Finance Commission

September 13, 2019
Economy

The Finance Commission is appointed by the President under Article 280 of the Constitution. As per the provisions contained in the Finance Commission [Miscellaneous Provisions] Act, 1951 and The Finance Commission (Salaries & Allowances) Rules, 1951, the Chairman of the Commission is elected from among persons who have had experience in public affairs, and the four other members are selected from among persons who:

  • are, or have been, or are qualified to be appointed as Judges of a High Court; or
  • have special knowledge of the finances and accounts of Government; or
  •  wide experience in financial matters and in administration; or
  • have special knowledge of economics

There are four important functions assign to the FC under the constitution of India –

  • Distribution of tax revenue between center and state.
  • Providing grants and aids to the state government under Article 275 of the Indian constitution.
  • Supplementing the state government revenue for the working of panchayats and municipalities.
  • Any other matter referred to the Commission by the President in the interests of sound finance.

The need for a Finance Commission

The Indian federal system allows for the division of power and responsibilities between the center and states. Correspondingly, the taxation powers are also broadly divided between the center and states.  State legislatures may devolve some of their taxation powers to local bodies.

15th Finance Commission

It has been constituted by President on 27 November 2017 in pursuance of clause (1) of Article 280 of Constitution of India and Finance Commission (Miscellaneous Provisions) Act, 1951. The finance commission has to submit its report on 30 October 2019. The recommendations would be applicable for the period from 2020-2025. It is constituted under the Chairmanship of N.K Singh.

Importance of 15th Finance Commission

The 15th FC has been set up in a time when huge reforms have been taken under the fiscal federalism:

  • Replacement of Planning Commission with NITI Aayog.
  • Introduction of Goods and Service Tax(GST) from July 2017.
  • Removal of distinction between Non-plan and plan expenditure.
  • Passing of full budget before the commencement of the new financial year i.e. 1st February

As per the latest reports, Union Cabinet chaired by PM Narendra Modi has approved the extension of the term of 15th FC up to 30 November 2019, because of the huge reforms in the previous 5 years period. This extension will enable FC to examine various comparable estimates for financial projections in view of reforms as well as new realities to finalize its recommendations for the period 2020-2025.