1.2 Finance Commission - Article 280
Finance Commission :-
One of the instruments which the Constitution has evolved for the purpose of distributing financial resources between Centre and States is the Finance Commission (Articles 270,273,275 and 280).
It acts as a quasi-judicial.
The Constitution of India envisages the Finance commission as the “balancing wheel of fiscal federalism in India”.
The Finance Commission, according to Article 280 of the Constitution, is constituted by the president once every five years and is a high-power body. The duty of the Commission is to make recommendations to the President as to:
the distribution between the Union and the States of the net proceeds of taxes the States themselves 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;
any other matter referred to the Commission by the President in the interests of sound finances. The Chairman of the Commission must be a person having 'experience in public affairs'; the other four members must be from among the following:
A High Court Judge or one qualified to be;
A person having special knowledge of the finances and accounts of the government;
A person having wide experience in financial matters and administration;
A person with special knowledge of economics.
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Finance Commissions
Members of 15th Finance Commission -
Chairman of 15th Finance Commission: Nand Kishore Singh
Full-time members of the 15th Finance Commission: Ashok Lahiri, Ajay Narayan Jha, and Anoop Singh.
Part-Time Member: Ramesh Chand, Shaktikanta Das served as a member of the commission from November 2017 to December 2018.
15th Finance Commission
The Finance Commission (FC) is a constitutional body that determines the method and formula for distributing the tax proceeds between the Centre and states, and among the states as per the constitutional arrangement and present requirements.
Under Article 280 of the Constitution, the President of India is required to constitute a Finance Commission at an interval of five years or earlier.
The 15th Finance Commission was constituted by the President of India in November 2017, under the chairmanship of NK Singh. Its recommendations will cover a period of five years from the year 2021-22 to 2025-26.
Some Details of Tax Distribution
Central Taxes : Taxes which are exclusively central, and the revenues from which are wholly appropriated for the use of the Central Government form one group. These include export duties, corporation tax, taxes on the capital value of the assets, exclusive of agricultural land of individuals and companies.
Income tax constitutes a separate category, in as much as while it is the Center, which levies, fixes rates and collects the tax, it has to share proceeds with the States as prescribed by the President on the basis of the recommendations made by the Finance Commission.
Union duties of excise other than duties which have been given to States, which may be shared if Parliament has so decided. The Constitution has left it to the discretion of Parliament to decide by law whether any of the union duties of exercise should be shared with the States, how these are to be shared, and how the shares are to be distributed to the States.
Taxes which are to be levied and collected by the Center, but to be distributed entirely (except for those proceeds which are attributable to the Union territories) to the States in accordance with such principles of distribution as may be laid down by Parliament by law. These taxes consist of succession and estate duties; terminal taxes on passengers and goods carried by rail, sea or air; taxes on railway fares and freights; taxes on the sale or purchase of newspapers; sale or purchase taxes on inter-state trade.
Taxes levied by the Center but collected by the States and appropriated by them for their own use. They are stamp duties and excise duties on medicinal and toilet preparations containing alcohol; in connection with these two taxes, the centre only levies the tax, and fixes the rate of duty to be paid on the alcohol contained in the medical and toilet preparations but each State collects the tax and appropriates it for its own purpose.
Grants and Loans :- Besides the devolution of revenues the Union meets the financial needs of the State in two other ways :
by making grants-in-aid of State revenues and other grants, and
by giving loans.
Members of 16th Finance Commission -
The Sixteenth Finance Commission was constituted on 31.12.2023 with Shri Arvind Panagariya, former Vice-Chairman, NITI Aayog as its Chairman.
The 16th Finance Commission (FC) has begun its work, established under Article 280 of the Indian Constitution, primarily focusing on the devolution of the consolidated fund.Since the 73rd and 74th constitutional amendments, local bodies have gained significant recognition within the federal system.
These amendments introduced sub-clauses 280(3)(bb) and (c), which mandate the FC to recommend measures to augment State consolidated funds for supporting panchayats and municipalities.
The National Commission on Urbanisation in the mid-80s described cities as “engines of growth.”
Although this view is somewhat narrow, the reality is that cities contribute around 66% of India’s GDP and about 90% of total government revenues.
Cities, thus, are an important spatial zone for the overall development of the country. However, our economic scale is insufficient to meet rising needs.
The World Bank estimates that $840 billion is needed for basic urban infrastructure in the next decade.
The following members are appointed to the Commission with the approval of the President of India.
International Comparison: Countries like South Africa, Mexico, the Philippines, and Brazil allocate significantly higher percentages of their GDP (1.6% to 5.1%) to urban local bodies compared to India’s 0.5%.
Importance of Intergovernmental Transfers (IGTs): IGTs make up about 40% of Urban Local Bodies (ULBs) revenue in India but suffer from unpredictability, lack of earmarking for vulnerable groups, and horizontal equity.
Financial Health of ULBs: Despite efforts by multiple Finance Commissions, financial devolution to cities in India remains inadequate, affecting city productivity and quality of life.
