The Finance Commission is constituted by the President under article 280 of the Constitution, mainly to give its recommendations on distribution of tax revenues between the Union and the States and amongst the States themselves.
Two distinctive features of the Commission’s work involve redressing the vertical imbalances between the taxation powers and expenditure responsibilities of the centre and the States respectively and equalization of all public services across the States.
Its primary job is to recommend measures and methods on how revenues need to be distributed between the Centre and states.
Besides suggesting the mechanism to share tax revenues, the Commission also lays down the principles for giving out grant-in-aid to states and other local bodies.
The commission has to take on itself the job of addressing the imbalances that often arise between the taxation powers and expenditure responsibilities of the centre and the states, respectively.
Primarily, it has to ensure a sense of equality in public services across the states.
The First Finance Commission was constituted on 22.11.1951 under the chairmanship of Shri K.C. Neogy on 6th April, 1952.
Composition of Finance 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
Every member will be in office for the time period as specified in the order of the president, but is eligible for reappointment provided he has, by means of a letter addressed to the president, resigned his office.
The functions of the Finance Commission—
It is the duty of the Commission to make recommendations to the President as to—
[a] the distribution between the Union and the States of the net proceeds of taxes which are to be, or may be, divided between them and the allocation between the States of the respective shares of such proceeds;
[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 supplement the resources of the Panchayats in the State on the basis of the recommendations made by the Finance Commission of the State;
[d] the measures needed to augment the Consolidated Fund of a State to supplement the resources of the Municipalities in the State on the basis of the recommendations made by the Finance Commission of the State;
[e] any other matter referred to the Commission by the President in the interests of sound finance.
The Commission determines its procedure and have such powers in the performance of their functions as Parliament may by law confer on them.
The recommendations of the Finance Commission are implemented as under:-
[a] Those to be implemented by an order of the President— The recommendations relating to distribution of Union Taxes and Duties and Grants-in-aid fall in this category.
[b] Those to be implemented by executive orders— The recommendations in respect of sharing of Profit Petroleum, Debt Relief, Mode of Central Assistance, etc. are implemented by executive orders.
The recommendations made by the Finance Commission are only of advisory nature and hence, not binding on the government.