Law and You > Constitutional Law > Finance Commission of India (Article 280)
The Finance Commission of India is a constitutional body that is established under Article 280 of the Constitution of India for the purpose of allocating and distributing the tax revenues among the centre and state governments in accordance with contemporary requirements. Article 280 requires that the President of India should appoint a Finance Commission within two years from the commencement of the Constitution and thereafter once in every five years or even earlier, if necessary. The Sixteenth Finance Commission was constituted on 31.12.2023 with Shri Arvind Panagariya, former Vice-Chairman, NITI Aayog as its Chairman.
Objectives of the Finance Commission:
The major causes behind the formation of Finance Commission was the allocation of financial resources among various states and the other objectives discussed below.
- The finance commission does its research on the needs of all the states individually and the amount which they will need for the growth and development in the location.
- Various taxes are shared between the centre and state, and the finance commission finalises the essential criteria for the division of taxes.
- The finance commission is a monetary link between the central government and all the state governments and it maintains the Chinese communications regarding the same
- If there is any kind of financial upgradation required for the country’s overall development, then the finance commission advises the government about the same.
Composition of Finance Commission:
Article 280 has fixed the total strength of Finance Commission by specifying that it should consist of a Chairperson and four other members. The Finance Act 1951, Section (3) specifies the qualifications for the Chairperson and members. According to the Act, ‘the Chairperson of the Commission shall be selected from among persons, who have or had experience in public affairs. The other members shall be selected from among persons who is:
- A judge of the high court or qualified enough in the field of finance or experience in financial matters is eligible to be appointed.
- A member is eligible to be part of the finance committee if he has specialized knowledge of finances and handling accounts for the government.
- A person having broad knowledge and experience of financial and economic matters along with the administration.
Disqualification of Members from Finance Commission:
The membership of a member can be disqualified from the finance committee if he or she is found mentally unfit or involved in any kind of ethical activity.
Tenure of Members of the Finance Commission:
The tenure of the members of the Finance Commission is specified by the President of India. Generally, the members are appointed for a duration of 5 years but under certain specific conditions, the members can be reappointed. As all of the members are appointed by the President of India, hence he can disqualify the candidates or reappoint the members.
Functions of Finance Commission:
It shall be the duty of the Finance Commission to make recommendations to the President pertaining to the following matters:
- The distribution between the Union and the States of the net proceeds of taxes revenues and the allocation between the States of the respective shares of such proceeds. By doing so it redresses the vertical imbalances between the taxation powers and expenditure responsibilities of the centre and states respectively and equalization of all public servies across the states.
- The principles that 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 by way of grants-in-aid of their revenues.
- The measures needed to augment the Consolidated Fund of a State to supplement the resources of the Panchayats and Municipalities in the State on the basis of the recommendations made by the Finance Commission of the State.
- The continuance or modification of the terms of any agreement entered into by the Government of India with the Government of any State specified in Part ‘B’ of the First Schedule under clause (i) of Article 278 or under Article 306.
- The Commission shall use the latest Census for drawing the population data while making its recommendations.
- Any other matter referred to it by the President.
Procedure of Working of Finance Commission:
- The work of the Finance Commission starts soon after the Government announces its composition and terms of reference.
- In the first phase the Commission addresses letters to the State Governments, asking them to submit estimates of their expenditure and revenue for over the next five years.
- Once the estimates are received, the Commission scrutinizes these estimates and calls for the concerned officers from the States to its Headquarters in Delhi for clarifications.
- The estimates of different States are then revised accordingly.
- The Commission then undertakes tour in all States in the subsequent phase. Normally, the Commission hears the Chief Minister and the Finance Minister of each State vis-à-vis the financial estimates delved upon. Here, the State can submit a memorandum outlining their needs and demands. The Commission also hears and receives memoranda pertaining to finances from industry and bankers.
- This then is followed by the final phase, wherein, the Commission meets in Delhi to finalize the report of each and every State. It submits its report to the President of India a few months before the annual budget presentation.
- The President then recommends the same for consideration and implementation by the Union Cabinet.
Finance Commission Report:
- The report prepared by the Finance Commission is submitted to the President of India.
- Each house of the Parliament considered the Finance Commission’s report under the president’s guidance and leadership.
- As a result of the recommendations provided by the Finance Commission of India, the following steps are taken
- It includes the recommendations regarding the distribution of taxes and duties that must be put into effect by the president’s order.
- The executive orders to be implemented share the profit of petroleum mode of central assistance and debt relief.
- The government Agencies are not bound by the recommendations given by the Finance Commission, and they are purely advisory. It is totally up to the government as the money will be granted to the states based on the recommendations made by the government of India.
Sixteenth Finance Commission of India:
The Government of India, with the approval of the President of India, has constituted the Sixteenth Finance Commission, in pursuance to Article 280(1) of the Constitution. Dr Arvind Panagariya, former Vice-Chairman, NITI Aayog, and Professor, Columbia University is the Chairman. Shri Ritvik Ranjanam Pandey has been appointed as Secretary to the Commission. Detailed terms of reference for Sixteenth Finance Commission have also been spelt out in the notification.
The Sixteenth Finance Commission is supposed to make recommendations as to the following matters, namely: —
- The distribution between the Union and the States of the net proceeds of taxes which are to be, or may be, divided between them under Chapter I, Part XII of the Constitution and the allocation between the States of the respective shares of such proceeds;
- 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 by way of grants-in-aid of their revenues under article 275 of the Constitution for the purposes other than those specified in the provisos to clause (1) of that article; and
- The measures needed to augment the Consolidated Fund of a State to supplement the resources of the Panchayats and Municipalities in the State on the basis of the recommendations made by the Finance Commission of the State.
The Sixteenth Finance Commission may review the present arrangements on financing Disaster Management initiatives, with reference to the funds constituted under the Disaster Management Act, 2005 (53 of 2005), and make appropriate recommendations thereon.
The Sixteenth Finance Commission has been requested to make its report available by 31st day of October, 2025 covering a period of five years commencing on the 1st day of April, 2026.
Conclusion:
The Finance Commission of India is a constitutional body established under Article 280 of the Indian Constitution. It plays a crucial role in the fiscal federalism of India by recommending the distribution of financial resources between the central government and the state governments. The Finance Commission is constituted every five years by the President of India to make recommendations on the distribution of net proceeds of taxes between the Union (central government) and the states, the principles governing grants-in-aid to states, and any other matter referred to it by the President in the interest of sound finance. The Finance Commission plays a crucial role in promoting fiscal equity, balance, and stability between the central government and the states. Its recommendations help in addressing fiscal disparities, promoting cooperative federalism, and ensuring the efficient use of financial resources for the socio-economic development of the country. Thus, the Finance Commission of India serves as an important constitutional mechanism for addressing fiscal imbalances, promoting cooperative federalism, and ensuring the equitable distribution of financial resources among the central government and the state governments.