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. Under Article 280, it is constituted periodically by the President to promote an orderly and equitable system of fiscal transfers.

Constitution and composition

The President of India must constitute a Finance Commission every fifth year, or earlier if considered necessary. It consists of a Chairman and four other members; Parliament may prescribe their qualifications and method of selection.

Matters on which it recommends

The Commission must recommend to the President the following aspects of fiscal distribution:

• The distribution between the Union and the States of the net proceeds of shareable taxes, called vertical devolution, and the allocation of the States' share among them, called horizontal devolution.
• The principles governing grants-in-aid to State revenues from the Consolidated Fund of India under Article 275.
• Measures needed to augment a State's Consolidated Fund to supplement the resources of Panchayats, based on the recommendations of the State Finance Commission.
• Measures needed to augment a State's Consolidated Fund to supplement the resources of Municipalities, based on the recommendations of the State Finance Commission.
• Any other matter referred by the President in the interests of sound finance.

Nature and legislative accountability

Its recommendations are advisory, although they carry significant institutional weight in fiscal federalism. Under Article 281, the President must lay every recommendation before each House of Parliament, together with an explanatory memorandum on the action taken.

How UPSC asks this