Finance Commission of India – Functions, Members, Chairman, Finance Commission UPSC

By BYJU'S Exam Prep

Updated on: November 14th, 2023

The Finance Commission of India is a constitutional body that allocates revenues for both the central and state governments, promoting fiscal federalism. The President established the Finance Commission in 1951 under Article 280 of the Indian Constitution. The core idea of creating the Finance Commission of India was to establish a healthy financial and helpful relationship between the center and the state government.

The Finance Commission topic is a part of the Indian Polity for the UPSC exam and is relevant for both the Prelims and Mains exam. Know more about the Finance Commission, its functions, composition, and the latest news about the 16th Finance Commission of India.

What is the Finance Commission?

The Finance Commission of India is a constitutional body that is established to allocate and distribute tax revenues among the center and state governments following contemporary requirements.

  • Article 280 of the Indian Constitution provides for the Finance Commission as a quasi-judicial body.
  • The Finance Commission is constituted by the president every 5 years or as required in the mid-term.

Finance Commission PDF

The Finance Commission assesses the financial position of the federal and state governments, recommends the distribution of taxes between them, and sets out the principles of the distribution of those taxes between states. Recommendations of the Finance Commission also aim to improve the quality of public spending and promote fiscal stability.

16th Finance Commission Chairman

The last and most recent commission constituted was the 15th Finance Commission in November 2017, which was chaired by NK Singh, who was formerly a member of the Planning Commission of India. The 16 Finance Commission Chairman will be appointed soon by the President, who will take over the reins after Shri N.K. Singh.

Recently, Ajay Narayan Jha joined the 15th Finance Commission as a member and replaced Shri Shaktikant Das, who resigned as a commission member and was appointed as the Governor of the Reserve Bank of India.

History of Finance Commission

The Finance Commission of India was established in 1951 under Article 280 of the Constitution of India. The Commission is a constitutional body that is set up every five years to recommend the distribution of taxes between the central government and the state governments.

As the title suggests, the primary function of the Commission is to define the financial relations between the state governments and the central government. Furthermore, over the years, the Finance Commission has played a crucial role in ensuring a fair distribution of resources between the central government and state governments.

Finance Commission of India

Check out the complete details of the finance commission in India and accelerate to enhance the level of preparation for the upcoming IAS exam.

Finance Commission of India Highlights of the Finance Commission of India
16 Finance Commission Chairman To be appointed
Finance Commission Members 1 Chairman + 4 Members
Functions of the Finance Commission Its primary duty is to assess the financial health of the Union and State Governments, recommend tax sharing between them, and establish the guidelines for tax distribution among State Governments.
Finance Commission Article Article 280
Current Finance Commissioner of India N K Singh
15th Finance Commission Constituted in November 2017. Recommendations to be followed from 2021-22 to 2025-26
14th Finance Commission Chairman – YV Reddy. The report talked about vertical and horizontal tax devolution.
First Finance Commission The 1st Finance Commission was constituted on 22 November 1951 under Shri K.C. Neogy.
Who appoints the Finance Commission? President of India

Finance Commission Chairman and Composition

The Finance Commission is composed of a chairman accompanied by four other members who are appointed by the President of India. These Finance Commission members hold office for a period specified by the President in his order. The President of India has all rights reserved for the appointment and reappointment of the finance committee members.

  • The constitution of India has given the parliament the authority to determine the process of selection of the members of the Finance Commission members and their qualifications accordingly.
  • The Parliament of India sets the qualifications for the Finance Commission chairman and the members of the commission who have enough experience in public affairs.

Finance Commission Members

The members of the Finance Commission of India consist of a chairman and four members. The chairman takes control of the commission and monitors its activities. Currently, the chairperson of the Finance Commission of India is Nand Kishore Singh. The other four members of the Finance Commission are as follows.

  • Ajay Narayan Jha
  • Ashok Lahari
  • Anup Singh
  • Dr. Ramesh Chand
  • The secretary of the Finance Commission is Shri Arvind Mehta.

Eligibility of Members of the Finance Commission

Aside from the chairman, the four other members of the Finance Commission must meet the following requirements:

  • A judge of the high court who is qualified enough in the field of finance or experienced in financial matters is eligible to be appointed.
  • A member is eligible to be part of the finance committee if he has specialized knowledge of finances and handling accounts for the government.
  • A person having broad knowledge and experience in financial and economic matters along with the administration.

The membership of a member can be disqualified from the finance committee if he or she is found mentally unfit or involved in any unethical activity. Remember, all of the members are appointed by the President of India; hence he can disqualify the candidates or reappoint the members.

Tenure of Finance Commission Members

The President of India specifies the tenure of the members of the Finance Commission. Generally, the members are appointed for a duration of 5 years, but under certain specific conditions, the members can be reappointed.

Functions of the Finance Commission

There are many functions of the Finance Commission of India. The Finance Commission is supposed to recommend the following matters to the President of India-

  1. The distribution of the net proceeds of taxes should be shared among the center and the states.
  2. The principles that govern the grant-in-aid by the central government to the state government are out of the consolidated fund.
  3. Any matter referred to which is in the interest of sound finances by the President of India.
  4. The measures required to extend a state’s consolidated fund to supplement the resources of the panchayat and municipalities in the state are based on recommendations made by the state Finance Commission.
  5. The Finance Commission decides its own procedure and enjoys power in the performance of its function.
  6. Every 5 years, the Finance Commission determines the grounds for the distribution of taxes among the center and states and the principles governing the grant-in-aid to the states.
  7. The members of parliament received the Finance Commission’s recommendation and an explanatory memorandum of the actions taken by the government.

The above-mentioned are the major functions of the Finance Commission of India and can be asked in the UPSC Mains Exams.

Finance Commission Articles

The provision of the Finance Commission of India was drafted in early 1920 to consolidate the dominating businesses of Britishers in India. As part of his efforts to rectify the inequalities, Dr. BR Ambedkar, then minister of law, established the first Finance Commission in 1952 under the chairmanship of K.C. Neogy.

  • The drafts of the acts and rules of the commission served as the basis for its establishment.
  • Many measures were incorporated into the Indian constitution to close the fiscal gap between the center and the states, including Article 268, which allows the central government to impose duties but leaves it up to the states to collect and retain the taxes.

Powers of Finance Commission

The recommendations which are made by the Finance Commission of India are just advisory in nature and are not binding on the government. It is totally up to the central government to either implement its recommendations or grant the money to the states.

  • Ideally, it would be right to say that it is not written or laid down in the Constitution that the recommendations put up by the Finance Commission bind the government of India or raise the legal right in favor of the states to receive the fund recommended by the Finance Commission.
  • The constitution of India oversees the Finance Commission to be the balancing wheel of fiscal federalism in India. The erstwhile planning commission, which was a non-constitutional and non-statutory body, undermined its role in the state fiscal relations until 2014. It was highlighted by Dr.P.V. Rajamannar, the chairperson of the fourth Finance Commission, that the Finance Commission and the Planning Commission overlapped their functions and responsibilities in federal fiscal transfers.
  • The planning commission was replaced by a new body called NITI Aayog in 2015.

Recommendations of the Finance Commission

The Finance Commission of India is a constitutional body whose purpose is to make recommendations to the Indian President regarding different subjects, such as the distribution of taxes. The commission is responsible for assessing the financial needs of the central government, state governments, and local bodies. Some of the key recommendations of the Finance Commission of India are:

  • The Finance Commission recommends the sharing of taxes collected by the central government between itself and the state governments.
  • Finance Commission makes recommendations for the distribution of grant-in-aid to states from the Consolidated Fund of India.
  • The Finance Commission also recommends debt relief to states that are heavily indebted.
  • It also recommends special assistance to states that are backward or have a high population of Scheduled Castes and Scheduled Tribes.

Finance Commission Report

The report prepared by the Finance Commission is submitted to the President of India. Each house of the Parliament considered the Finance Commission’s report under the president’s guidance and leadership. As a result of the recommendations provided by the Finance Commission of India, the following steps are taken-

  1. It includes the recommendations regarding the distribution of taxes and duties that must be implemented by the president’s order.
  2. The executive orders to be implemented share the profit of petroleum mode of central assistance and debt relief.
  3. The government agencies are not bound by the recommendations given by the Finance Commission, and they are purely advisory. It is totally up to the government as the money will be granted to the states based on the recommendations made by the Government of India.

List of Finance Commission Chairmen

The complete list of the chairman list of the finance commission until the Chairman of Finance Commission 2022 is given below.

Finance Commissions Chairman of Finance Commission Appointed in the Year
Chairman of Finance Commission 2022 To be appointed 2022
15th Finance Commission Chairman N.K. Singh 2017
14th Finance Commission Chairman Y.V. Reddy 2013
13th Chairman of Finance Commission Dr. Vijay Kelkar 2007
12th Finance Commission Chairman Dr. C. Rangarajan 2002
11th Finance Commission Chairman A.M. Khusro 1998
10th Chairman of Finance Commission K.C. Pant 1992
9th Finance Commission Chairman N.K.P Salve 1987
8th Chairman of Finance Commission Y.B. Chavan 1982
7th Finance Commission Chairman J.M. Shelat 1977
6th Finance Commission Chairman Brahmandanda Reddy 1972
5th Chairman of Finance Commission Mahavir Tyagi 1968
4th Finance Commission Chairman Dr. P.V. Rajamannar 1964
3rd Chairman of Finance Commission A.K. Chanda 1960
2nd Finance Commission Chairman K. Santhanam 1956
1st Chairman of Finance Commission K.C. Neogy 1951

Finance Commission UPSC

The Finance Commission of India topic is an important topic covered under the Indian Polity Syllabus of the UPSC exam. Since this topic is dynamic and there are consistent revisions in the Finance Commission, it is important to go through the current affairs regularly along with the study material provided.

Finance Commission UPSC Questions

You can also download the UPSC previous year question paper for practice. The candidates can get acquainted with the types of questions asked in the exam, this will assist them in laying out an effective strategy for the exam.

[Prelims 2011] Question-1. With reference to the Finance Commission of India, which of the following statements is correct? [a] It encourages the inflow of foreign capital for infrastructure development. [b] It facilitates the proper distribution of finances among the public sector undertakings. [c] It ensures transparency in the financial administration. [d] None of the statements given above is correct.

Correct Answer. Option D None of the statements given above is correct.

[Prelims 2012] Question-2. Which of the following is among the noticeable features of the recommendations of the 13th Finance Commission? [1] A design for the goods and services tax and a compensation package linked to adherence to the proposed design.  [2] A design for the creation of a lack of jobs in the next 10 years in consonant with India’s demographic dividend. [3] Devolution of a specified share of Central taxes to local bodies as grants

Choose the correct answer from the codes given below- [a] 1 only, [b] 2 only, [c] 1 and 3, [d] 1, 2 and 3

Correct Answer. Option A [ 1 only] A design for the goods and services tax and a compensation package linked to adherence to the proposed design.

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