The Finance Commission Notes with PDF

These notes are your ultimate revision weapon to revise The Finance Commission. We’ve distilled years of previous exam questions (PYQs) into one powerful, concise resource. Everything you need to know, nothing you don’t.

• PYQs, Decoded: All key concepts from past exams, organized and simplified.
• Revise in Record Time: Short, precise, and designed for last-minute review.
• Focus on What Matters: Master high-probability topics and boost your confidence.
• Free PDF to download.

Finance Commission of India: A Structured Overview

1. Constitutional Basis & Establishment

• Established under Article 280 of the Indian Constitution.
• Constituted by the President of India every five years.
• As of 1999, twelve Finance Commissions had been constituted.

2. Composition & Appointment

• Consists of a Chairman and four other members.
• The qualifications for the Chairman and members are determined by the President.
• The Chairman and members are appointed by the President.

3. Primary Function & Core Responsibilities

The Finance Commission is the primary agency for resolving vertical (Centre-State) and horizontal (State-State) fiscal disputes.

Its specific responsibilities include recommending:

• Revenue Sharing:
  • The distribution of the net proceeds of taxes (e.g., Income Tax, Excise Duty) between the Union and the States.
  • The principles governing the shares of these tax proceeds among the States.
• Grants-in-Aid:
  • The principles governing grants-in-aid from the Consolidated Fund of India to the States.
  • To consider applications for grants-in-aid from the States.
• Other Matters:
  • Any other matter referred to it by the President in the interest of sound finance.

4. Parliamentary Procedure

• The President causes every recommendation of the Commission to be laid before each House of Parliament.

5. Key Clarifications: What the Finance Commission Does NOT Do

• It does not perform general auditing of the Central or State governments’ financial positions.
• It does not allow the withdrawal of money from the Consolidated Fund of India.
• It does not supervise the tax-levying process of the Union and State Governments.
• It does not deal with the devolution of Trade Tax.
• It is not directly involved in encouraging foreign capital inflow.
• It does not distribute finances to Public Sector Undertakings (PSUs).
• While its recommendations can impact local bodies, it is not directly involved in finances between States and Local Self-Governments (this is the role of State Finance Commissions).

6. Distinction from Other Bodies

The function of financial distribution of tax revenues and grants is not performed by:

• The Planning Commission (now defunct)
• National Development Council
• Inter-State Council
• Sarkaria Commission
• Public Accounts Committee
• Union Ministry of Finance

7. Chairmen of Recent Finance Commissions

• 12th Finance Commission: Dr. C. Rangarajan
• 13th Finance Commission: Dr. Vijay L. Kelkar
• 14th Finance Commission: Dr. Y.V. Reddy
• 15th Finance Commission: Shri N.K. Singh (nominated in 2017)

Related Constitutional Bodies & Mechanisms

A. State Finance Commission

• Constitutional Status: A constitutional body.
• Role: Recommends to the Governor the principles for the distribution of finances between the State government and Local Bodies (Panchayats and Municipalities), including grants-in-aid from the State’s Consolidated Fund.
• Clarification: The Union Finance Commission recommends financial assistance to the States, which can include funds for Panchayats. The State Finance Commission deals directly with the devolution of funds from the state to local bodies.

B. Means of Resource Allocation (Fiscal Federalism)

• Current Mechanisms:
  • Tax sharing (as recommended by the Finance Commission).
  • Grants-in-aid (as recommended by the Finance Commission).
  • Centrally Sponsored Schemes.
• Historical Mechanism (No longer in operation):
  • Transfer for plan implementation under the Gadgil formula (associated with the defunct Planning Commission).

C. Miscellaneous Fact on Taxation

• Taxes on transactions in Stock Exchanges and Futures Markets (e.g., Securities Transaction Tax) are levied and collected by the Union Government, not the State Governments.

D. Key Provision

• The constitutional provisions regarding the division of taxes between the Union and the States cannot be suspended under any circumstances.

Know More About The Finance Commission:

• The Finance Commission – Old Year Questions
• The Finance Commission One Liner Questions & Answers