Constitutional & Legal Status
- Constitutional Body: Established under Article 280 of the Constitution.
- Quasi-judicial nature: Advises on financial matters between Centre and States.
- Non-permanent body: Constituted every 5 years or earlier if required by the President.
Articles Related to Finance Commission
- Article 280: Establishes the Finance Commission and its core mandate.
- Article 281: Provides for laying Commission’s recommendations before Parliament with explanatory notes.
Composition
- Chairman + 4 Members, appointed by the President.
- Tenure: As specified by the President; eligible for reappointment.
- Qualifications (Finance Commission Act, 1951):
- Chairman: Experienced in public affairs.
- Other members:
- Judge or eligible to be a HC judge.
- Expert in government finance/accounting.
- Expert in financial administration.
- Expert in economics.
Functions of the Finance Commission
- Vertical Distribution: Share of taxes between Centre and States.
- Horizontal Distribution: Share of States among themselves.
- Grants-in-Aid: From Centre to States (Article 275).
- Augmentation of State Funds: To strengthen Panchayats and Municipalities.
- Advisory on Financial Matters: Any matter referred by the President.
Nature of Recommendations
- Advisory Only: Not binding on the government.
- Final Implementation: Subject to Union Government’s discretion.
Finance Commission & Fiscal Federalism
- Fiscal Federalism: Balancing vertical and horizontal fiscal relations.
- Promotes Cooperative Federalism: Encourages Centre-State dialogue.
- Addresses Inter-State Inequality: More funds to backward States.
- Empowers Local Bodies: Recommends fund augmentation based on SFC.
Key Roles
- Equitable resource distribution.
- Promotes social welfare via targeted grants.
- Enhances state autonomy with predictable fund flows.
- Builds Panchayat & Municipality capacity.
- Strengthens federalism by enabling cooperation.
- Encourages fiscal discipline and accountability.
- Fosters reform-based governance.
- Responds to contemporary challenges (e.g. GST, climate change).
Challenges and Criticism
- Data Issues: Inconsistent or outdated fiscal data.
- Political Interference: Conflict between Centre and States.
- Mismatch of Resources and Responsibilities.
- Overlap with GST Council functions.
- Increasing centralization of expenditure.
- Limited control over local governments.
- Implementational Gaps due to non-binding nature.
Way Forward
- Make FCI a permanent body (as suggested by PV Rajamannar Committee).
- Enhance institutional capacity and data analytics.
- Improve stakeholder engagement and transparency.
- Promote cooperative & competitive federalism.
- Address modern issues like digital economy, pandemics, and climate change.
Reports
- Submitted to President, then laid before Parliament with an action taken report.
Recent Commissions
15th Finance Commission
- Chairman: N.K. Singh
- Period: 2021–22 to 2025–26
- Key Focus: Performance-based incentives, defence funding, COVID-19 impact.
16th Finance Commission
- Chairman: Arvind Panagariya
- Constituted: 31 December 2023
- Report Due: By 31 October 2025
- Award Period: 1 April 2026 onwards
- Key ToR:
- Tax distribution between Union and States.
- Grants-in-aid principles under Article 275.
- Augmentation of funds for Panchayats and Municipalities.
- Review of Disaster Management Fund under the DM Act 2005.
