Finance Commission

Context: The government will soon kick off the process to set up the Sixteenth Finance Commission, with the Finance Ministry likely to notify the terms of references for the constitutional body, tasked with recommending the revenue sharing formula between the Centre and States and their distribution among States, towards the latter half of this year.    

What is Finance commission?

  • The finance commission is a quasi-judicial body constituted by the president of India under Article 280 of the Indian Constitution. It was established in the year 1951, to define the fiscal relationship framework between the Centre and the state.
  • Finance Commission aims to reduce the fiscal imbalances between the centre and the states (Vertical imbalance) and also between the states (horizontal imbalance). It promotes inclusiveness.
  • Its working is characterised by extensive and intensive consultations with all levels of governments, thus strengthening the principle of cooperative federalism.
  •  Its recommendations are also geared towards improving the quality of public spending and promoting fiscal stability.
  • The first Finance Commission was set up in 1951 and there have been fifteen so far.
  • A Finance Commission is set up once in every 5 years. It is normally constituted two years before the period. It is a temporary Body.


  • The Finance Commission consists of a chairman and four other members to be appointed by the president.
  • They hold office for such period as specified by the president in his order. They are eligible for reappointment
  • The constitution authorises the parliament to determine the qualification of members of the commission and the manner in which they should be selected.
  • Accordingly, the Parliament of India enacted the Finance Commission [Miscellaneous Provisions] Act, 1951 and The Finance Commission (Salaries & Allowances) Rules, 1951 to specify the qualification of the chairman and members of the commission
  • 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 selected from among persons who have had experience in public affairs, and the four other members are selected from among persons who–
    • (a) are, or have been, or are qualified to be appointed as Judges of a High Court; or
    • (b) have special knowledge of the finances and accounts of Government; or
    • (c) have had wide experience in financial matters and in administration; or
    • (d) have special knowledge of economics

  Functions of Finance Commission of India

Article 280 (3) speaks about the functions of the Finance Commission. The Article states that it shall be the duty of the Commission to make the recommendations to the President as to:

  • 1.  The distribution between the Union and the States of the net proceeds of taxes, which may be divided between them and the allocation among the states of the respective shares of such proceeds;
  •  2.  To determine the quantum of grants in-aid to be given by the Centre to states [Article 275 (1)] and to evolve the principles governing the eligibility of the state for such grant-in-aid;
  • 3.  Any other matter referred to the Commission by the President of India in the interest of sound finance. Several issues like debt relief, financing of calamity relief of states, additional excise duties, etc. have been referred to the Commission invoking this clause

About Fifteenth Finance Commission

  • The Fifteenth Finance Commission was constituted on 27 November 2017 against the backdrop of the abolition of Planning Commission (as also of the distinction between Plan and non-Plan expenditure) and the introduction of the goods and services tax (GST), which has fundamentally redefined federal fiscal relations.
  • It was chaired by N.K Singh
  • Its recommendations will be implemented starting 1 April 2020.

Leave a comment

error: Content is protected !! Copying and sharing on Social media / websites will invite legal action