Finance Commission | Indian Polity for UPSC CSE PDF Download

Composition of the Finance Commission

• Article 280 of the Constitution establishes the Finance Commission as a quasi-judicial body.
• The President of India constitutes the Finance Commission every five years, although it can be formed earlier if necessary.
• The Commission consists of a Chairman and other members, all of whom serve for a period specified by the President. They can be reappointed for additional terms.
• The Constitution empowers Parliament to set the qualifications for the Chairman and members of the Commission. The Chairman is required to have experience in public affairs.
• The four other members should be chosen from the following categories:
• A judge of a High Court or a person qualified to be appointed as such.
• An individual with specialized knowledge in finance and accounts.
• A person with substantial experience in financial and administrative matters.
• An expert in economics with relevant knowledge.

Functions of the Finance Commission

• The Finance Commission is tasked with advising the President on several key issues, including:
• The distribution of net tax proceeds between the Centre and the States, including the allocation of shares among the States.
• The principles governing grants-in-aid to States from the Centre.
• The measures needed to enhance the Consolidated Fund of States to support resources for Panchayati Raj institutions and Municipalities, based on recommendations from the State Finance Commission.
• Any other matters referred to the Commission by the President.
• After completing its work, the Commission submits its report to the President, who then presents it to Parliament along with a memorandum outlining the actions taken on the recommendations.

Advisory Role of the Finance Commission

• The recommendations made by the Finance Commission are advisory in nature. This means that while they provide guidance on important financial matters, they are not legally binding and can be accepted or rejected by the government.
• The Union Government has the authority to accept or reject the Finance Commission's recommendation regarding the sharing of tax revenue with the States.
• However, since the Finance Commission is a constitutional body with quasi-judicial powers, its recommendations should not be dismissed without very compelling reasons.
• The Constitution of India assigns the Finance Commission a crucial role in maintaining fiscal balance between the Centre and the States, as well as among the States themselves.
• Due to the establishment of the Planning Commission, which has now been replaced by the NITI Aayog, the role of the Finance Commission has undergone significant changes. There is now considerable overlap in planning functions between the two organisations.