The Finance Commission of India is a constitutional body formed every five years to recommend principles governing the distribution of tax revenues between the Union Government and the State Governments. Established under Article 280 of the Indian Constitution, its primary role is to address fiscal imbalances between the center and the states, ensuring equitable resource allocation and promoting fiscal federalism.
The Commission’s recommendations are crucial for maintaining financial stability and promoting inclusive growth across the country. Its composition typically includes a chairman and four other members, selected based on their expertise in public finance, economics, administration, or law. The chairman is often a person with significant experience in public affairs.
The Commission’s terms of reference, specified by the President of India, outline the specific areas of focus for each iteration. These terms often include suggestions on how to improve the quality of public spending, promote fiscal discipline, and manage debt sustainably. They may also address issues related to Goods and Services Tax (GST) compensation and the impact of national policies on state finances.
The core functions of the Finance Commission revolve around several key areas:
- Devolution of Taxes: Determining the percentage of central taxes to be shared with the states, commonly referred to as the ‘divisible pool’. This is a major source of revenue for state governments.
- Principles of Distribution: Formulating the criteria for distributing the divisible pool among the states. These criteria often include factors like population, income distance (a measure of inequality), area, forest and ecology, tax effort (state’s own revenue mobilization), and demographic performance.
- Grants-in-Aid: Recommending grants-in-aid to states under Article 275 of the Constitution. These grants are intended to address specific needs or support particular development programs.
- Measures to Augment Consolidated Funds: Suggesting measures to improve the financial resources of states to supplement their Consolidated Funds.
- Any Other Matter: Addressing any other matter referred to it by the President in the interest of sound finance.
The Finance Commission’s recommendations, once finalized and submitted to the President, are presented to the Parliament along with an Explanatory Memorandum detailing the action taken on those recommendations. While the Union Government is not legally bound to accept all recommendations, they carry significant weight and are generally implemented with modifications. The recommendations are typically in effect for a period of five years, aligning with the Commission’s tenure.
Over the years, successive Finance Commissions have played a vital role in shaping India’s fiscal landscape. Their analyses and recommendations have helped address regional disparities, promote fiscal prudence, and strengthen cooperative federalism, contributing significantly to India’s overall economic development.
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