State Finance Commissions

A State Finance Commission is a constitutional body constituted by the Governor to review the financial position of rural and urban local governments. Articles 243-I and 243-Y require it to recommend principles for sharing state revenues, assigning local revenues, providing grants and strengthening local finances.

Constitution and composition

Under Article 243-I, the Governor constitutes an SFC at the expiration of every fifth year to review Panchayat finances. The state legislature may prescribe by law its composition, member qualifications and selection procedure.

• Article 243-Y extends the SFC's review and recommendations to Municipalities.

Core financial mandate

For both Panchayats and Municipalities, the SFC recommends a framework for fiscal transfers and local revenue powers.

• It recommends principles governing the distribution of the net proceeds of state-leviable taxes, duties, tolls and fees between the state and local bodies, including allocation among different levels of local bodies.
• It identifies taxes, duties, tolls and fees that may be assigned to or appropriated by local bodies.
• It recommends principles governing grants-in-aid from the Consolidated Fund of the State.
• It suggests measures needed to improve the financial position of local bodies and considers other matters referred by the Governor in the interest of sound local finance.

Legislative accountability and wider role

The Governor must place the Commission's recommendations before the state legislature, together with an explanatory memorandum on the action taken. The recommendations are advisory, but this reporting requirement promotes transparency and legislative scrutiny.

• Under Article 280, the Union Finance Commission recommends measures to augment State Consolidated Funds for Panchayats and Municipalities on the basis of SFC recommendations.