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Finance Commission

The government constituted the 14th Finance Commission under the chairmanship of former RBI Governor Y V Reddy.The Union government has extended the term of the 14th Finance Commission by two months to 31 December 2014 to examine financial projections.

carry out consultations with the government of Andhra Pradesh and Telangana in view of additional term of reference made to it.


What Is The Role Of Finance Commissions?
A finance commission is set up every five years by the President under Article 280 of the Constitution. Its main function is to recommend how the Union government should share taxes levied by it with the states. These recommendations cover a period of five years. The commission also lays down rules by which the centre should provide grants-in-aid to states out of the Consolidated Fund of India. It is also required to suggest measures to augment the resources of states and ways to supplement the resources of panchayats and municipalities.

Why Does The Constitution Provide For Sharing Of Tax Proceeds?
Under the federal structure envisaged in the Constitution, most of the taxation powers are with the Centre but the bulk of spending is done by the states. Such a federal structure requires transfer of resources from the Centre, which levies and collects the big taxes such as income tax and indirect taxes like excise and customs, to the states. Canada and Australia, which also have federal governments, have a similar tax-sharing system.

Can The Commission Examine Other Fiscal Issues As Well?
Yes. The government can ask the commission to make suggestions on specific fiscal issues that it may want addressed. For instance, the government has asked the 14th Finance Commission to deliberate on the level of subsidies and explore statutory measures to insulate pricing of public utility services like drinking water, irrigation, power and public transport from policy fluctuations. The new commission will also look at the impact of GST and suggest a mechanism to compensate states in case of revenue loss. Besides, it will deliberate on listing, disinvestment and sale of state-owned companies.

What Is The Force Of The Commission's Recommendations?
The Constitution does not make the recommendations of the Finance Commission binding on the government of the day. However, there is a strong precedent that governments generally go by the suggestions as far as sharing of revenues is concerned. These recommendations relating to distribution of Union taxes and duties and grants-in-aid are usually implemented by a presidential order.

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