Question

Consider the following statements about the functions of the Finance Commission:

1. It recommends the distribution of taxes between the Centre and States.

2. It supervises the tax collection mechanisms of the Union government.

3. It advises on measures to augment the consolidated fund of states for local bodies.

Which of these statements is/are correct?

• A. 1 and 3
• B. 2 only
• C. 1, 2, and 3
• D. 1 and 2

Answer 1

Answer:

A. 1 and 3

Finance Commission of India

• The Finance Commission is a constitutional body established under Article 280 of the Indian Constitution.
• It is appointed by the President of India every five years.
• Its primary role is to review the financial position of the Union and State governments and recommend measures for fiscal management.

Functions of the Finance Commission

• Distribution of Net Proceeds of Taxes:
  1. The most significant function is to recommend the division of net proceeds of taxes that are to be divided between the Union (Centre) and the States (Statement 1 is correct).
  2. It also recommends the apportionment of the respective shares of such proceeds between the Union and the States.
  3. This aims to ensure a fair distribution of financial resources across the country.
• Principles of Grants-in-Aid:
  1. It recommends the principles governing grants-in-aid of the revenues of the States out of the Consolidated Fund of India.
  2. These grants are given to States that are in need of assistance.
• Augmentation of Consolidated Fund of States for Local Bodies:
  1. The Finance Commission also recommends the measures needed to augment the Consolidated Fund of a State to supplement the resources of the Panchayats and Municipalities in the State based on the recommendations made by the State Finance Commission (Statement 3 is correct).
  2. This function was added by the 73rd and 74th Constitutional Amendments Act, 1992.
• Other Recommendations:
  1. It can make recommendations on any other matter referred to it by the President in the interest of sound finance.

Exclusions from Functions

• The Finance Commission does not supervise the tax collection mechanisms of the Union government. This function is handled by other bodies like the Central Board of Direct Taxes (CBDT) and the Central Board of Indirect Taxes and Customs (CBIC). Therefore, Statement 2 is incorrect.

Key Past Recommendations

• 14th Finance Commission (2015-2020): Recommended increasing the States' share of divisible central taxes from 32% to 42%.
• 15th Finance Commission (2020-2025): Recommended a 41% share for States, considering the newly formed Union Territories of Jammu and Kashmir and Ladakh.