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Finance Commission of India

Finance Commission
Finance Commission


The Finance Commission of India is a crucial constitutional body established under Article 280 of the Indian Constitution. Its primary purpose is to define the financial relations between the central government and the individual state governments. The Commission is tasked with making recommendations concerning the distribution of the net proceeds of taxes to be shared between the Centre and the states, and the allocation between the states themselves.


Composition and Appointment

The Finance Commission is appointed by the President of India every five years or at such earlier time as the President considers necessary. It consists of a Chairman and four other members. To be appointed to the Commission, individuals must have qualifications from the fields of public affairs, administration, finance, or economics. This ensures that the Commission is knowledgeable and capable of handling complex financial governance issues.

Functions and Recommendations

The Finance Commission's main function is to make recommendations to the President of India on several key financial governance aspects, including:

  • The distribution of the net proceeds of taxes between the Centre and the states, which should be divided according to a formula recommended by the Commission.

  • The principles that should govern the grants-in-aid to the states from the Consolidated Fund of India.

  • Measures needed to augment the Consolidated Fund of a state to supplement the resources of the Municipalities and Panchayats in the state.

  • Any other matter referred to the Commission by the President in the interests of sound finance.

Impact and Importance

The recommendations made by the Finance Commission have substantial implications for state finances and play a crucial role in ensuring fiscal stability and efficiency in the economic system of India. They are designed to promote fiscal equalisation among states, address fiscal imbalances, and ensure efficient and equitable allocation of resources.

The Finance Commission also works to foster cooperative federalism by ensuring a smooth financial relationship between the various levels of government. This body's recommendations are not binding but are highly influential and generally accepted by the Government of India, thereby playing a vital role in the federal fiscal governance of the country.


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