State Finance Commission: Role, Functions, Recommendations & Limitations
State Finance Commission
The Indian Constitution makers clearly demarcated the duties and responsibilities of the Union government and the states and further assigned revenue streams to both of them to discharge their duties and responsibilities.
However, this model underwent a major change four decades after the Constitution came into effect. The 73rd Constitutional Amendment Act, 1992 formally recognized a three-tier system of local self-governance comprising at village level, block level and district level bodies.
For instance, the Gram Panchayats have historically existed in the country for thousands of years as a unit of self-rule. However, the 73rd amendment gave the Gram Panchayats a real boost in the form of endowing it with a constitutional status, thereby assigning to them – funds, functions, and functionaries.
Appointment of State Finance Commission
Under Article 243-I of the Constitution of India, the Governor of a state is required to constitute a Finance Commission every five years. Wondering why? This is to decide the resource allocation between the state government and the Panchayati Raj Institutions.
Article 243-Y also brought city councils or municipalities under the purview of the State Finance Commission.
The Legislature of a State may, by law, provide for the composition of the Commission, the qualifications which shall be requisite for appointment as members thereof and the way they shall be selected
The Commission shall determine their procedure and shall have such powers in the performance of their functions as the Legislature of the State may, by law, confer on them.
Role of State Finance Commission
A State Finance Commission has functions similar to that of the Central Finance Commission. It allocates resources of a state to its Panchayati Raj institutions at all three levels in terms of taxes, duties and levies to be collected by the state and the local bodies.
Its job is similar to that of the Central Finance Commission constituted by the President of India under Article 280 of the Constitution, that divides the central taxes between the Union government and state governments.
State Finance Commission’s Recommendations
A State Finance Commission reviews the financial position of the panchayats in a state and makes recommendations to the Governor about the principles that should govern the distribution of tax proceeds – taxes, duties, levies, toll fee collected by the state between the state and its Panchayati Raj Institutions at all three levels ie. village level, block level and district level.
It also recommends the following:
- Taxes, levies, and fees levied or appropriated by Panchayats themselves.
- Grants-in-aid to Panchayati Raj Institutions from the consolidated fund of a state.
- Ways to improve the financial position of the Panchayati Raj Institutions.
- Measures for the overall improvement of Panchayat’s finances.
Under Article 243-I of the Indian Constitution, the governor of a state ensures the laying of a State Finance Commission’s recommendations to the table of the state legislature. It also includes a memorandum of action taken by the government on the Commission’s report.
Limitations of State Finance Commission
The State Finance Commission has several limitations in comparison to Finance Commission of India.
- Task: The task of SFCs to correct horizontal imbalances is extremely burdensome than the UFC.This is because SFCs have to consider nearly 2.5 lakh local governments.
- Data: The financial reporting system of the Union and States is well laid down.
On the other hand, local governments with no proper budgetary system are in deep disarray.So SFCs face a crucial problem of reliable data.
- Support: Several sufficient conditions remain unfulfilled in the case of SFCs.
SFCs have not been provided with the necessary environment to play their rightful role in Indian fiscal federalism.
- Perception: Unlike UFCs, the SFCs face attitudinal limitation from within.SFCs and local governments are seen to be of inferior constitutional status than the UFC.This is a prevailing notion among some politicians, policy makers and even experts.
