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FINANCE COMMISSION
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FINANCE COMMISSION
ARTICLE 280
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Composition and Qualifications

q Composition (Article 280):
• Chairman and four members are appointed by the President
q Qualifications:
• Parliament may by law determine the qualifications which shall be
requisite for appointment as members of the Commission and the
manner in which they shall be selected (Article 280).
• Parliament thus enacted the Finance Commission (Miscellaneous
Provisions) Act, 1951.
• This Act specifies the qualifications, disqualifications, term of office,
conditions of service and salary and procedure and powers of the
Commission.
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Qualifications
• The Chairman of the Commission shall be selected from among
persons who have had experience in public affairs, and the four
other members shall be 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.
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Disqualifications
• A person shall be disqualified for being appointed as, or for
being, a member of the Commission,--
(a) if he is of unsound mind;
(b) if he is an undischarged insolvent;
(c) if he has been convicted of an offence involving moral turpitude;
(d) if he has such financial or other interest as is likely to affect
prejudicially his functions as a member of the Commission.
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Term of office
• Every member of the Commission shall hold office for such period as
may be specified in the order of the President appointing him, but
shall be eligible for reappointment:
• Provided that he may, by letter addressed to the President,
resign his office.
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Functions (Article 280)

q It shall be 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 under this Chapter
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 and 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
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Procedure and powers of the Commission (FC Act, 1951)

• The Commission shall determine their procedure and in the performance of
their functions shall have all the powers of a civil court under the Code of
Civil Procedure, 1908 while trying a suit in respect of the following
matters, namely:--
(a) summoning and enforcing the attendance of witnesses within the
territory of India;
(b) requiring the production of any document;
(c) requisitioning any public record from any court or office.
• The Commission shall have power to require any person to furnish
information on such points or matters as in the opinion of the Commission
may be useful for, or relevant to, any matter under the consideration of the
Commission and any person so required shall be deemed to be legally
bound to furnish such information
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Implications for Centre State Relations

• The President lays the report of the Finance Commission before the
Parliament along with an explanatory memorandum on the action
taken on the report.
• The Commission only has an advisory role.
• The Central government finally decides the money to be
distributes to the states.
• The Fifteenth Finance Commission was constituted last year under
the chairmanship of N.K. Singh.
• The Commission has less than two years to complete its deliberations
and submit its report by October 2019.
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Implications for Centre-State Relations

• Finance Commission, under Article 280 of the Constitution of India,
focuses on the:
Vertical Distribution (division of revenues between Centre and
states) and
• Horizontal distribution (between states to ensure regional equity).
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Terms of Reference: Implications for Centre-State Relations

• Presidential terms of reference (ToR) of the Fifteenth Finance Commission have
raised questions,
• Recently a conclave of Finance Ministers of the southern States was held to
discuss contentious issues in the ToR.
• Concern-1: directive to use population data in the ToR from the 2011 Census,
and not the 1971 Census that was used earlier, is an exaggeration.
• The earlier Finance Commissions were issued the directive to use population
data of 1971 based on a parliamentary resolution.
• Counter-point: Logically, general purpose transfers to States by way of tax
devolution and grants are meant to enable them to provide comparable levels of
public services at comparable tax effort.
• Public services have to be provided to the current population and not just the
population of either the 1971 Census or the 2011 Census.
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Terms of Reference: Implications for Centre-State Relations

• Presidential terms of reference (ToR) of the Fifteenth Finance Commission have
raised questions,
• Recently a conclave of Finance Ministers of the southern States was held to
discuss contentious issues in the ToR.
• Concern-1: Directive to use population data in the ToR from the 2011
Census, and not the 1971 Census that was used earlier.
• The earlier Finance Commissions were issued the directive to use population
data of 1971 based on a parliamentary resolution.
• Counter-point: Logically, general purpose transfers to States by way of tax
devolution and grants are meant to enable them to provide comparable levels of
public services at comparable tax effort.
• Public services have to be provided to the current population and not just the
population of either the 1971 Census or the 2011 Census.
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Terms of Reference: Implications for Centre-State Relations

• Concern-2: Asking the Commission “to examine whether revenue deficit
grants be provided at all”;

• Concern-3: Considering “the impact of fiscal situation of the Union

government of substantially enhanced devolution by the Fourteenth Finance
Commission, coupled with continuing imperative of the national development
programme including New India 2022.

• Concern-4: Asking the Finance Commission to look at the conditions that may
be imposed by the Central government while providing consent to States when
they borrow under Article 293(3);
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Terms of Reference: Implications for Centre-State Relations

• Concern-5: Asking the Commission to propose measurable performance-
based incentives to States in respect of a number of areas such as the
implementation of flagship schemes, progress towards replacement rate of
population growth, a control or lack of it in incurring expenditure on populist
measures; and
• Concern-6: Promoting ease of doing business.