Constitutional Provision
Article 280 of the Constitution of India provides for the establishment of the Finance Commission by the President. It is a key constitutional mechanism to ensure fiscal federalism and financial balance between the Union and the States.
Composition
- Constituted by the President of India.
- Consists of a Chairperson and four other members.
- Qualifications of members are determined by Parliament.
- Typically includes experts in public finance, economics, administration, and law.
Periodicity
- Constituted every five years, or earlier if necessary.
Functions
Under Article 280(3), the Finance Commission makes recommendations to the President regarding:
- Distribution of net proceeds of taxes between the Union and the States (vertical devolution).
- Allocation of the States’ share among the States (horizontal distribution).
- Principles governing grants-in-aid to States under Article 275.
- Measures to augment the Consolidated Fund of a State to supplement resources of Panchayats and Municipalities (added by the 73rd and 74th Constitutional Amendments).
- Any other matter referred to it in the interest of sound finance.
Role in Fiscal Federalism
- Addresses vertical fiscal imbalance between Union and States.
- Reduces horizontal imbalances among States.
- Promotes equity and efficiency in intergovernmental fiscal transfers.
- Strengthens cooperative federalism.
Nature of Recommendations
- Recommendations are advisory in nature.
- However, they carry significant constitutional and political weight.
- The Union Government generally accepts them, with modifications where necessary.
Significance
Article 280 institutionalises periodic review of Centre–State financial relations. The Finance Commission acts as a neutral constitutional body to balance fiscal equity, efficiency, and national integration within India’s federal framework.
