Question

Choose the correct statement(s) regarding the functions of the Finance Commission.

i) It recommends the distribution of net tax proceeds between the Centre and the states.

ii) It determines the principles for grants-in-aid to states from the Consolidated Fund of India.

iii) It has the authority to enforce its recommendations on the Union government.

iv) It advises on measures to augment the Consolidated Fund of a state for panchayats and municipalities.

• A. i, ii, and iv
• B. i and iii
• C. ii and iii
• D. iii and iv

Answer 1

Answer:

A. i, ii, and iv

Finance Commission

• The Finance Commission is a constitutional body established under Article 280 of the Indian Constitution. It is a quasi-judicial institution appointed every five years by the President of India.

• Primary Role: Its core function is to advise the President on the distribution of net tax proceeds between the Union and the states, and the allocation of the same between the states themselves. This ensures vertical and horizontal fiscal federalism.

• Grants-in-Aid: The Commission determines the principles that should govern the grants-in-aid of the revenues of the states out of the Consolidated Fund of India. This is crucial for addressing revenue deficits and supporting states with specific needs.

• Augmenting State Funds: It also makes recommendations on measures needed to augment the Consolidated Fund of a State to supplement the resources of the Panchayats and Municipalities in the State. This promotes decentralized governance and local body finances.

• Advisory, Not Binding: While the Finance Commission's recommendations are highly persuasive and generally accepted by the government, they are essentially advisory in nature. The Union government is not constitutionally bound to implement all its recommendations, although significant deviations usually require parliamentary approval and strong justification. Statement (iii) is therefore incorrect.

• Impact on Fiscal Policy: The recommendations of the Finance Commission have a significant impact on the fiscal policies of both the Central and State governments, influencing resource allocation and inter-governmental fiscal relations.

• Recent Trends: The terms of reference for each Finance Commission often include specific additional tasks, such as reviewing disaster management funding, the impact of fiscal reforms, or recommending performance-based grants.