Statutory Institutions/Commissions: Finance Commission

Finance Commission is important commission in composition of India and also serves as a constitutional body for allocation of certain resources of revenue between the Union and the State Governments. It was set up under Article 280 of the Indian Constitution by the President of India. It was formed to describe the financial relations between the centre and the state.

Finance Commission of India was framed basically to assign resources between the Union and the States. It is constituted by the President and all appointments to the commission are made by him as well. Finance Commission of India was formed in the year 1951 under Article 280 of the Constitution of India. The Commission was structured according to the world standards. The intent of forming the Finance Commission was to allocate resources of the revenue between the Union and the State Governments in India sufficiently.

The historical outlook of Finance Commission: In Indian set up, it is signified that numerous factors unexpectedly necessitated for the formation of the finance commission India. The historical standpoint of Finance Commission India also specifies that the need for such financial commission of India was realized by the British rulers to protect its trade and commerce from the mounting threats from the other European business rivals such as the Dutch, Portuguese and the French. Additionally, the basic draft of the provisions of finance commission of India was made in the early 1920s, to combine the business dominance of the British Rule in India. The first structured draft of the finance commission was a hollow structure and it drew intense criticisms from different Indian leaders of India. A commission was formed to look into the ambiguities of the drafted provision of the Finance commission and make necessary changes to it.

Finance Commission India after independence:

The Finance Commission of India was established according to the drafted Acts and Rules in the year 1951. The President of India is authorized with the selection and responsibilities of the finance commission of India. Furthermore, the President of India assigns the term of their office of the Finance commissioner and the four other member of the commission. The commissioner and the four members of the Finance Commission of India are accountable, directly to the President of India. The President of India constitutes a Finance Commission within maximum of two years from the commencement of the draft and thereafter completion of every fifth year or at earlier time.

Structure of finance commission:

The Finance Commission consists of a chairman and four other members, appointed by the President himself. The qualification of the commissioner and the four members are determined by the elected parliament and by formulating appropriate law.

Establishment of Finance Commission of India:

The comprehensive set up and of the Finance Commission has been provided in Article 280 of the Constitution of India. The Article states:

• The President shall, within two years from the initiation of this Constitution and thereafter and at the expiration of every fifth year or at such time earlier as the President considers necessary, by order constitute a Finance Commission which shall consist of a Chairman and four other members to be appointed by the President.
• Parliament may by law determine the qualification which shall be requisite for appointment as members of the Commission and the manner in which they shall be selected.
• It shall be the duty of the Commission to make recommendations to the President as to the distribution of the net proceeds of taxes which are to be, or may be divided between them under this chapter and the allocation between the States of the respective shares of such proceeds. It is also the responsibility of the Finance Commission to describe the financial relations between the Union and the State and it also caters to the purpose of devolution of non-plan revenue resources.

One of the major tasks of a Finance Commission as specified in Article 280 (3) (a) of the Constitution is to make recommendations regarding the distribution between the Union and the states of the net proceeds of taxes. This is the most vital task of any Finance Commission, as the share of states in the net proceeds of Union taxes is the predominant channel of resource transfer from the Centre to states.

Composition of Finance Commission of India:

The Finance Commission of India has a Chairman along with four other members and a Secretary. The Chairman is the person who heads the Commission and presides over its activities. The Indian Parliament is approved to determine by law the qualifications of the members of the Commission and method of their selection. The Chairman of the Finance Commission is designated among persons who have had the experience of public matters, and four other members are selected among persons who are qualified as judges of High Courts of India, or have knowledge of finance, or have vast experience in financial matters and are in administration, or have knowledge of economics. All the appointments are made by the Indian President. A member can be disqualified on the following grounds: when a member is found to be of unsound mind, is involved in a vile act or if his interests are likely to affect the functioning of the Commission.

The tenure of the office of the Member of the Finance Commission is stated by the President of India and in some cases the members are also reappointed. The members shall give part time or whole time service to the Commission as scheduled by the President. The salary of the members of the Finance Commission is according to the provisions laid down by the Constitution of India.

Powers, Functions and Responsibilities of finance commission:

Under the Indian Constitution, the basis for sharing of divisible taxes by the Centre and the States and the principles governing grants-in-aid to the states have to be decided by the Commission every five years. The President can refer to the Commission any other matter in the interest of sound finance. The recommendations of the Commission together with a descriptive memorandum as to the action taken by the Government on them are laid before each house of Parliament. The Commission has to assess the increase in the Consolidated Fund of a state to affix the resources of the Panchayat in the state. It also has to appraise the increase in the Consolidated Fund of a state to affix the resources of the Municipalities in the state.

The Commission has been given sufficient powers to operate within its area of activity. It has all the powers of the Civil Court as per the Code of Civil Procedure, 1908. It can call any witness, or can ask for the production of any public record or document from any court or office. It can ask any person to give information or document on matters as it may feel to be useful or pertinent. It can function as a civil court in discharging its duties.

Functions of Finance Commission:

Major functions of finance Commission is to make recommendations to the president of India on the following affairs:

• The distribution of the net proceeds of taxes to be shared between the Centre and the states, and the allocation between the states of the respective shares of such proceeds.
• The principles that should govern the grants-in-aid to the states by the Centre (i.e., out of the consolidated fund of India).
• The measures needed to augment the consolidated fund of a state to supplement the resources of the panchayats and the municipalities in the state on the basis of the recommendations made by the state finance commission.
• Any other matter referred to it by the president in the interests of sound finance.

Till 1960, the commission also recommended the grants given to the States of Assam Bihar Orissa and West Bengal in lieu of assignment of any share of the net proceeds in each year of export duty on jute and jute products. These grants were to be given for a transitory period of ten years from the commencement of the Constitution.

The commission submits its report to the president. He lays it before both the Houses of Parliament along with an explanatory memorandum as to the action taken on its recommendations.

Powers of Finance Commission: Commission has following powers:

• The Commission shall have all the powers of the Civil Court as per the Code of Civil Procedure, 1908.
• It can call any witness, or can ask for the production of any public record or document from any court or office.
• It can ask any person to give information or document on matters as it may feel to be useful or relevant.
• It can function as a civil court in discharging its duties.

The Constitution of India foresees the Finance commission as synchronizing fiscal federalism in India. Though, its role in the Centre-state fiscal relations has been destabilized by the emergence of the Planning Commission, a non-constitutional and a non-statutory body. Dr P V Rajamannar, the Chairman of the Fourth Finance commission, emphasised the overlapping of functions and responsibilities between the Finance Commission and the Planning Commission in federal fiscal transfers as "the reference in Article 275 to grants-in aid to the revenues of states is not confined to revenue expenditure only. There is no legal warrant for excluding from the scope of the Finance Commission all capital grants; even the capital requirements of a state may be properly met by grants-in-aid under Article 275, made on the recommendations of the Finance Commission".

The legal position is that there is no provision in the Constitution to avert the finance commission from taking into consideration both capital and revenue requirements of the states in formulating a scheme of devolution and in recommending grants under Article 275 of the Constitution. But the creation of Planning Commission inexorably has led to a duplication and overlapping of functions, to avoid that a practice has grown which has resulted in the curtailment of the functions of the finance commission.

Complete plan, with respect to both policy and programme, comes within the purview of the Planning Commission and as the assistance to be given by the Centre to plan projects either by way of grants or loans is practically dependent on the recommendations of the Planning Commission. It is understandable that the Finance Commission cannot operate in the same field. The main functions of the Finance Commission consist in determining the revenue gap of each state and providing for filling up the gap by a scheme of devolution, partly by a distribution of taxes and duties and partly by grants-in-aid.

Significance of Finance Commission: There is immense importance of the Finance Commission in constitution of India. It is a constitutional instrument capable of settling many complicated financial glitches that affect the relations of the Union and States. This is evident from the recommendations of the last 14 finance Commissions appointed so far.

Report of Finance Commission in Parliament Article 281 states that President shall cause every recommendation made by the Finance Commission under the provisions of this Constitution together with a descriptive memorandum as to the action taken thereon to be laid before each House of Parliament.

Recommendations: Finance Commission does not communicate with the Union Government in the matters of increasing 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. With respect to States Finance Commission, it suggests the actions needed to increase the Consolidated Fund of a State to supplement the resources of the Panchayat and Municipalities in the State on the basis of the recommendations made by the Finance Commission of the State.

On Panchayat and Municipalities: The role of the Finance Commission has expanded after the 73rd and 74th Constitutional amendments to identify the rural and urban local bodies as the third tier of government. Article 280 (3) (bb) and Article 280 (3) (c) of the Constitution command the Commission to recommend measures to increase the Consolidated Fund of a State to supplement the resources of Panchayats and Municipalities based on the recommendations of the respective State Finance Commissions. This also includes enhancing the resources of Panchayat and municipalities.

Table: List of finance commission in India

To summarize, the Finance Commission is a Constitutional body framed under Article 280 of the Indian Constitution. It is established every five years by the President of India to assess the state of finances of the Union and the States and suggest strategies to maintain a stable and sustainable fiscal environment. It also makes recommendations regarding the devolution of taxes between the Centre and the States from the divisible pool which includes all central taxes excluding surcharges and cess which the Centre is constitutionally mandated to share with the States.