Finance Commission of India is established by President of India as per Article 280 of the constitution. The first finance commission was established in 1951. The Constitutional requirement for setting up a Finance Commission in India was an original idea, not borrowed from anywhere. That is why it is called the original contribution.
Article 280 reads: President should, within two years of commencement of the Constitution and thereafter on expiry of every 5th year, or at such intervals as he/ she thinks necessary, would constitute a Finance Commission.
A Finance Commission would consist of a Chairman and 4 other members who are all will be appointed by the President.
Since the commission has to be constituted at regular intervals, a certain measure of continuity in the work of these commissions is ensured. Each commission benefits by the work of previous commission.
Finance commission has to make recommendations to the President on two specific matters and on any other mater referred to the commission by the president in the interest of Sound Finance. The two specific matters are as follows:
- How the net proceeds of taxes should be distributed between the Union and States?
- On what principles, the grants-in-aid of the revenues of the State out of the Consolidated Fund of India should be give to needy states?
The President, after considering the recommendations of the Finance Commission with regard to income tax, prescribes by order the percentages and the manner of distribution. So, parliament is not directly concerned with the assignment and distribution of the income tax.
Relevance of Finance Commission
The importance of the Finance Commission as a Constitutional instrument is capable of settling many complicated financial problems that affect the relations of the Union and States. This is evident from the recommendations of the last 14 finance Commissions appointed so far.
Report of Finance Commission in Parliament
Article 281 says that President shall cause every recommendation made by the Finance Commission under the provisions of this Constitution together with an explanatory memorandum as to the action taken thereon to be laid before each House of Parliament.
Finance Commission does not tell the Union Government on how to increase its funds. Its work is to make recommendations on distribution between the Union and the States of the net proceeds of taxes and the principles which should govern the grants-in-aid of the revenues of the States out of the Consolidated Fund of India and the sums to be paid to the States which are in need of assistance by way of grants-in-aid of their revenues.
Finance Commission suggests the measures needed to augment the Consolidated Fund of a State to supplement the resources of the Panchayat and Municipalities in the State on the basis of the recommendations made by the Finance Commission of the State.
On Panchayat and Municipalities
The role of the Finance Commission has widened after the 73rd and 74th Constitutional amendments to recognise the rural and urban local bodies as the third tier of government. Article 280 (3) (bb) and Article 280 (3) (c) of the Constitution mandate the Commission to recommend measures to augment the Consolidated Fund of a State to supplement the resources of Panchayats and Municipalities based on the recommendations of the respective State Finance Commissions (SFCs). This also includes augmenting the resources of Panchayat and municipalities.