Finance Commission – Indian Polity Notes

India’s federal polity empowers Centre with better subjects for taxation which provides better revenues vis a vis States. States play key role in India’s welfare state, by implementing several welfare measures, they face revenue shortfall, they are provided share from taxes collected by the Centre. How much tax shall be devolved to States is decided based on an expert commission appointed by the President known as ‘Finance Commission’.

Historical Background:

Constitution states that under clause (1) of Article 280 that Finance Commission shall be constituted by the President within two years of commencement of the constitution. Following that the First Finance Commission was appointed under chairmanship of K C Neogy in 1951.

Since, India’s federal structure has centralizing tendencies, it was imperative for nascent democracy to devolve a mechanism through which states will get their fair share in the sharable tax pool of centre. For this purpose the commission was envisaged. The successive commissions have augmented the share given to states. Post 73^rd constitutional amendment act, the commission was asked to recommended on measure to augment Consolidated Fund of States to supplement resources of the Panchayats and The Municipalities.

Further, being an constitutional body, it is expected to perform quasi-judicial functions. It’s recommendations cannot we turned down by the Government without substantial reasons.

Article 280:

Article 280 provides for Finance Commission for distribution of revenues between Centre and State. 

Clause 1: President shall constitute Finance Commission on expiry of every fifth year.

Clause 2: Qualifications & manner of selection for members will be decided by Parliament.

Article 281:

It provides for the President to lay down the reports submitted to him by the Finance Commission along with explanatory memorandum before each houses of Parliament.

Composition:

Under Article 280(1), The Finance Commission shall consist of a chairman and four other members, appointed by the President.

Qualifications:

In light of Article 280(2), the Parliament has enacted The Finance Commission Act 1951, which entails details about Finance Commission.

According to act, qualifications are:

For Chairman: He/She shall be person having experience in public affairs.

For other members: Rest 4 members shall be selected from amongst following:

• A judge of High Court or one qualified to be appointed as one.
• A person having specialised knowledge of finance and accounts of government.
• A person having wide experience in financial matters and in administration.
• A person having special knowledge of economics.

Functions:

Once Finance Commissions are constituted every five years, they are given Terms of Reference (ToR) by the Government, simply these are areas wherein the commission will provide it’s valued recommendations. 

Commission provides recommendations on:

• Sharing of Central Tax Pool between Centre and State.
• Distribution of central grants to States.
• Measures to improve finances of states to supplement the resources of Panchayats and the Municipalities.
• Any other matter referred to the commission by the President.

The commission makes its recommendations to the President via its report. Which is tabled before Parliament.

By convention, all recommendations given by the Commission are implemented by the Government. Once recommendations of commission are accepted. Work of commission is completed.

Further while discharging it’s duties in pre-report submission the commission has all powers of a civil court as per CPC 1908. It can call anyone to witness before it or can ask for record from any court or office.

Finance Commission (TILL DATE).

Finance Commission	Chairman	Appointment	Report	Period of Implementation
First	K C Neogy	1951	1952	1952 – 57
Second	K Santhanam	1956	1957	1957 – 62
Third	A K Chanda	1960	1961	1962 – 66
Forth	Dr P V Rajamannar	1964	1965	1966 – 69
Fifth	Mahavir Tyagi	1968	1969	1969 – 74
Sixth	Brahmanandam Reddy	1972	1973	1974 – 79
Seventh	J M Shelat	1977	1978	1979 – 84
Eighth	Y B Chavan	1982	1984	1984 – 89
Ninth	N K P Salve	1987	1989	1989 – 95
Tenth	K C Pant	1992	1994	1995 – 2000
Eleventh	A M Khusro	1998	2000	2000 – 05
Twelfth	Dr C Rangarajan	2002	2004	2005 – 10
Thirteenth	Dr Vijay Kelkar	2007	2009	2010 – 15
Fourteenth	Y V Reddy	2013	2014	2015 – 20
Fifteenth	N K Singh	2017	2020	2021 – 26

Fifteenth Finance Commission:

Appointed under chairmanship of Mr N K Singh, it was first Finance Commission which used 2011 Census data unlike 1971 Census data as used by previous commissions. It had created uproar in States which have worked to control their population growth especially Southern States & Smaller States. To console these states, the commission incorporated “Demographic Performance” as one of the criteria for devolution. States with lower fertility ratio are ranked high in this parameter.

Unlike it’s predecessors, this commission has submitted two reports. First for financial year 2020-21 and second for 2021-26.

It reduced share of states from 42% (14^th Finance Commission) to 41%. As Jammu & Kashmir is not longer a state and along with Ladakh are separated Union Territories.

For distribution of taxes among states, it has recommended mechanism based on weightages:

• 12.5% to demographic performance
• 45% to income.
• 15% each to:
  • Population
  • Area
• 10% to forest and ecology
• 2.5% to tax and fiscal efforts.

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