Finance Commission

Agency in Indiafinance commissions of India in general

The Finance Commissions (IAST: Vitta Āyoga) are commissions periodically constituted by the President of India under Article 280 of the Indian Constitution to define the financial relations between the central government of India and the individual state governments. The First Commission was established in 1951 under The Finance Commission (Miscellaneous Provisions) Act, 1951. Fifteen Finance Commissions have been constituted since the promulgation of Indian Constitution in 1950. Individual commissions operate under the terms of reference which are different for every commission, and they define the terms of qualification, appointment and disqualification, the term, eligibility and powers of the Finance Commission. As per the constitution, the commission is appointed every five years and consists of a chairman and four other members. The most recent Finance Commission was constituted on 31st December 2023 and is chaired by Arvind Panagariya former Vice Chairman of NITI Aayog.

Distribution of 'net proceeds' of taxes between Center and the States, to be divided as per their respective contributions to the taxes. Determine factors governing Grants in Aid to the states and the magnitude of the same. To make recommendations to the president as to the measures needed to augment the Fund of a State to supplement the resources of the panchayats and municipalities in the state on the basis of the recommendations made by the finance commission of the state. Any other matter related to it by the president in the interest of sound finance.

The Finance Commission (Miscellaneous Provisions) Act, 1951 was passed to give a structured format to the finance commission and to bring it to par with world standards, by laying down rules for the qualification and disqualification of members of the commission, and for their appointment, term, eligibility and powers.

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 members of the commission shall provide full time or part time service to the commission, as the President specifies in his order. The members shall be paid salaries and allowances as per the provisions made by the Central Government.

Major Recommendations of 14th Finance Commission headed by Prof. Y V Reddy

The share of states in the net proceeds of the shareable Central taxes should be 42%. This is 10 percentage points higher than the recommendation of 13th Finance Commission. Revenue deficit to be progressively reduced and eliminated. Fiscal deficit to be reduced to 3% of the GDP by 2017–18. A target of 62% of GDP for the combined debt of centre and states. The Medium Term Fiscal Plan (MTFP) should be reformed and made the statement of commitment rather than a statement of intent. FRBM Act needs to be amended to mention the nature of stocks which shall require targets relaxation. Both centre and states should conclude 'Grand Bargain' to implement the model Goods and Services Act (GST). Initiatives to reduce the number of Central Sponsored Schemes (CSS) and to restore the predominance of formula based plan grants. States need to address the problem of losses in the power sector in time bound manner.

The Fifteenth Finance Commission was constituted by the Government of India, after the approval from the President of India, through a notification in the Gazette of India in November 2017. Nand Kishore Singh was appointed as the commission's chairman, with its full time members being Shaktikanta Das and Anoop Singh and its part time members being Ramesh Chand and Ashok Lahiri. However Ajay Narayan Jha was appointed replacing Shaktikanta Das who resigned from the commission to serve as the governor of the Reserve Bank of India. The commission was set up to give recommendations for five years commencing on 1 April 2020. Some newspapers like The Hindu and The Economic Times noted that commission's job was harder because of the rollout of goods and service tax (GST), as, it had taken certain powers related to taxation away from states and the Union and had given it to the GST Council.