Expert Speak India Matters
Published on Aug 02, 2018

Finance Commissions decide the distribution taxes between the centre and the states, and is the key financial lever determining the federal structure of the Indian economy.

70 Policies — Finance Commissions, 1951

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The following is a chapter from the book 70 Policies that Shaped India: 1947 to 2017, Independence to $2.5 Trillion.

Find the book here.

Formed on 16 May 1951 under an Act of Parliament, <1> Finance Commissions — constituted every five years, there have been 14 so far, with the 15th underway — derive their authority from Article 280 of the Constitution <2> to decide the distribution taxes between the centre and the states, and is the key financial lever determining the federal structure of the Indian economy. It makes recommendations about how central levies collected by states, taxes and duties levied and collected by the centre but assigned in whole to the states, and grants and loans are distributed. In its last set of recommendations, the 14th Finance Commission, headed by former RBI Governor Y.V. Reddy, raised the share of states in taxes by 10 percentage points to 42 percent. <3> It also said that the FRBM Act <4> needs to be amended and made more specific about targets relaxation. <5> “The challenge is to design a basic incentive-compatible framework for the Union and State governments to hold each other accountable over agreed fiscal targets,” the report stated. <6> However, even though Finance Commission is the Constitutional authority on centre–state distribution of financial resources, the Planning Commission <7> had eroded its powers. “ role and function of the Finance Commission, as provided in the Constitution, can no longer be realised fully due to the emergence of the Planning Commission as an apparatus for national planning,” the Third Finance Commission noted. <8> Citing the overlap of Finance Commissions with the Planning Commission and the resultant anomalies, the Second Finance Commission stated <9> that it had become a “statutory body with limited functions.” On the other hand, the Planning Commission was often called a “super-cabinet”, <10> with functions such as determining and allocating resources being under it. This Constitutional debasement ended on 1 January 2015, when the Planning Commission was dissolved, giving the 15th Finance Commission <11> the opportunity to begin with a clean slate.

<1> Finance Commission (Miscellaneous Provisions) Act, 1951, Ministry of Law and Justice, Government of India, 16 May 1951.

<2> Constitution of India, Article 280, Ministry of Law and Justice, Government of India, 9 November 2015.

<3> Report of the Fourteenth Finance Commission, 5 December 2014, 90, accessed 29 December 2017.

<4> The Fiscal Responsibility and Budget Management Act, 2003, Ministry of Law and Justice, Government of India, 26 August 2003.

<5> Ibid., 197–203.

<6> Ibid., Report of the Fourteenth Finance Commission, 197, accessed 29 December 2017.

<7> Chapter 6: Planning Commission

<8> Report of the Third Finance Commission, Page 35, Finance Commission of India, 14 December 1961, accessed 29 December 2017.

<9> Report of the Second Finance Commission, Finance Commission of India, 30 September 1957, 13, accessed 29 December 2017.

<10>Planning Commission or Super-Cabinet,” Economic and Political Weekly, 25 March 1950, accessed 29 December 2017.

<11> Notification, The Gazette of India, Ministry of Finance (Department of Economic Affairs), Government of India, 27 November 2017, accessed 29 December 2017.

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