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—
[a] 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;
[b] The determination of the taxes, duties, tolls and fees which may be assigned as, or appropriated by, the Panchayats;
[c] The grants-in-aid to the Panchayats from the Consolidated Fund of the State;
 The measures needed to improve the financial position of the Panchayats;
 Any other matter referred to the Finance Commission by the Governor in the interests of sound finance of the Panchayats.
Article 243Y of the Constitution further provides that the Finance Commission constituted under Article 243 I shall make similar recommendation vis-a-vis municipalities.
The Governor is required to cause every recommendation made by the State Finance Commission together with an explanatory memorandum as to the action taken thereon to be laid before the Legislature of the State.
The Finance Commissions in the States usually comprises of the chairman, member secretary, and other members.
State Finance Commissions receive grants from the Finance Commission that is set up by the central government.