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Finance Commission-Roles and Functions

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  • Last Updated : 20 Sep, 2022
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The Finance Commission is a constitutional body, formed under Article 280 of the Indian Constitution. The main purpose of forming the Finance Commission is to give its recommendations on the distribution of Tax revenues between the Centre and the states as well as among the states. On November 22, 1951, the first Finance Commission was established under the chairmanship of K.C. Niyogi. The committee’s recommendations were submitted in 1953. 

Roles of Finance Commission:

a. The Indian constitution establishes a Finance Commission as a quasi-judicial entity under Article 280. It is established by the President of India every fifth year, or sooner if he deems it necessary.

b. Finance Commission consists of a chairman and four additional members, who are selected by the president of India. They serve for the length of time indicated by the president in his order. They have a chance to be re-appointed.

c. On the 2nd of January 2013, the president issued an order to form the 14th Finance Commission whose term will run from 1st April 2015 to 31st March 2020. Y.V. Reddy is the commission’s chairman. The 13th Finance Commission recommended that the state’s part of the union tax be increased from 32 per cent to 42 per cent.

d. The Finance Commission proposes a principle for the grant-in-aid of revenues from the consolidated fund of India to states. The president receives the commission’s report.

e. The Finance Commission’s job is to recommend how the net revenues of taxes should be distributed between the union and the states; the interstate council is in charge of state coordination and cooperation, and the planning commission’s job is to allocate resources between the centre and the states. “NITI AAYOG” has taken over the planning commission (National Institution for Transforming India).

f. The constitution’s seventh schedule governs the division of powers between the union and the states. This has three sub-lists:
1. Union list
2. State list
3. Concurrent list

Functions of Finance commission:

According to Article 280(3) of the constitution, the main function of the Finance Commission is-
1. To make recommendations for the division of tax revenue between the union and the states.
2. To establish the criteria that shall govern the grants in aid of revenues to states from the India Consolidated Fund.
3. On the basis of the finance commission’s suggestion, suggest the appropriate measures to raise the consolidated fund of the states for the development of Panchayats in the state.
4. Any other subject that the president refers to the panel in the interest of prudent financial management. The parliament’s role is to authorise withdrawals from India’s consolidated fund. The finance ministry’s job is to make sure that the federal government and state governments are collecting taxes in accordance with the budget’s stipulations.

The Finance Commission of India makes recommendations under article 280(3) of the constitution in the following cases: 

• Distribution of federal tax receipts between the union and the states; 
• Aid in the revenue of the states under articles 275 
• Any other topic that the president recommends to the commission.

On the proposal of the Finance Commission, income tax is levied and split between the union and the states under article 270, while central excise tax is shared under article 272. The Financial Commission also calculates state grants-in-aid under article 275, but the trade tax is imposed and collected by the states, whose distribution is not the finance commission’s responsibility.

According to Article 243(1) of the constitution, the governor of a state shall establish a Finance Commission to review the financial position of the panchayats and make recommendations to the governor as soon as possible, but no later than one year after the constitution (73rd amendment act) 1992 takes effect, and then every fifth year. As a result, the state Finance Commission is a legal entity. The finance commission is required by Article 280(3) (bb) of the constitution to give recommendations to the panchayats and municipalities “on the basis of the recommendations made by the state finance commission.”

The provisions of Articles 268 to 279 relating to the division of taxes between the union and the states can be suspended by parliament’s order during a national emergency, subject to specified modifications as necessary by the order, as stipulated in Article 354(1) of the Indian constitution.

The Finance Commission is made up of four members, including the chairperson, who is selected by the president of India, as per article 208(1) of the constitution.

 

 

 

Important Questions:

Q1: Which entity looks after the distribution of taxes between the Centre and states?

1. Niti Aayog
2. Finance Commission
3. Reserve bank of India
4. PMO office

Solution:

According to Article 280(3) of the constitution, the main function of the Finance Commission is to make recommendations for the division of tax revenue between the union and the states.

Q2: Which of the following is the basis for distributing the net revenues of taxes between the centre and the states, as recommended by the President?

1. Ministry of Finance
2. RBI
3. Finance Commission
4. Parliament

Solution:

According to Article 280, of the constitution, the President constituted a Finance Commission. This commission mainly gives its recommendations on the distribution of tax revenues between the Union and the States and amongst the States themselves.

Q3. Which of the following periods were covered by the first Finance Commission’s recommendations?

1. 1951-56
2. 1952-57
3. 1953-58
4. 1954-59

Solution: 

In 1951, the President of India appointed the first Finance Commission of India for the period 1952-57. The commission was chaired by K. C. Niyogi.

Q4. The President of India appoints the Finance Commission under…..?

1. Article 262
2. Article 315
3. Article 280
4. Article 261

Solution:

According to Article 280, of the constitution, the President constituted a Finance Commission.

Q5: What is the purpose of the Finance Commission?

1. Budget recommendations 
2. State-to-state financial cooperation
3. Financial assistance to the most vulnerable.
4. Recommendations on tax income sharing between the Union and the States, as well as among the States themselves 

Solution:

According to Article 280, of the constitution, the President constituted a Finance Commission. This commission mainly gives its recommendations on the distribution of tax revenues between the Union and the States and amongst the States themselves.

Q6. What credentials does the Finance Commission lack?

1. Qualified to serve as a High Court Judge 
2. Has extensive financial knowledge
3. In-depth understanding of economics
4. High Court counsel with three years of experience

Solution:

To become a member of the finance commission, a person’s qualifications are:

  • He/she has been qualified as High Court judges
  • He/she should be knowledgeable in finance 
  • He/she should be experienced in financial matters  and are in administration, 
  • He/she should possess knowledge of economics. 

Q7. Under which article does the Finance commission aid in the revenue of the state?

1. Article 275
2. Article 208(1)
3. Article 280(1)
4. Article 283

Solution:

The finance commission of India makes recommendations under article 280(3) of the constitution in the following cases:

• Distribution of federal tax receipts between the union and the states; 
• Aid in the revenue of the states under article 275; a
• Any other topic that the president recommends to the commission.

Q8: When was the first Finance Commission established?

1. 1951
2. 1954
3. 1982
4. 1973

Solution:

In 1951, the President of India appointed the first Finance Commission of India for the period 1952-57. The commission was chaired by K. C. Niyogi.

Q9. Who was the Finance Commission’s First Chairman?

1. Y. V. Reddy
2. J. B. Kripalani
3. K. C. Niyogi 
4. N.K Singh 

Solution:

In 1951, the president of India appointed the first Finance Commission of India for the period 1952-57. The commission was chaired by K. C. Niyogi.

Q10: Under which article, the governor of a state can establish a finance commission for Panchayats?

1. Article 280(1)
2. Article 208(1)
3. Article 243(1)
4. Article 280b

Solution:

According to Article 243(1) of the constitution, the governor of a state shall establish a Finance Commission to review the financial position of the Panchayats.

Q11. Who is in charge of appointing the Finance Commission?

1. Prime Minister
2. President
3. Finance Minister
4. Home minister
Solution:

According to Article 280, of the constitution, the President has the power to appoint a Finance Commission. 

Q12. Who will be the chairman of the 15th Finance Commission?

1. Raghuram Rajan
2. Shanmukham Chetty
3. Y.V. Reddy
4. N. K. Singh

Solution:

The President constituted the 15th finance commission in November 2017. N K Singh is the head of the 15th Finance Commission.

Q13. What is the title of the 15th Finance Commission report?

1. Finance Commission in Covid pandemic
2. Finance Commission in Nature Calamities
3. Finance Commission in COVID Times
4. Finance Commission in Corona pandemic

Solution:

The scales are used to illustrate the balance between the States and the Union on the front of this year’s report, which reads: ‘Finance Commission in Covid Times.’

Q14. How many members are constituted in the Finance commission?

1. 2
2. 7
3. 11 
4. 4 

Solution:

The finance commission is made up of four members, including the chairperson, who is selected by the President of India.


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