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Chapter 45. Finance Commission (Indian Polity & Constitution Summary Laxmikanth)

Finance Commission

rticle 280 of the Constitution of India provides for a Finance Commission as a quasi judicial body. It is constituted by the president of India every fifth year or at such earlier time as he considers necessary.

The Finance Commission consists of a chairman and four other members to be appointed by the president. They hold office for such period as specified by the president in his order. They are eligible for reappointment.
The Constitution authorises the Parliament to determine the qualifications of members of the commission and the manner in which they should be selected. Accordingly, the Parliament has specified the qualifications of the chairman and members of the commission1. The chairman should be a person having experience in public affairs and the four other members should be selected from amongst the following:
1. A judge of high court or one qualified to be appointed as one.
2. A person who has specialised knowledge of finance and accounts of the government.
3. A person who has wide experience in financial matters and in administration.
4. A person who has special knowledge of economics.

The Finance Commission is required to make recommendations to the president of India on the following matters:
1. 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.
2. The principles that should govern the grants-in-aid to the states by the Centre (i.e., out of the consolidated fund of India).
3. 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 commission2.
4. Any other matter referred to it by the president in the interests of sound finance.
Till 1960, the commission also suggested the grants given to the States of Assam, Bihar, Odisha 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 temporary 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.

Advisory Role
It must be clarified here that the recommendations made by the Finance Commission are only of advisory nature and hence, not binding on the government. It is up to the Union government to implement its recommendations on granting money to the states.
To put it in other words,‘It is nowhere laid down in the Constitution that the recommendations of the commission shall be binding upon the Government of India or that it would give rise to a legal right in favour of the beneficiary states to receive the money recommended to be offered to them by the Commission’3.
As rightly observed by Dr. P.V. Rajamannar, the Chairman of the Fourth Finance Commission, “Since the Finance Commission is a constitutional body expected to be quasi-judicial, its recommendations should not be turned down by the Government of India unless there are very compelling reasons”.
The constitution of India envisages the Finance commission as the balancing wheel of fiscal federalism in India. However, its role in the Centre–state fiscal relations was undermined by the emergence of the erstwhile Planning Commission, a non-constitutional and a non-statutory body. Dr P V Rajamannar, the Chairman of the Fourth Finance commission, highlighted the overlapping of functions and responsibilities between the Finance Commission and the erstwhile Planning Commission in federal fiscal transfers.4

Table 45.1 Finance Commissions Appointed so far

Finance CommissionChairmanAppointed inSubmitted Report inPeriod of implementation of Report
FirstK.C. Neogy195119521952–57
SecondK. Santhanam195619571957–62
ThirdA.K. Chanda196019611962–66
FourthDr. P.V. Rajamannar196419651966–69
FifthMahavir Tyagi196819691969–74
SixthBrahamananda Reddy197219731974–79
SeventhJ.M. Shelat197719781979–84
EighthY.B. Chavan198219841984–89
NinthN.K.P. Salve198719891989–95
TenthK.C. Pant199219941995–2000
EleventhA.M. Khusro199820002000–2005
TwelfthDr. C. Rangarajan200220042005–2010
ThirteenthDr. Vijay Kelkar200720092010–2015
FourteenthY.V. Reddy201320142015–2020

Table 45.2 Articles Related to Finance Commission at a Glance

Article No.Subject-matter
280.Finance Commission
281.Recommendations of the Finance Commission

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