Question

Consider the following statements regarding the role of the Finance Commission:

1. It acts as a balancing wheel of fiscal federalism in India.

2. Its report is submitted to the Parliament for approval.

3. It can recommend financial assistance to municipalities directly.

Which of these statements is/are correct?

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

Answer 1

Answer:

A. 1 only

Finance Commission: Role and Functions

• The Finance Commission of India is a constitutional body established under Article 280 of the Constitution. It is constituted every five years by the President of India.
• Statement 1: It acts as a balancing wheel of fiscal federalism in India.
  This statement is correct. The Finance Commission plays a crucial role in mediating the financial relations between the Union government and the State governments. It recommends the distribution of net proceeds of taxes between the Union and the States and the allocation of revenues among the States themselves. This ensures a degree of equity and uniformity in fiscal matters across the country, acting as a balancing mechanism in India's federal structure.
• Statement 2: Its report is submitted to the Parliament for approval.
  This statement is incorrect. The Finance Commission submits its report to the President of India, who then causes the report along with an explanatory memorandum as to the action taken thereon to be laid before each House of Parliament. Parliament does not approve the report, but discusses it.
• Statement 3: It can recommend financial assistance to municipalities directly.
  This statement is incorrect. While the Finance Commission can recommend measures to augment the consolidated fund of a State to supplement the resources of Panchayats and Municipalities, it cannot recommend financial assistance to municipalities directly. Such recommendations are made to the concerned State governments for further action. The State Finance Commissions are responsible for recommending financial assistance to local bodies.
• Exam Focus: Key aspects to remember for competitive exams include the constitutional article (Art. 280), the periodicity of its establishment (every 5 years), to whom the report is submitted (President), and its primary role in vertical and horizontal fiscal devolution. Distinguishing its role from that of the NITI Aayog and State Finance Commissions is also important.