster management efforts. This includes reviewing the funds established under the Disaster Management Act of 2005 and making appropriate suggestions for enhancements or changes.

Conclusion

Finally, the Finance Commission of India (FCI) is an important component of fiscal federalism, ensuring that financial resources are distributed fairly between the Union and State governments. As India progresses economically and socially, the Finance Commission's function will become increasingly important. Taking the necessary actions to solve the issues it faces would help create balanced regional development and ensure the nation's financial stability.