This article has been written by Oishika Banerji of Amity Law School, Kolkata. This article provides a detailed analysis of the Finance Commission of India.
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The Finance Commission of India is a constitutional body that has survived for over 50 years on Indian soil. Formed under Article 280 of the Indian Constitution, the Finance Commission of India functions as a quasi-judicial body. The purpose behind the formation of this Commission is to determine the methods and formulas necessary for distributing the tax proceeds between the Centre and states as well as among the states as per the arrangement provided by the Constitution of India and current requirements. Along with this, the taxes and grants that are to be provided to the local bodies in states for their functioning are also determined by the Finance Commission of India. It is to be noted that Article 281 of the Constitution provides that it is the President of India who is required to lay the Finance Commission report before each House of Parliament along with a note that explains the actions taken by the government on the basis of the recommendations given by the Commission. It was the 73rd Constitutional Amendment Act, 1992 that facilitated the constitution of a Finance Commission at a 5 years interval by the state governments in order to decide the division of resources between the state government, and the Panchayat institutions at all levels. From 2000 onwards, there have been five Finance Commission that has been constituted from time to time, namely;
- The 12th Finance Commission was constituted in November 2002 under the chairmanship of former RBI governor and noted economist Dr. C Rangarajan.
- The 13th Finance Commission was constituted on November 13, 2007, under the chairmanship of Dr. Vijay Kelkar.
- The 14th Finance Commission was constituted on January 02, 2013, under the chairmanship of former RBI governor Dr. YV Reddy.
- The 15th Finance Commission was constituted in November 2017, under the chairmanship of NK Singh who has been a former member of the Planning Commission.
In this article, the Finance Commission of India has been explained with a detailed analysis of its composition, functions, and roles.
Composition of the Finance Commission
The Finance Commission of India is composed of five members which include one Chairman, and four other members of the Commission. All of these members are appointed by the President of India who also determines the term of their office. These members are anyway subjected to reappointment as per requirement. The responsibility of determining the qualification, and the manner of appointment for the Finance Commission’s members rest on the Parliament’s shoulder, as have been provided by the Indian Constitution. The qualification that has been determined by the Parliament for the Chairman and the members of the Commission have been presented hereunder;
- The Chairman of the Commission must be an individual with expertise in public affairs. The current Chairman of the Commission is Mr. N.K. Singh, who has been a member of the Planning Commission alongside being an IAS officer.
- The four members of the Commission are selected from the following list;
- A high court judge, or an individual who has been qualified to hold such a position.
- A person who has his or her expertise in finance and accounts of the government.
- Any person having divergent experience in financial matters and in administrative matters.
- Any person possessing special knowledge of economics, and related studies.
The 15th Finance Commission has been formed with Mr. N. K. Singh as its Chairman followed by Mr. Ajay Narayan Jha, Prof. Anoop Singh, Mr. Ashok Lahiri, Prof. Ramesh Chand as the members of the Commission, and Mr. Arvind Mehta as the Secretary.
Functions of the Finance Commission
The Finance Commission of India has been vested with certain functions that are determined by the President of India. The majority of these functions surround the recommendations that are supposed to be delivered by the Commission to the President of the nation. The functions of the Finance Commission have been listed hereunder;
- It is the responsibility of the Finance Commission to recommend the distribution of the net proceeds of taxes that are supposed to be shared between the Union, and the states, along with the inter-state distribution.
- The Finance Commission recommends the principles that are applied to govern the grants-in-aid to the states and the Union Territories by the Union from the Consolidated Fund of India.
- The Commission recommends the measures that need to be adopted to augment the consolidated fund of a state in order to facilitate supplying of the required resources to the panchayats and the local bodies of the state so as to avoid hindrance in their functioning. The Commission has to carry out this function on the basis of the recommendations made by the state finance commissions as per their requirement.
- As it is the President of India who carries out all the necessary formalities in relation to the Finance Commission of India, any matter which the President feels needs to be considered by the Finance Commission from time to time, will be taken up by the Commission as a function only. A report is submitted by the Commission to the President after delivering the necessary functions allotted to it. This report is further presented before the Houses of the Parliament by the President which accompanies a memorandum that explains the necessary actions taken by the Commission to fulfill its functions.
It is interesting to note that till 1960, the Finance Commission used to provide suggestions to the states of Assam, Bihar, Odisha, and West Bengal in relation to the assignment of share of the net proceeds to the export duty on jute products. Such grants were provided for a temporary period extending up to 10 years from the commencement of the Indian Constitution.
The advisory role played by the Finance Commission
The term ‘advisory’ symbolizes recommendations. Therefore, the Finance Commission of India can be said to be a recommendatory body that gives advice to the President of the nation, who after going through the same, applies it to make decisions on financial matters. This advisory role of the Finance Commission is in a way binding on the President of India. The President can either accept the recommendations made or reject them. Further, whether to implement the recommendations issued by the Commission or not in matters of granting money to the states, rests on the Union Government. The advisory role is neither of a binding nature nor can give rise to a legal beneficiary in the state’s favor to receive money from the Union on the basis of the recommendations made by the Commission. This has been clarified by the Indian Constitution itself.
The Chairman of the Fourth Finance Commission, Dr. P.V. Rajamannar has rightly pointed out the advisory role played by the Finance Commission during his term of office. He said that “since the Finance Commission is a constitutional body expected to be quasi-judicial, its recommendations should not be turned down by the Government of India unless there are very compelling reasons”. The importance of the advisory role of the Finance Commission lies in its balancing mechanism of fiscal federalism in India. Previously, the functions of the Finance Commission used to overlap with the functions allotted to the Planning Commission. This would create confusion in both the bodies, but the same has been erased by the introduction of NITI Aayog.
The 15th Finance Commission Report : an understanding
The 15th Finance Commission Report was submitted on 9th November 2020 for the period of 2021-22 to 2025-26 to the Hon’ble President of India. The Commission prepared its report as per the terms of reference and majorly recommended the following areas:
- Apart from the vertical and horizontal tax devolution, the Commission recommended local government grants, and disaster management grants.
- The Commission was asked to examine and recommend performance incentives for States in many necessary areas like the power sector, adoption of DBT, solid waste management, etc.
- The 15th Finance Commission was also asked to examine the need for setting up a separate, and independent mechanism for funding defence and internal security of India, and determine the functioning procedure for the same.
The 15th Finance Commission Report was organized in four volumes with Volume I and II, consisting of the main report and accompanying annexes, Volume III was completely devoted to the Central Government as it addressed the challenges in the future and possible ways of handling it and Volume IV was devoted to the states where the Commission has analyzed the finances of each state and addressed the key challenges that individual states come across.
The Finance Commission is perceived to be the supreme constitutional body regulating finance in India, both between the Centre and the states, and among the states. There are several prominent factors that have contributed to the fall of this esteemed institution and the same is reflected in the 12th Finance Commission. The Central government has noticed appointments made to the Commission simply on the grounds of distribution of patronages to the individuals belonging to some of the other regional parties. As India witnesses the emergence of coalition parties, the detriment suffered by the Finance Commission cannot go unnoticed. The Commission is supposed to be technical in its approach and logical in its procedure, and recommendations provided to the President require members who are experts in the subject matters related to the Commission. Ignorance of such a necessity welcomes the decaying of this constitutional body. Actions must, therefore, be taken in order to rule out the irregularities taking place within and by the Commission.
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