Finance Commission of India


The Finance Commission of India is constituted under Article 280 of the Constitution by the President of India. The primary function of the Finance Commission is to recommend the distribution of taxes between Union and States and amongst States and States. President after two years from the commencement of the Constitution of India and thereafter every five years has to constitute Finance Commission of India. If necessary, the President can constitute a Finance Commission before the expiry of five years.

The first Finance Commission of India was constituted vide Presidential Order dated 22.11.1951 under the chairmanship of Shri K.C. Negoy on 06.04.1952 and from then fifteen finance Commissions have been constituted so far at every five year intervals.

Two unique features of the Finance Commission of India is equalization of public services across the States and redressal of vertical imbalances between the taxation powers and expenditure responsibilities between the State and the Centre.

The recommendations of the Finance Commission of India are implemented as:

  1. The recommendations in consonance with those relating to the distribution of Union Taxes and Duties and Grants in Aid are to be implemented by an order of the President of India.
  2. Other recommendations issued by the Finance Commission are to be implemented through executive orders.

Composition of Finance Commission of India

The Finance Commission of India comprises of

  1. Chairman: The Chairman heads the Finance Commission and presides over the activities of the Commission.
  2. Four other members

Qualification of the Members

The Chairman of the Finance Commission is ought to have experience in public affairs whereas the other four members are

  1. Who have special knowledge in economics, financial matters and administration;
  2. Who have special knowledge of the finances and accounts of the Government;
  3. Who are or have been qualified to be appointed as Judges of High Court.

Grounds of disqualification of the members of Finance Commission

If the members are:

  1. Found to be of unsound mind
  2. Found to be undischarged insolvent;
  3. Convicted of an immoral offence;
  4. Financial and other interests hinders with the smooth functioning of the Commission

Functions and Duties of Finance Commission

It shall be the duty of the Commission to make recommendations to the President in terms of:

  1. The distribution amongst the Union and the States of the net proceeds of the taxes are to be divided between and allocation between the States of the share of such proceeds.
  2. The Commission would determine the procedure and shall have such powers in the course of performance of their functions as the law confers on them.
  3. The regulation of the Consolidated Fund of India and the principles upon which the grants in aid are given to the revenue of the States.
  4. Such other matters conferred by the law on the Finance Commission.
  5. The allocation of the net tax proceeds to be divided between the states and the Union.
  6. The measures required to extend the funds of the state to bolster the resources of the panchayats and the municipalities of the State in conformity made by the State Finance Commission.
  7. Any matters conferred by the President of India in the interest of sound finance.

Advisory Role of Finance Commission

The recommendations made by the Finance Commission are of advisory nature thus not binding on the Government and it is the discretion of the Government to implement its recommendations on the hierarchy of granting money.

The Reports of Finance Commission

Under the Article 281 of the Indian Constitution, the President of India has to lay the reports of the Finance Commission of India before both the Houses of the Parliament coupled with the explanatory note and the actions initiated on the Finance Commission’s recommendations.

The 12th Finance Commission of India

The 12th Finance Commission was constituted in November 2002 by the President of India under the chairmanship of noted economist and former governor Dr. C Rangarajan where its recommendations were covered during the period of April 2005 to March 2010.

The 13th Finance Commission of India

The 13th Finance Commission of India was constituted under the chairmanship of Dr. Vijay Kelkar by the President of India on November 2007 where the recommendation of this Commission was covered in the period of April 2010 to March 2015.

The 14th Finance Commission

The 14th Finance Commission was constituted under the chairmanship of former RBI governor Dr. VV Reddy by the President of India whose recommendations were applicable for a period of five years from April 2015 to March 2020 who submitted their report in December 2014.

The 15th Finance Commission

The 15th Finance Commission was constituted under the chairmanship of NK Singh a former member of Planning Commission by the President of India whose recommendations would be applicable for the period of April 2020 to March 2020.

State Finance Commission

The State Commission was constituted by the 73rd and 74th Constitutional Amendments to rationalize and recommend the fiscal and financial regulations at the State level and for division and allocation of resources between the State and the Panchayati Raj Institutions. Though mandated the State Finance Commissions are not constituted after 5 years on regular basis and is burdened with the large number of local governments’ thus untimely submission of reports with lacking proficiency.

  1. Article 243I of the Constitution has mandated the State Governor to constitute a Finance Commission in every five years.
  2. Article 243Y of the Constitution states that the Finance Commission constituted shall review the financial position of the Municipalities and make recommendations to the Governor with regards to the recommendations to be implemented.
  3. The Constitution of India provided to set up the Finance Commissions within one year from the commencement of the Constitutional Amendment Act, 1992 of which only 13 States have constituted the 5th State Finance Commission till date.


Though at both the levels of governance has legal provisions to constitute Finance Commissions to regulate the allocation of financial resources, there is considerable divergence between the Constitutional provisions mandated and the working of the Finance Commissions in terms of State Finance Commissions on ground.

Author: Aathira Pillai,
Dr. D.Y. Patil College of Law, BLSLLB 4th year

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