Finance Commission of India

The Finance Commission is a constitutional body that recommends how specified financial resources should be shared between the Union and the States. Constituted periodically by the President under Article 280, it supports an orderly and equitable system of fiscal transfers within India's federal structure.

Constitution and composition

The President of India constitutes the Commission every fifth year, or earlier if necessary. It consists of a Chairman and four other members; Parliament may determine by law the qualifications required for appointment and the manner of their selection.

Constitutional mandate

Under Article 280(3), the Commission recommends to the President the principles and arrangements governing specified fiscal transfers.

• It recommends the distribution between the Union and the States of the net proceeds of shareable taxes, known as vertical devolution, and the allocation of the States' share among individual States, known as horizontal devolution.
• It recommends the principles governing grants-in-aid of State revenues from the Consolidated Fund of India under Article 275.
• It recommends measures needed to augment a State's Consolidated Fund to supplement the resources of Panchayats, based on the recommendations of the State Finance Commission.
• It similarly recommends measures to supplement the resources of Municipalities, based on the recommendations of the State Finance Commission.
• It considers any other matter referred to it by the President in the interests of sound finance.

Status and accountability

The Commission's recommendations are advisory, although they carry significant institutional weight in India's fiscal federalism. Under Article 281, the President must lay its recommendations before each House of Parliament, along with an explanatory memorandum on the action taken.