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Economics and Governance

Finance Commission

The finance commision or the vitta aayog defines the financial relations between the central and the state governments of India. The Finance Commission has appointed every five years and consists of a chairman and four other members. In the following section, we will see the structure, function and the constitutional validity of the Finance Commision of India. Let us see in the below section!

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Finance Commission

The most Crucial problems in a federation is that of balancing powers and resources between the governments. That is why our constitution makers were quite cautious on the count and provided for a finance commission under Article 280, to recommend mainly the financial transfers from the union to the states with a view to reducing vertical as well as horizontal federal fiscal imbalances.

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History Of The Finance Commision

The Finance Commission was established in 1951 by Dr B.R. Ambedkar, the then incumbent law minister, to address these imbalances. Several provisions to bridge the fiscal gap between the Centre and the States were already enshrined in the Constitution of India, including Article 268, which facilitates levy of duties by the Centre but equips the States to collect and retain the same. Similarly, Articles 269, 270, 275, 282 and 293, among others, specify ways and means of sharing resources between the Union and States.

Recommendations of The Finance Commission

The recommendations of the finance commission will cover the following:

  • distribution between the state government and Municipalities of the net proceeds of the taxes, duties, tolls and fee leviable by the state.
  • allocation of share of such proceeds between the Municipalities at all levels in a state.
  • determination of taxes, duties, tolls, and fees to be assigned or appropriated by the Municipalities.
  • grant-in-aid to Municipalities from the consolidated fund of the state.
  • measures needed to improve the financial position of the Municipalities.

The scope of The Commission

Article 280 of the Indian Constitution defines the scope of the commission:

  1. The President will constitute a finance commission within two years from the commencement of the Constitution and thereafter at the end of every fifth year or earlier, as the deemed necessary by him/her, which shall include a chairman and four other members.
  2. Parliament may by law determine the requisite qualifications for appointment as members of the commission and the procedure of selection.
  3. The commission is constituted to make recommendations to the president about the distribution of the net proceeds of taxes between the Union and States and also the allocation of the same amongst the States themselves. It is also under the ambit of the finance commission to define the financial relations between the Union and the States. They also deal with the devolution of unplanned revenue resources.

Functions Of The Finance Commision

The following are the main functions of the Finance Commission of India:

  1. The finance commission is responsible for the distribution of net proceeds of taxes between Center and the States. This distribution is made on the basis of the respective contributions of the States to the taxes. The greater the tax paid by a State, the greater is the share from the net proceeds of taxes.
  2. It determines the factors governing grants that are made to the states in the form of aids to the states and it also fixes the amount that is given in the form of aid by the center to the state governments.
  3. The Commission is responsible to make recommendations to the president as to the measures that are needed to augment the Fund of a State to supplement the resources of the Panchayats and Municipalities.

Grounds On Which A Member Of The Commission Can Be Disqualified

A member may be disqualified if:

  • He is mentally unsound; and as follows.
  • He is an undischarged insolvent;
  • He has been convicted of an immoral offence
  • His financial and other interests are such that it hinders the smooth functioning of the commission.

List Of The Finance Commissions Of India

Finance Commission

                                                                                                                                              Source: Youtube.com

Year Of Establishment Chairman Operational Duration
First 1951 K. C. Neogy 1952–57
Second 1956 K. Santhanam 1957–62
Third 1960 A. K. Chanda 1962–66
Fourth 1964 P. V. Rajamannar 1966–69
Fifth 1968 Mahaveer Tyagi 1969–74
Sixth 1972 K. Brahmananda Reddy 1974–79
Seventh 1977 J. M. Shelat 1979–84
Eighth 1983 Y. B. Chavan 1984–89
Ninth 1987 N. K. P. Salve 1989–95
Tenth 1992 K. C. Pant 1995–2000
Eleventh 1998 A. M. Khusro 2000–2005
Twelfth 2002 C. Rangarajan 2005–2010
Thirteenth 2007 Dr Vijay L. Kelkar 2010–2015
Fourteenth 2013 Dr Y. V Reddy 2015–2020
Fifteenth 2017 N. K. Singh 2020–2025

Recommendations Of The Fourteenth Finance Commission

The current Finance Commission has made the following recommendations:

  1. As per the reports of the previous finance commission, the share of the states in the net proceeds of the shareable Central Taxes was 32%. The fourteenth commission raised it to 42%.
  2. The fiscal deficit to be progressively reduced to 3% and ultimately eliminated.
  3. The Centre, as well as the State Governments, should conclude “Grand bargain’ to implement the model GST Act.

Practice Question

Q 1: Who was the Chairman of the Seventh Finance Commission of India?

A) J. M. Shelat                   B) N. K. Singh                  C) N. K. Singh                         D) N. K. Singh

Ans: A) J. M. Shelat

Q 2: Who is responsible for setting up of the Finance Commission in India?

A) Veer Savarkar                          B) Pandit Nehru                      C) Mahatma Ghandhi                       D) B R Ambedkar

Ans: D) B R Ambedkar

 

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