Finance Commission of India – UPSC Exam Notes
Finance Commission of India
Article 280 of the Constitution of India provides for a Finance Commission, a quasi-judicial body that recommends principles by which fiscal horizontal and vertical balance can be maintained in the India’s Fiscal Federal Structure.
Article 270 makes provision for sharing of a share of central taxes with the states. Article 275 provides for statutory grants in Aid and Article 282 provides for discretionary grants for the states. In order to formulate fair principles based on which these grants can be provided to the state, role of finance commission becomes vital in the Indian polity.
Why is there a need for centre to share taxes with the States?
1. Need for Vertical balance in federalism:
In the Federal political structure of the Indian Constitution, there is a tendency in favour of the Centre. In fiscal matters, the Centre is much stronger than the states as the revenue-generating taxes, such as Income tax, corporate tax, and half of GST go to the Union.
| Some taxes levied by the Centre, State and Local bodies | ||
| Centre | States | Local bodies |
| Income Tax | State GST | Tax on Land and Building |
| Corporation Tax | Tax on Electricity | Vehicle Tax |
| Central GST | Excise Duty on Alcohol | Tolls |
| Customs | Stamp Duty | Entertainment Tax |
Thus, the constitution makers felt a need to make a constitutional provision to mandate the Union to share a portion of its tax revenue with the states under Article 270.
In this context, the Finance Commission has been created under article 280. The Finance Commission devises a formula to distribute the net tax proceeds between the Centre and states collectively; that is called vertical balance.
2. Need for Horizontal balance in federalism:
- The Finance Commission also tells how the taxes are to be distributed between different states to maintain the horizontal balance.
- Due to vast regional disparities (e.g. Himalayan States), some states are not able to raise adequate resources as compared to other better-positioned states. To maintain equity, the Finance Commission recommends special funds that can be shared with comparatively disadvantaged states from the Centre’s pool of taxes.
Composition of Finance Commission in India:
Article 280 mentions that a Finance commission should be established at every five year or earlier by the President through an order.
- Appointment and Removal: Since, the President can appoint the Finance commission at any time before five year, its appointment and removal is at the discretion of the President (i.e. the government).
- The Finance Commission comprises the Chairman and four other members.
- The tenure and the salary are decided by the order of the President.
The government generally appoints the Finance commission and provides it with a term of reference document, to serve as guiding principles in order to make its recommendations. The commission then studies the fiscal balance of the country and submits its recommendations via a report, which is then laid before the Parliament.
| Terms of Reference |
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Qualification of Members of Finance Commission
Article 280, leaves it upon the Parliament to decide on the selection process and qualification of the members. Thus, the Finance Commission (Miscellaneous Provisions) Act, 1951 was passed by the Parliament, which mentions the following qualification:
- Chairman: Experienced in public affairs
- Member 1: Judge of high court or qualified to be appointed as one.
- Member 2: Specialised knowledge of finance and accounts of the government.
- Member 3: Wide experience in financial matters and administration.
- Member 4: Special knowledge of economics
They are eligible for reappointment.
