Author: Keerthana Kesavan,

3rd Year School of Law,
 Christ (deemed to be University), Student.

The finance commission of India was established in the year 1951, under Article 280 of the Indian Constitution. This body primarily thrives to determine the boundaries by defining the financial relationship between the Centre and the various States of the Republic of Indian. Additionally, the financial commission lists out the taxation relationship between the Centre and the States and also determines grant in aids from the Centre to the State. The primary function of the Finance commission is to determine the distribution of Union taxes and funds within the multiple States. The Constitution through Articles 270 & Articles 272 off the Indian Constitution provide for the distribution of Union tax revenues to the states of the Federation, but does not provide for explicit terms and conditions for the distribution of the same. The term in ‘need of assistance’ (Art 275) allows the discretion of the finance commission in determining whether a particular state is in need of such aid thereby granting exclusive power to them. This paper aims at understanding the rationale behind the finance commissions reports, and cataloguing the method of determining the factors that the finance commission of India takes into consideration while determining the distribution of Centre- State taxes. Further this paper will also analyse the ‘need for assistance’ within Art 275, and see the interpretative value given to the above sentence by the finance commission of India. The above will be used to conclusively understand as to how the finance commission of India functions and maintains a relationship between the Centre and the State, with regard to financial aid and how the same goes on to have a much larger impact on the functioning of the country.
Keywords: Financial Commission, Centre-State relationship, Tax, Grants, function
The Finance Commission is believed to perform merely financial duties and handling of the nation’s finances. It is essential to note that one of the primary duties it performs is the regulation centre-state relations. A sound financial system is of great importance as the balanced and efficient division of financial resources is a sign of the nation’s good governance and ensures the development of the nation. The Indian Constitution discusses the ‘federal’ nature of the country. The federal nature provides for the distribution of powers and authority between the State and Union Governments. A nation’s financial motive is of large importance as it is a primary tool that aids developing nations like India to achieve their goals. An essential point of discussion is the duties performed by the commission. Not only is the commission responsible for the division of financial resources in the country but also performs a balancing function and acts as the bridge between the centre and the various states. The purpose of this paper is to primarily understand the role of the finance commission in managing finance resources in the centre and state respectively and secondly to delve into a discussion on the role it plays in maintaining financial relations between centre and state.
1.     Role of the Finance Commission
Centre-State fiscal relation are of utmost importance as the distribution of money to the states is a key to initiating development and securing a balanced economic structure. Secondly, an economically strengthened state ensures purposeful programmes and policies are implemented which leads to a stronger
national economy[1]. The Finance Commission adopts a gap-filling approach by seeking to be the balance between the centre and state. The body has been established under Article 280 of the Indian Constitution. The Article provides for the appointment of Commission by the President within expiry of two years from the commencement of Constitution and thereafter every five year or early if he considers essential, guided by the advice of the Central Council of Ministries (Article 74). The Commission is to consist of a chairman and 4 members appointed by the President. Article 280(2) states that the Parliament is empowered to determine by the required qualifications for the appointment as the member of the Commission. Accordingly, the Finance Commission Act 1951 was enacted by the Parliament; the Act was subsequently amended in the year 1955.[2]  This body primarily thrives to determine the boundaries by defining the financial relationship between the Centre and the various States of the Republic of India.
The scheme of allocation of taxing power provided in our Constitution fails to create financial equilibrium between the responsibilities and resources at the State level, because most of the expansive and lucrative sources of taxation lies with the Centre, but on the other hand the State’s financial needs are huge due to their responsibilities to provide welfare and ensure development. Thus, this is an example of voluminous task that lies ahead of the commission and the duty it must perform.[3]
The Commission performs a multiplicity of functions that can be divided into the following broad heads namely-
a)     To determine a scheme to fairly distribute the available taxes between Centre-State
Article 270 provides for the compulsory tax sharing between the Centre and States, the net proceeds of income tax which is levied and collected by the Union, such proceeds which are assigned to the States are not part of the Consolidated Fund of India, the percentage of such proceeds are assigned to the States on the basis of recommendations made by the Finance Commission.[4] It is on the advice of the Commission that there is tax-sharing from the divisible pool. This is an important function all together because a clear-cut distinction is sought between the needs of the Centre-State and then the required division is sought.
b)     To recommend how Grant-in Aid is to be provided to the States
Under Article 275 of Indian Constitution, it is the duty conferred on the Union Government to provide Fiscal Grants to the needy and poor States as may be determined by the Parliament, Grants are paid out the Consolidated Fund of India. Grant-in-Aids have discussed to be a core balancing factor of financial equilibrium as it ensures parity in the receipt of funds. This grant is offered based on the budgetary needs of the State, special obligations faced by the State in a national scenario and
to give aids to less developed states to bring them on the face of development.
c)     The 73rd and 74th Amendment have paved way for the strengthened financial status of local bodies by providing the supplementing to the resources of the Panchayats and Municipalities in the States[5]
The Commission has sought to balance the needs of the urban and local bodies by recommending the devolution of resources between both bodies. This has been done to financially empower the local bodies.
d)     Reference of matters relating to fiscal interest between inter-Governmental bodies
Article 280(3) provides that matters relating to fiscal interest between any inter-Governmental body can be referred to the Commission by the President. It is said that matters are referred to the commission in the interest of ‘sound finance’. Thus, the term is wide and the scope and applicability of the term is wider.
The Finance Commission only acts as an advisory body by suggesting how financial matters must be dealt with but their recommendations are not binding and are merely suggestive in nature. But one of the primary drawbacks of the Commission is the lack of sufficient representation from the States. It is believed that the interests of the Centre are always placed above that of the State and thus in the process, the requirements of the State bodies are not taken into consideration but are merely left to the satisfaction of the Commission.[6]Political influence is also said to have a major influence as parties in the Centre tend to push for the interests of the States they govern to display a sense of development and thus these states find it easier to access and receive the requires grants and support for their requirements.
2.     Analysis of powers at the discretion of the Commission
Article 275 of the Constitution states that ‘Such sums as Parliament may by law provide shall be charged on the Consolidated Fund of India in each year as grants-in-aid of the revenues of such States as Parliament may determine to be in need of assistance, and different sums may be fixed for different States.Attention must be focused on the term ‘need of assistance’.
The Finance Commission has the discretion to determine which states require financial assistance. A notable problem arises at this juncture. The large allocation for centrally sponsored schemes at the expense of assistance for state plans is clear confirmation of the discretion available to the centre in determining these transfers.[7]The Commission has also notably in the past leaned towards the interests of the Centre and thus there is no precedent of an established system of fair allocation between Centre and State. It is clearly visible by the term ‘need for assistance’ that it is at the discretion of the Commission to determine which states are in actual need of aid and support. Additionally, it is on the discretion of the members of the Commission to determine the total aid required by each state and the total extent of the resource deficit. This could result in a problematic scenario as there is no established method of distribution and neither is there a pre set pattern of allocation. There is also no decided pattern of determining how the actual need of assistance is to be judged.
The States have differential fiscal requirements. Balancing the budget is widely considered to be the foundation of state fiscal practices. Keeping a budget balanced in times of fiscal stress, however, can be an overwhelming challenge for policymakers.[8]On a plain reading, the article describes a framework for distribution of net proceeds between the Union and the States through a law framed in accordance with the procedure laid down in clause (2). It is in clause (2) of Article 270 that we find a reference to percentage of distribution. The manner of such percentage has to be prescribed by the Finance Commission; until a Finance Commission has been constituted, it can be prescribed by the President by Order and after the Finance Commission has been constituted, it shall be prescribed by the President by Order after considering the recommendations of the Finance Commission.[9] It is argued that this might be slightly problematic because there is no established precedence of distribution of proceeds. Secondly at the present states it is visible that certain states have remain poverty- stricken and have not been able to break these shambles and yet there is no notable effort made by the commission to ensure that their situation is better. ‘Need for assistance’ is an arbitrary term that seems to be judged on the grounds of what the commission deems to be fit. Thus, this results in unequal and inappropriate division of funds between states. In 2018, N K Singh while detailing the allocation of funds, clearly stated that “What weighting will be assigned, what weighting will be chosen and what are the ingredients of those weighting is entirely the discretion of the commission.” His statement was in response to the allegations by the Southern states that they may lose out on central funds due to their demographic gains.[10] The allegation by the states is a clear sign that the lack of a pre-decided method of allocation results in a difficulty as the distribution is not equitable.
3.     Suggested regime for allocation of funds
A fair and equitable method of ensuring effectiveness and efficiency of allocation of funds is to create a pre-existing method of allotment where all essential factor are taken into count. This ensures that a certain parity is maintained. Additionally, over the years, various possible requirements of states have been catalogued and thus there is an understanding of what ‘need’ of state could possibly arise. Thus, what would be an ideal initiative would be that the requirements be catal
ogued and the required funds be allotted on those grounds. It is further essential that these recommendations be made by an unbiased body that can recommend how to ensure such parity. The needs of states can further be catalogued on the basis of their use. What could be done is a categorised list could be prepared consisting of requirements graded on the basis of their urgency, use and importance. Thus, based on the requirement of the state, the true need of the parties can be judged and then the required funds could be allocated. Further, the same must be followed for national allocation as well. It is believed that the needs of the centre are often prioritised over that of the state and the same must be strictly avoided and thus the cataloguing of needs could aid with this. Often, the requirements of the centre are closely linked with the requirements of certain states and as well and this distinction must be made.
It is a fact beyond any doubt that in Indian federation the Centre is more powerful than the States. The division of functions and resources has favoured the Centre with relatively more elastic revenue resources as against the States who have to discharge functions which demand increasing financial resources.[11]The balancing device, in these circumstances is of the great significance so far as financial relations between two layers of the Government. The inadequacy and inelasticity of the resource base is the principal cause of this vertical imbalance. [12]Thus, to ensure a strengthened structure and a sound financial system, it is required that some parity be introduced into the system.

[1] George A. Akerlof, Centre-State Fiscal Relations in India, Indian Economic Review, 99 (1969).

[2] M. Jai Ganesh, Dr M. Gandhi, Role of Finance Commission in Maintaining the Fiscal Federalism in India, 4, Journal of Research in Humanities and Social Science, 116, at 117, (2016).

[3] Id.

[4] Alice Jacob, Centre-State Governmental Relations in The Indian Federal System, 10, Journal of the Indian Law Institute, 583, at 610(1968).

[5] supra note 2, at 118.

[6] Centre-State Financial Relations: III – A Possible Line of Departure from Gap-Filling, 8, Economic and Political Weekly, at 1295 (1973).

[7] B. P. R Vithal, Role of Articles 275 and 282 in Federal Fiscal Transfers, 32, Economic & Political Weekly, 1689(1997).

[8], (last accessed on 18
February 2020).

[9], (last accessed on 12 January 2020).

[10], (last accessed on 20 February 2020).

[11] Patel, Himmat G, Some Aspects of States Indebtedness with Special Reference to Central Loans, Ph. D. Thesis (unpublished), Sardar Patel University, Vallabh Vidyanagar, 1977, pp. 9-1.

[12] Himmat Patel, Centre-State Financial Relations, 41, The Indian Journal of Political Science, 639(1980).

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