FINANCE COMMISSION

What is Finance Commission

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.

 Functions of the Finance Commission

    It is the duty of the Commission to make recommendations to the President as to—  

• 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; 
• 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 supplement the resources of the Panchayats in the State on the basis of the recommendations made by the Finance Commission of the State;
• 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;
• Any other matter referred to the Commission by the President in the interests of sound finance.

Selection of Chairman of Finance Commission

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

The recommendations of the Finance Commission are implemented  as under:-

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.
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 First Finance Commission was constituted vide Presidential Order dated 22.11.1951 under the chairmanship of Shri K.C. Neogy on 6th April, 1952.  Fourteen Finance Commissions have been appointed so far at intervals of every five years.

 Most federal systems resolve the vertical and horizontal imbalances through mechanisms similar to the Finance Commission. For example Australia and Canada. 

 Fourteenth Finance Commission?

 The Fourteenth Finance Commission has been set up under the Chairmanship of Dr. Y.V.Reddy [Former Governor Reserve Bank of India].  

Other Members of the Commission are Ms. Sushma Nath [ Former Union Finance Secretary ], Dr. M.Govinda Rao [ Director, National Institute for Public Finance and Policy, New Delhi ), Dr. Sudipto Mundle, Former Acting Chairman, National Statistical Commission. Prof Abhijit Sen (Member, Planning Commission) is the part-time Member of the Fourteenth Finance Commission.  Shri Shri Ajay Narayan Jha is the Secretary, Fourteenth Finance Commission.

The Finance Commission is required to give its report by 31st October, 2014. Its recommendations will cover the five year period commencing from 1st April, 2015.

It has recommended an increase in the share of states in the centre's tax revenue from the current 32 per cent to 42 per cent. This is indeed the single largest increase ever recommended by a Finance Commission.