Finance Commission of India is a constitutional body to define financial relations between the Centre and the states. Established under Article 280 of the Constitution of India, it was formed in 1951.
Constitutional Basis
The Finance Commission was created by the President of India. Article 280 mandates its formation every five years. The President can also establish the Commission earlier if necessary. The Commission’s role is to recommend the distribution of taxes and grants-in-aid to states.
Composition
The Finance Commission consists of a Chairman and four members. The President appoints these individuals. The Chairman should have experience in public affairs. Members must possess qualifications related to finance, economics, or law.
Qualifications and Disqualifications
Members should have experience as High Court judges, in finance, or in administration. They must not be of unsound mind or involved in any corrupt practices. Conflicts of interest also disqualify individuals from membership.
Tenure and Salary
The President specifies the tenure of the Finance Commission members. Members may serve part-time and can be re-appointed. Their salaries are determined by constitutional provisions.
Functions of the Finance Commission
The Finance Commission’s main functions include:
- Distributing net tax proceeds between the Union and states.
- Allocating tax shares among states.
- Determining principles for grants-in-aid to states.
- Enhancing resources for local bodies based on state recommendations.
- Addressing any other financial matters referred by the President.
Advisory Role
The recommendations of the Finance Commission are advisory. They are not legally binding on the government. The Union government decides whether to implement these recommendations.
Impact on Fiscal Federalism
Finance Commissions play a vital role in fiscal federalism. They shape the distribution of financial resources between the Union and states. Their recommendations also influence governance and development trajectories in India.
Key Areas of Recommendation
The Finance Commission focuses on three main areas:
- Vertical Devolution: This refers to the share of states in the divisible pool of central taxes.
- Horizontal Distribution: This allocates resources among states based on fiscal needs and capacities.
- Grants-in-aid: These are additional transfers to states or sectors needing assistance.
Successful Recommendations
Several Finance Commissions have made impactful recommendations:
- Increased tax devolution from 10% to 42% over time.
- Introduced performance-based incentives for states.
- Established disaster relief funds for states and local bodies.
- Provided grants for local bodies to enhance fiscal autonomy.
Implementation and Monitoring
The Union government accepts most recommendations with minor changes. Acceptance is notified through a Presidential Order. This order specifies the validity period of the recommendations. Various ministries oversee the implementation of these recommendations.
Challenges Faced by Finance Commissions
The Finance Commissions face several challenges:
- Data Gaps: Incomplete and outdated data affects assessments.
- Political Factors: Balancing interests of various stakeholders is complex.
- Implementation Issues: Recommendations may not always be effectively implemented.
- Evaluation Difficulties: Measuring the impact of recommendations is challenging.
Emerging Issues for the 16th Finance Commission
The 16th Finance Commission faces new challenges:
- Co-existence with GST Council: The GST Council’s decisions impact revenue projections.
- Funding Defence and Security: A mechanism for funding defence is still being developed.
- Post-COVID-19 Impact: The pandemic has changed fiscal needs and priorities.
Future Directions
The Finance Commission should focus on several key areas:
- Enhancing Fiscal Autonomy: Provide predictable resources to Union and states.
- Promoting Accountability: Encourage sound fiscal policies and practices.
- Addressing Emerging Issues: Be responsive to changing economic scenarios.
- Strengthening Institutional Capacity: Improve analytical and advisory capabilities.
