Revision summary
Article 280 creates a Finance Commission to share taxes and recommend grants. It also advises how States should fund panchayats and municipalities. After the Planning Commission, it became the main formula-based transfer. GST, disaster windows, and 2011 population terms expanded and politicised the role. Cesses and Union modification still limit how federal the award really is.
Model answer
Introduction
The Finance Commission is a constitutional accountant of the Union–State purse. Its classical job is to recommend how taxes are shared and which grants go to States. After the Planning Commission ended, that job has grown into the main formula of Indian fiscal federalism.
Body
Constitutional functions
- Article 280 requires the President to constitute a Finance Commission every five years, or earlier.
- It recommends the distribution of the net proceeds of taxes between the Union and the States, and the allocation among States—the vertical and horizontal shares.
- It recommends the principles of grants-in-aid under Article 275 from the Consolidated Fund of India.
- After the Seventy-third and Seventy-fourth Amendments it also suggests measures to augment State funds for panchayats and municipalities on the basis of State Finance Commission reports.
- It may report on any other matter referred by the President in the interest of sound finance, which is how disaster, GST, and performance conditions enter the terms of reference.
Classical fiscal federalism
- Shareable taxes under Article 270, grants, and the State’s own tax space together decide whether a State can fund police, schools, and hospitals without a begging bowl.
- Commissions from the First to the Fourteenth raised the States’ share and refined criteria such as population, income distance, area, and forest cover.
Emerging role
- Abolition of the Planning Commission and of Plan/non-Plan distinctions left the Finance Commission as the principal formula-based transfer, with NITI Aayog as an adviser, not a cheque writer.
- The Fourteenth Commission’s 42 per cent share, continued near that band by the Fifteenth, made the Commission the centre of the federal bargain.
- GST replaced many State taxes; the Commission now sits beside the GST Council on compensation logic, cess, and the revenue shock of 2020.
- Local-body grants, urban performance, and disaster-risk windows make it a third-tier fiscal body, not only a Union–State splitter.
- Terms of reference on 2011 population, defence and internal security, and tax effort show the Union steering the Commission; States call this a centralising turn.
Examination
- The emerging role is larger and more political: it fills the Plan-gap, disciplines States, and funds cities.
- It is still recommendatory; the Union can modify awards, and cesses outside the divisible pool shrink the very share the Commission announces.
- Fiscal federalism therefore now turns on the Commission’s formula plus GST politics, not on a Planning Commission block grant.
Flow diagram
flowchart TD P[President Art 280] --> FC[Finance Commission] FC --> V[Vertical share] FC --> H[Horizontal among States] FC --> G[Art 275 grants] FC --> L[Local bodies] N[NITI no cheque] --> FC
Conclusion
The Finance Commission’s functions are tax devolution, grants-in-aid, and local-body augmentation under Article 280. Its emerging role is to be the main rule-book of fiscal federalism after Plan transfers ended—powerful in formula, still bounded by cesses, GST, and Union terms of reference.
Quick related
Students also ask
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Identify the major pressure groups in Indian Politics and examine their role in it.
Next question in the 2020 paper (Q14). View answer →
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Is a Finance Commission award binding like a court decree?
No. It is recommendatory. In practice the Union usually implements the core shares, but cesses and some grants can still be designed outside the pool.
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Did NITI Aayog replace the Finance Commission?
No. NITI is a think-tank. Formula transfers now sit mainly with the Finance Commission.
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