Finance Commission of India

Under Article 280 of the Constitution, the President of India is required to constitute a Finance Commission at an interval of five years or earlier.

The Finance Commission is a constitutional body, that determines the method and formula for distributing the tax proceeds between the Centre and states, and among the states as per the constitutional arrangement and present requirements.

The constitution makers devised an elaborate method through Finance Commission, clearly demarcating the duties and responsibilities of the units of the Union and of the Union itself while allocating resources to perform those duties.

Article 280 of the Constitution of India

Provisions regarding Finance Commission have been elaborated in the Article 280 of the Constitution of India.

1. The President shall, within two years from the commencement of this Constitution and thereafter at the expiration of every fifth year or at such earlier time 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.
2. Parliament may by law determine the qualifications which shall be requisite for appointment as members of the Commission and the manner in which they shall be selected
3. It shall be the duty of the Commission to make recommendations to the President as to-
   1. the distribution between the Union and the States 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.
   2. the principles which should govern the grants-in-aid of the revenues of the States out of the Consolidated Fund of India;

bb. the measures needed to augment the Consolidated Fund of a State to supplement the resources of the Panchayats in the State on the basis of the recommendations made by the Finance Commission of the State;

3. 3. the measures needed to augment the Consolidated Fund of a State to supplement the resources of the Municipalities in the State on the basis of the recommendations made by the Finance Commission of the State;]
   4.  any other matter referred to the Commission by the President in the interests of sound finance.
4. The Commission shall determine their procedure and shall have such powers in the performance of their functions as Parliament may by law confer on them.

Nature of Finance Commission Recommendations

While constituting the commission, the central government decides the terms of reference. This includes the reference points to be used for formulating recommendations such as which census will be used as a reference point for factoring in the population of states.

After holding consultations with all the stakeholders that include the ministries and departments of the Union government, state governments, trade bodies, banks and industry, the Commission finalizes the formula for dividing the tax pie for a period of five years.

The Finance Commission also decides the share of taxes and grants to be given to the local bodies in states. This part of tax proceeds is called Finance Commission Grants, which is a part of the Union budget.

The recommendations made by the Finance Commission are advisory in nature and, hence, not binding on the Government.Article 281 of the Constitution says that the 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.

Sixteenth  Finance Commission: Terms of Reference

Terms of Reference Terms of Reference and the matters that shall be taken into consideration by the Fifteenth Finance Commission in making the recommendations are as under:

The Finance Commission shall make recommendations as to the following matters, namely:

1. The distribution between the Union and the States of the net proceeds of taxes which are to be, or may be, divided between them under Chapter I, Part XII of the Constitution, and the allocation between the States of the respective shares of such proceeds;
2. 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 by way of grants-in-aid of their revenues under article 275 of the Constitution for the purposes other than those specified in the provisos to clause (1) of that article; and
3. 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.
4. The Commission may review the present arrangements on financing Disaster Management initiatives, with reference to the funds constituted under the Disaster Management Act, 2005 (53 of 2005), and make appropriate recommendations thereon.
5. The Commission shall make its report available by 31st day of October, 2025 covering a period of five years commencing on the 1st day of April, 2026.

The Finance Commission normally takes about two years to make their recommendations. As per the clause (1) of article 280 of the Constitution, the Finance Commission is to be constituted every fifth year or earlier. However, as the recommendations of the 15th FC cover the six-year period up to 31st March 2026, the 16th FC has been constituted now. This will enable the Finance Commission to consider and appraise the finances of the Union and the States for the period immediately, preceding the period of its recommendations. In this context, it is pertinent to mention that there are precedents where the Eleventh Finance Commission was constituted six years after the Tenth Finance Commission. Similarly, the Fourteenth Finance Commission was constituted five years and two months after the Thirteenth Finance Commission.

Fifteenth Finance Commission

The Fifteenth Finance (the 15th FC) was constituted on 27.11.2017 for making recommendations for a five-year period of 2020-21 to 2024-25. On 29.11.2019, the ToR of the 15th FC was amended requiring the Commission to submit two reports, namely a first report for financial year 2020-21 and a final report for an extended period of 2021-22 to 2025-26. As a result, the 15th FC made its recommendations for a six-year period from 2020-21 to 2025-26.