Role of Finance Commission in Centre- State financial relations

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Under the Constitution the financial Resources of the State are very limited though they have to do many works of social uplift under directive principles. In order to cope with their ever-expanding needs, the Central Government makes grants-in-aid to the States. Grant- in-aid to States , through it Central Government exercises a strict control over the States because grants are granted subject to certain conditions.

The Indian constitution provides for a federal framework with powers divided between the Centre and the states. The Financial powers entrusted by the Constitution reflect a clear asymmetry between the Taxation powers and the functional responsibili-ties, with the Centre being assigned taxes with higher revenue potential and States being entrusted with more functional responsibilities. The Constitution provides, under ARTICLE 280, the institutional mechanism of Finance Commission and other enabling provisions for the transfer of resources from the Centre.

The Role of the Finance Commission under Indian Constitution are to make recommendation to the President with regard to following matters:
a) To determine the scheme that governs the matters relating to the distribution of net proceeds of taxes which are in the divisible pool, between the Centre and States.
b) To make recommendations, to determine the principle that would regulate or govern the revenues to the States from the Central Revenue in the form of Grant in Aid to the needy States
c) This function of the Commission is included by the way of 73rd and 74 Constitutional Amendment to strengthen the financial Status of the local bodies by providing the supplement to the resources of the Panchayats And Municipalities in the States on the basis of the recommendation of State Finance Commission from the Consolidated fund of the State.
d) The last function of the Commission as provided by the Constitution under Article 280 3(d) is very vast any matter relating to the Fiscal interest between the intergovernmental bodies can be referred to the Commission by the President, These function or Terms of Reference, which broadly fixed by the Constitution itself; while at the same time an element of flexibility is built into these terms of reference under sub clause (d) of Article 280(3). Under this Clause the President has a power to refer any matter to the Commission ‘in the interests of Sound finance.

The 73rd and 74th Constitutional Amendment Acts, 1992, which gave Constitutional status to Panchayati Raj institutions (PRIs) and Urban Local Bodies (ULBs) respectively, in both letter and spirit in order to bring about greater decentralisation and increase the involvement of the community in planning and implementing schemes and, thus, increase accountability.

The Amendments left important matters such as implementation, service delivery (including local capacity building) and transfer of responsibilities and powers to rural local bodies at the discretion of the state legislatures. Consequently, while expenditure responsibilities of local bodies are extensively enhanced, there is no law to ensure a corresponding assignment of funds to match the additional responsibilities.

The State Finance Commissions are required to recommend financial support from the state and principles for determination of taxes, tolls and fees that could be assigned to or appropriated by the local bodies

Article 243I of the Indian Constitution prescribes that the Governor of a State shall, as soon as may be within one year from the commencement of the Constitution (Seventy-third Amendment) Act, 1992, and thereafter at the expiration of every fifth year, constitute a Finance Commission to review the financial position of the Panchayats and to make recommendations to the Governor as to

The principles which should govern

The distribution between the State and the Panchayats of the net proceeds of the taxes, duties, tolls and fees leviable by the State, which may be divided between them under this Part and the allocation between the Panchayats at all levels of their respective Shares of such proceeds;
The determination of the taxes, duties, tolls and fees which may be assigned as, or appropriated by, the Panchayats;
The grants-in-aid to the Panchayats from the Consolidated Fund of the State;

State finances

The constitution (73rd and 74th) Amendment Acts, 1992 and Article 280 (3) (c) have altered the erstwhile fiscal devolution system and framework between the states and local governments. Under the new fiscal devolution system every State Government is required to constitute, once in five years, a Finance Commission under articles 243 (I) and entrust it with the task of reviewing the financial position of Local Government and making recommendations as to the principles that should govern.

The distribution between the state and the local governments of the net proceeds of the taxes, duties, tolls and fees leviable by the state.
The determination of the taxes, duties, tolls and fees that may be assigned to or appropriated by the local government.
The grant-in-aid to local government from the consolidate fund of the state.

A State Legislature has a provide by law, for the composition of the SFC, the qualification which shall be requisite for appointment as members thereof, and the manners in which they shall be selected. The existing constitutional provisions also provide that the Commission shall determine their procedure and shall have such powers in the performance of their functions as the legislature of the state. The Governor shall cause every recommendation made by the commission with the explanatory memorandum as to the action taken to be laid before the legislature of the state. In regard to the maintenance of the accounts by the panchayats and their Auditing, Article 243-J provides that “the legislature of a state may, be law, make provisions with respect to the maintenance of accounts by Panchyats and the auditing of such account.”

The 74th amendment of the constitution which is addressed to the municipal institutions had added one more mandatory provision. In the form of district planning committees to the domain of Pachayats. However, the crucial is a devolution of functional responsibilities, authority, power and financial resources on the panchayats which have been made discretionary for the state. Therefore, each state usually practice its own scheme of devolution, and in the process, the pattern and degree of devolution on panchayats significantly vary across the states, depending upon the functional canvas of the panchayats. Central Finance Commissions and State Finance Commission in context of local finance issues. Under Article, 280 of the Constitution, Central Finance Commission is constituted to make recommendations on sharing of union tax revenues, Revenue Deficit grant, grant-in-aid to local bodies, calamity relief and for up-gradation of standards of administration and special problems. Whereas the State Fiancé Commission is to mediate between the state and the local governments under Article 243 1 and 243 Y.

Local finances

Revenues and Taxation

The dissimilar nature of rural and urban governments is apparent from their differing revenue structures: in the former about 89 per cent of revenues are derived from the states, while in the latter about 81 per cent of revenues are internally generated, with local taxation claiming about 55 per cent and nontax revenues about 27 per cent in 1976-77. By 1986-87 the dependence of urban local govern ments on external assistance had increased from 19 per cent to 23 per cent. This was related to the declining share of nontax revenues trend which is likely to continue. On the other hand, substantial reduction of external dependence in the revenue structure of rural governments must await radical restructuring of their tax compe tence, mainly through the assignment of land revenues. Until this happens, rural local government will not develop its own Personality, while urban local governments will continue to be marginalised in generally unified Soviet-type fiscal arrangement.

state-wise breakdown of local government revenues indicates that three states (Maharashtra, Gujarat, and West Bengal) account for about two-thirds of rural government revenue, while among urban authorities the situation is more variegated, with only one state (Maharashtra) claiming disproportionate share of 39 per cent . This is mainly due to the importance of octroi in internal revenue (Maharashtra and Uttar Pradesh) and larger external assistance (Maharashtra, Madhya Pradesh, and West Bengal). In Madhya Pradesh the urban authorities claim more external assistance (43 percent) due to their share of compensation for the state entry tax. Maharashtra’s dominant reliance on internal revenue for both tax and nontax sources (86 per cent both rural and urban) also is striking. The internal revenue mobilization picture of local authorities is diverse: among rural governments the best performers are Kerala and Uttar Pradesh (61 percent each), followed by Himachal Pradesh (53 percent), while among urban governments the highest ratings belong to Haiyana (99 per cent), Karnataka (95 percent), and Punjab (92 %) The worst states in terms of rural government revenue mobilization are West Bengal and Orissa (3 per cent each), followed by Bihar (8 percent); in urban government the worst state is again Bihar (less than 40 per cent), while others are way above.

Per-capita revenues of the various tiers of rural government and types of urban government show their relative fiscal resilience: the village and area authorities are more effective in rural government, while the municipal corporations and councils are effective in urban government. The town and notified authorities are shade better than the village councils in terms of revenue performance. On an overall basis, there seems to be need to enhance minimum revenues of rural authorities substantially (at least five-fold), while the urban authorities need minimum of half of this level of reve nues. This would imply increased tax devolution to the rural authori ties and increased assistance for the urban authorities. detailed look at the revenue competence of rural authorities shows the need for strengthening their compulsory taxation capabilities through assignment of land revenue and devolution of land cess.

Expenditures

Local functions are usually divided into obligatory and discretionaiy categories, but such distinction is only notional in the absence of any quantitative specifications. Urban authorities are reported to be equally dividing their expenditures on these two categories. Available data on local government expenditures show similar functional coverage by urban and rural authorities, despite their differences in functional competence. Such similarities also appear in expenditures on civic and social Services, although their relative importance varies. Rural authorities spend relatively more on social services due to the greater availability of function-specific grants for Education, Health, and welfare. Urban authorities, being finan cially self-reliant, spend more on community semces like public health and sanitation. With increased financial strain resulting from rising staff salaries, urban authorities are cutting down their expendi ture on social services and concentrating more on community services and on their core or obligatory services to cope with financial strain. Among rural authorities, the village and area-level authorities are more effective in providing local services than those at the district level.

The search for economy and effectiveness in local government expenditures seems to lie in the direction of obtaining “value for Money” through (1) cheaper technology, (2) greater productivity, (3) increased competition, and (4) promotion of joint services. In such effoits, local government manpower issues have critical significance which sometimes takes on political overtones. Yet there are isolated success stories from various local e.-.J.horities in this regard, which need to be collected and widely disseminated for replication elsewhere.

The Finance Commission is a statutory body constituted by the Government of India to review the financial relations between the Union and the States. It is also entrusted with the task of making recommendations on the distribution of net proceeds of taxes between the Union and the States, the principles governing grants-in-aid to the States, and the measures needed to augment the Consolidated Fund of a State.

The Finance Commission has played a significant role in the development of Centre-State financial relations. Its recommendations have helped to improve the fiscal position of the States and have also contributed to the Growth of the economy.

The Composition of the Finance Commission

The Finance Commission is a body of seven members, including a Chairman who is a retired judge of The Supreme Court or the Chief Justice of a High Court. The other members are nominated by the President of India on the recommendation of the Prime Minister. The Finance Commission is assisted by a Secretariat headed by a Secretary who is a senior Indian Administrative Service officer.

The Terms of Reference of the Finance Commission

The terms of reference of the Finance Commission are laid down in the Constitution of India. The Finance Commission is required to review the financial relations between the Union and the States and to make recommendations on the following matters:

The distribution of net proceeds of taxes between the Union and the States;
The principles governing grants-in-aid to the States;
The measures needed to augment the Consolidated Fund of a State;
Any other matter referred to it by the President.

The Functions of the Finance Commission

The main functions of the Finance Commission are to:

Review the financial relations between the Union and the States;
Make recommendations on the distribution of net proceeds of taxes between the Union and the States;
Make recommendations on the principles governing grants-in-aid to the States;
Make recommendations on the measures needed to augment the Consolidated Fund of a State;
Make any other recommendations that it may deem necessary.

The Recommendations of the Finance Commission

The Finance Commission has made a number of recommendations on the distribution of net proceeds of taxes between the Union and the States, the principles governing grants-in-aid to the States, and the measures needed to augment the Consolidated Fund of a State. Some of the important recommendations of the Finance Commission are as follows:

The Finance Commission has recommended that the net proceeds of taxes should be shared between the Union and the States in the ratio of 50:50.
The Finance Commission has recommended that the principles governing grants-in-aid to the States should be need, efficiency, and resource-generation capacity.
The Finance Commission has recommended that the measures needed to augment the Consolidated Fund of a State should include measures to improve tax collection, reduce expenditure, and mobilize resources.

The Impact of the Finance Commission’s Recommendations

The recommendations of the Finance Commission have had a significant impact on the financial relations between the Union and the States. The recommendations have helped to improve the fiscal position of the States and have also contributed to the growth of the economy.

Criticism of the Finance Commission

The Finance Commission has been criticized for a number of reasons. Some of the criticisms of the Finance Commission are as follows:

The Finance Commission has been criticized for being biased in favor of the States.
The Finance Commission has been criticized for being too bureaucratic and for not being responsive to the needs of the States.
The Finance Commission has been criticized for not being transparent in its decision-making process.

Reform of the Finance Commission

The Finance Commission has been reformed a number of times since its inception. Some of the reforms that have been made to the Finance Commission are as follows:

The size of the Finance Commission has been increased from five members to seven members.
The terms of reference of the Finance Commission have been expanded.
The Finance Commission has been given more powers to collect data and information.
The Finance Commission has been made more transparent in its decision-making process.

The Finance Commission is an important institution in the Indian federal system. It has played a significant role in the development of Centre-State financial relations. The recommendations of the Finance Commission have helped to improve the fiscal position of the States and have also contributed to the growth of the economy. However, the Finance Commission has also been criticized for a number of reasons. The Finance Commission has been reformed a number of times since its inception. The reforms that have been made to the Finance Commission have helped to improve its functioning.

The Finance Commission is a constitutional body that is appointed every five years to review the financial relations between the central government and the state governments. The Commission makes recommendations on the distribution of central taxes, grants-in-aid to the states, and other matters related to financial relations between the centre and the states.

The Finance Commission is appointed by the President of India on the recommendation of the Prime Minister. The Commission consists of a chairman and four members, who are appointed from among persons who are qualified to be appointed as judges of the Supreme Court.

The Finance Commission has the following functions:

To review the financial position of the union and the states;
To make recommendations on the distribution of central taxes between the union and the states;
To make recommendations on the grants-in-aid to be given by the union to the states;
To make recommendations on the principles that should govern the grants-in-aid to be given by the union to the states;
To make recommendations on any other matter referred to it by the President in the interests of sound finance.

The Finance Commission submits its report to the President, who places it before both Houses of Parliament. The recommendations of the Finance Commission are not binding on the government, but they are usually accepted by the government.

The Finance Commission has played a significant role in the development of the Indian economy. Its recommendations have helped to improve the financial position of the states and to promote balanced regional development.

Here are some frequently asked questions about the Finance Commission:

What is the role of the Finance Commission?
The Finance Commission is a constitutional body that is appointed every five years to review the financial relations between the central government and the state governments. The Commission makes recommendations on the distribution of central taxes, grants-in-aid to the states, and other matters related to financial relations between the centre and the states.
Who appoints the Finance Commission?
The Finance Commission is appointed by the President of India on the recommendation of the Prime Minister.
Who are the members of the Finance Commission?
The Finance Commission consists of a chairman and four members, who are appointed from among persons who are qualified to be appointed as judges of the Supreme Court.
What are the functions of the Finance Commission?
The Finance Commission has the following functions:
To review the financial position of the union and the states;
To make recommendations on the distribution of central taxes between the union and the states;
To make recommendations on the grants-in-aid to be given by the union to the states;
To make recommendations on the principles that should govern the grants-in-aid to be given by the union to the states;
To make recommendations on any other matter referred to it by the President in the interests of sound finance.
What is the significance of the Finance Commission?
The Finance Commission has played a significant role in the development of the Indian economy. Its recommendations have helped to improve the financial position of the states and to promote balanced regional development.
What are some of the key recommendations of the Finance Commission?
Some of the key recommendations of the Finance Commission include:
The devolution of central taxes to the states;
The provision of grants-in-aid to the states;
The principles that should govern the grants-in-aid to be given by the union to the states;
The appointment of a Finance Commission every five years.
What are some of the challenges faced by the Finance Commission?
Some of the challenges faced by the Finance Commission include:
The increasing demand for resources from the states;
The need to ensure balanced regional development;
The need to maintain fiscal discipline.
What is the future of the Finance Commission?
The Finance Commission is likely to continue to play a significant role in the Indian economy. Its recommendations will continue to be important for the development of the states and for the promotion of balanced regional development.

The Finance Commission is a statutory body constituted by the President of India every five years to review the financial relations between the Union and the States and to make recommendations to the President on the following matters:

The distribution of the net proceeds of taxes between the Union and the States.
The principles which should govern the grants-in-aid of the revenues of the States out of the Consolidated Fund of India.
The measures needed to augment the Consolidated Fund of a State to enable it to meet the expenditure on schemes of development.
The determination of the principles on which grants-in-aid should be given to the States for purposes other than those specified in (2) above.
The allocation of the proceeds of certain taxes between the Union and the States.

The Finance Commission is a powerful body and its recommendations are binding on the Union and the States. The Commission has played a significant role in shaping the financial relations between the Union and the States. Its recommendations have helped to improve the fiscal position of the States and have also contributed to the development of the country.

Here are some MCQs on the topic of the Finance Commission:

The Finance Commission is a statutory body constituted by the President of India every:
(a) 2 years
(b) 3 years
(c) 4 years
(d) 5 years
The Finance Commission makes recommendations to the President on the following matters:
(a) The distribution of the net proceeds of taxes between the Union and the States.
(b) The principles which should govern the grants-in-aid of the revenues of the States out of the Consolidated Fund of India.
(c) The measures needed to augment the Consolidated Fund of a State to enable it to meet the expenditure on schemes of development.
(d) All of the above.
The Finance Commission is a powerful body and its recommendations are:
(a) Not binding on the Union and the States.
(b) Binding on the Union but not on the States.
(c) Binding on the States but not on the Union.
(d) Binding on the Union and the States.
The Finance Commission has played a significant role in shaping the financial relations between the Union and the States. Its recommendations have helped to:
(a) Improve the fiscal position of the States.
(b) Contribute to the development of the country.
(c) Both (a) and (b).
(d) None of the above.
The Finance Commission has been constituted 15 times since its inception in 1951. The current Finance Commission is the 15th Finance Commission.

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