The Finance Commission

The Finance Commission of India came into existence in 1951. It was established under Article 280 of the Indian Constitution by the President of India. It was formed to define the financial relations between the center and the state. The Finance Commission Act of 1951 states the terms of qualification, appointment, and disqualification, the term, eligibility and powers of the Finance Commission.

The commission is appointed every five years and consists of a chairman and four other members. Since the institution of the first finance commission, stark changes have occurred in the Indian economy causing changes in the macroeconomic scenario. This has led to major changes in the Finance Commission’s recommendations over the years.

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Functions of the Finance Commission can be explicitly stated as:

  • Distribution of net proceeds of taxes between Centre and the States, to be divided as per their respective contributions to the taxes
  • Determine factors governing Grants-in-Aid to the states and the magnitude of the same.
  • To make recommendations to the president as to the measures needed to augment the Consolidated Fund of a State to supplement the resources of the panchayats and municipalities in the state on the basis of the recommendations made by the Finance Commission of the state.

Fourteenth finance commission is constituted under the chairmanship of Y.V. Reddy,former RBI Governor. Other members of the Commission are former Finance Secretary Sushma Nath, NIPFP Director M. Govinda Rao, Planning Commission Member Abhijit Sen and Former Acting Chairman of National Statistical Commission Sudipto Mundle.

The First Finance Commission was appointed by the president on 20 November 1951, which was chaired by Mr. K.C. Neogy. Other members of the commission included Mr. V.P. Menon, Mr. R. Kaushalendra Rao, Dr. BK Madan and Mr. M.U. Rangachari. After Mr. V.P. Menon’s resignation on 18 February 1952, Mr. V.L. Mehta was appointed as a member. The commission was asked to make recommendations regarding:

  • Allocations of income tax and Union Excise Duties and tax sharing
  • Amounts payable as Grants- in-Aid to the States in need of Assistance under the ‘substantive portion of Clause 1 of Article275’.
  • Grants-in-Aid to certain States in lieu of their share of export duty on jute and jute products according to Article 273 # Continuation or adjustment of the terms of agreement with the Part B States under Article 278 (1) or under Article 306.

Recommendations of 13th Finance Commission

  • The share of states in the net proceeds of the shareable Central taxes should be 32%.This is 1.5% higher than the recommendation of 12th Finance Commission.
  • Revenue deficit to be progressively reduced and eliminated, followed by revenue surplus by 2013–14
  • Fiscal deficit to be reduced to 3% of the GDP by 2014–15
  • A target of 68% of GDP for the combined debt of center and states
  • The Medium Term Fiscal Plan(MTFP)should be reformed and made the statement of commitment rather than a statement of intent.
  • FRBM Act needs to be amended to mention the nature of shocks which shall require targets relaxation.
  • Both center and states should conclude ‘Grand Bargain’ to implement the model Goods and Services Act(GST).To incentivise the states, the commission recommended a sanction of the grant of Rs500 billion.
  • Initiatives to reduce the number of Central Sponsored Schemes (CSS) and to restore the predominance of formula-based plan grants.
  • States need to address the problem of losses in the power sector in time bound manner.

The Finance Commission is a Constitutional body set up every five years to make recommendations relating to the distribution of the net proceeds of taxes between the Union and the States, the principles which should govern the grants-in-aid of the revenues of the States out of the Consolidated Fund of India and the measures needed to augment the Consolidated Fund of a State to supplement the resources of the Panchayats and the Municipalities.

The recommendations of the Thirteenth Finance Commission will cover the period of five years from 1st April 2010 to 31st March 2015. Besides, the 14 Finance Commission would suggest measures for maintaining a stable and sustainable fiscal environment consistent with equitable growth.

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