Importance and role of Finance Commission In India

India to be a “Union of States”.  In effect, India is a federation consisting of one National or Union Government and a number of Governments of the federating units such as the states and the Union Territories.

In such a composite polity, it is essential that the financial resources should be divided between the Union Government and the government of the federating units.

The Finance Commission of India was formed on 22nd November, 1951. The Finance Commission has been provided for by the Indian constitution as part of the scheme of division of financial resources between the two different sets of governments.

  • The role Finance Commission in India is to act as an instrument to divide proceeds of divisible taxes between the states and the Union government or in cases of taxes that are collected by the centre but the proceeds of which are allocated between the states, to determine the principles of such allocation.
  •  The Finance commission of India also determines the principles of governing the grants-­in-aids of the revenues of states out of the consolidated fund of India. It is an important function of the Indian Finance Commission.
  • Thirdly the commission has the duty of considering any matter referred to the commission by the President in the interest of sound finance.

The President under Article 280 lays the recommendations of the finance commission before each House of the Parliament with an explanatory note as to the action to be taken on the recommendations.

It should be noted that chapter XII, Article 280 of the Indian constitution do not exhaust the entire gamut of financial relations between the Union and the States. The Finance Commission distributes of proceeds of Income tax between the union and the states. But, taxes on the emoluments of the central government are attributable only to the union territories.

Under Article 280 (C), the President may refer any matter to the Finance commission in the interest of “sound finance.”  Till now the President of India has asked the commission to make recommendations on the principles governing distribution of the net proceeds of estate duty in respect of property Tax on Railway fare and excise duties on sugar and tobacco etc. The President also sought recommendations on the rates of interest, and terms of repayment of loans to the various states by the government of India.

Till now, fourteen Finance Commissions have made their recommendations. They focus on the financial relations between the State government and the Central government. These recommendations steadily increase share of the state governments in the proceeds of the income tax. They also increased gradually the amount of grants-in-aids to be given to the states. As a result the states now enjoy considerable degree of financial autonomy so necessary for the proper functioning of the federation.

The Chairman of the Fourteenth Finance Commission is Dr. Y.V. Reddy. He previously held the prestigious position of the Governor of Reserve Bank of India (RBI). The Fourteenth Commission has given more importance on demographic transition. It has also recommended that the government of coastal states should get appropriate share of taxes collected from the production of minerals of territorial waters.

The Finance Commission as an autonomous body has served a splendid purpose. In as complex a polity as India is, it acted as an agency to bring about co-ordination and co-operation that is so important in the working of a federal system.

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