The Finance Commission (FC) mentioned under Article 280, is a constitutional body formed by the President of India every fifth year or at such earlier time as he considers necessary. It is a Quasi-Judicial body mandated to make recommendations for horizontal and vertical sharing of the divisible pool of taxes between the Union and the States and determine the principles for central grants-in-aid to states and other such matters referred to it by the President.
The Finance Commission of India: Structure and Authority
- Composition: The Finance Commission consists of a chairman and four other members to be appointed by the President. They are eligible for reappointment.
- Parliamentary Authority: The Constitution authorizes the Parliament to determine the qualifications of members and how they should be selected.
- Legislative Framework: Parliament enacted the Finance Commission (Miscellaneous Provisions) Act, 1951 to provide for the qualification criteria, service conditions of members, powers, and procedures of the Commission.
Key Aspects of the Finance Commission (Miscellaneous Provisions) Act, 1951
Qualification:
The chairman must possess experience in public affairs, while the other four members can be selected from the following categories:
- A high court judge or someone eligible for the position.
- An individual with expertise in government finance and accounting.
- Someone with extensive experience in finance and administration.
- An individual with specialised knowledge in economics.
Tenure and Reappointment:
- Every member shall hold office for such a period as may be specified in the order of the President appointing him.
- A member may resign by addressing a letter to the President.
- Members are eligible for reappointment.
Disqualification for Membership:
A person is disqualified from being appointed as a member if:
- He is of unsound mind.
- He is an undischarged insolvent.
- He has been convicted of an offence involving moral turpitude.
- He has such financial or other interest as is likely to prejudicially affect their functions.
Conditions of Service and Salaries:
- Service Specification: Members may render whole-time or part-time service as specified by the President.
- Salaries and Allowances: Fees or salaries are determined by the Central Government through rules notified in the Official Gazette.
Parliamentary Oversight:
- Every rule made regarding salaries and allowances is laid before each House of Parliament for thirty days.
- If both Houses agree to modify or annul a rule, the rule is affected accordingly without prejudice to prior actions.
Procedure and Powers of the Commission
- Procedure Determination: The Commission decides its own procedures.
- Civil Court Powers: Under the Code of Civil Procedure, 1908, the Commission has the powers of a civil court regarding:
- Summoning and enforcing the attendance of witnesses.
- Requiring the production of documents.
- Requisitioning any public record from any court or office.
- Information Requirement: The Commission can require any person to furnish information. Such a person is legally bound to provide the information, overriding the Indian Income-tax Act, 1922.
- Quasi-Judicial Status: In the performance of their functions, they have all powers of a civil court, making the Finance Commission a quasi-judicial body.
- Jurisdiction: For enforcing witness attendance, jurisdiction extends to the entire territory of India.
Roles and Responsibilities
- Article 281: The President shall cause every recommendation and an action-taken memorandum to be laid before each House of Parliament.
- Tax Distribution: Recommending distribution of net proceeds of union taxes between Union and States and among States.
- Grants-in-Aid: Establishing principles for grants from the Consolidated Fund of India to the states.
- Augmenting State Funds: Recommending measures following the 73rd and 74th Constitutional Amendments to supplement panchayats and municipalities.
Advisory Body: Recommendations are advisory and do not carry constitutional recognition as legal rights. Implementation is up to the Union Government.
Terms of Reference (ToR): Constitutional mandates are reflected in the ToR, which have expanded over the years to include specific considerations starting with the second Finance Commission.
Normative Approach and Additional Grants
- Normative Approach: Used to assess expenditure needs and revenue-raising capacities for vertical tax distribution.
- Additional Recommendations: Beyond tax devolution, the Commission recommends:
- Revenue Deficit Grants: For states with deficits after tax devolution.
- Calamity Relief and Local Bodies: Assistance for natural disasters and supporting local governance.
- Other Specific Purposes: Specific grants as required.
Sixteenth Finance Commission
- Established on December 31, 2023.
- Chairman: Shri Arvind Panagariya (former Vice-Chairman of NITI Aayog).
- Terms of Reference notified on December 31, 2023.
- Submission deadline: October 31, 2025.
- Covering period: April 1, 2026 onwards for five years.
Comparison of 13th, 14th, and 15th Commissions
| Commission | Tax Devolution | Key Highlights |
|---|---|---|
| 13th FC | 32% | Share increased from 30.5%. |
| 14th FC | 42% | Focused on tax devolution as primary resource transfer. |
| 15th FC | 41% | Recommended net proceeds of divisible Union taxes. |
Horizontal Devolution Criteria (15th FC)
| Criterion | Weight |
|---|---|
| Population | 15% |
| Area | 15% |
| Forest and Ecology | 10% |
| Income Distance | 45% |
| Tax and Fiscal Efforts | 2.5% |
| Demographic Performance | 12.5% |
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