The Finance Commission is a constitutional body created by the President of India under Article 280 of the Constitution of India, 1950. Its main purpose is to keep a check on the vertical and horizontal imbalances of the federal finance of India. While vertical imbalances refer to the imbalance between the revenue generated by the Centre and states and their expenditure needs, horizontal imbalances refer to the failure of states to provide the comparable services due to their incapability to raise the necessary funds. It is usually constituted once in five years. The first Finance Commission was established in 1951. Till date, 14 Finance Commissions have been created.
Finance commission has to make recommendations to the President on two specific matters and on any other matter referred to the commission by the president in the interest of Sound Finance. The two specific matters are as follows:
The President, after considering the recommendations of the Finance Commission with regard to income tax, prescribes by order the percentages and the manner of distribution. They also make recommendations with respect to various policy issues whenever they arise and advise the President on any matter that according to it is related to sound public finance.
Article 281 says that President shall cause every recommendation made by the Finance Commission under the provisions of this Constitution together with an explanatory memorandum as to the action taken thereon to be laid before each House of Parliament.
Finance Commission does not tell the Union Government on how to increase its funds. Its work is to make recommendations on distribution between the Union and the States of the net proceeds of taxes and the principles which should govern the grants-in-aid of the revenues of the States out of the Consolidated Fund of India and the sums to be paid to the States which are in need of assistance by way of grants-in-aid of their revenues.