Question

The Constitution envisages the Finance Commission as the "balancing wheel of fiscal federalism." Which of its functions most directly supports this characterization?

• A. Making recommendations on any matter referred to it by the President in the interests of sound finance.
• B. Recommending measures to augment a state's consolidated fund for Panchayats.
• C. Recommending the distribution of the net proceeds of taxes between the Centre and the states.
• D. Having the powers of a civil court to summon and enforce the attendance of witnesses.

Answer 1

Answer:

C. Recommending the distribution of the net proceeds of taxes between the Centre and the states.

Finance Commission: A Key Constitutional Body

• 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 or at such earlier intervals as the President considers necessary.
• Its primary role is to advise the President on various financial matters between the Union and the States, and among the States themselves.

The 'Balancing Wheel' Role

• The characterization of the Finance Commission as the 'balancing wheel of fiscal federalism' stems from its crucial function in ensuring a fair and equitable distribution of financial resources.
• This function aims to reduce vertical and horizontal fiscal imbalances within the Indian federal structure.

Key Function Supporting the Characterization

• Recommending the distribution of the net proceeds of taxes between the Centre and the states: This is the most direct function that supports the 'balancing wheel' analogy.
• Vertical Imbalance: The Union government has more revenue-raising powers than the states. The Finance Commission recommends the share of central taxes that should be devolved to the states to address this.
• Horizontal Imbalance: States differ significantly in their revenue-generating capacities and expenditure needs. The Finance Commission's recommendations aim to ensure that all states, regardless of their fiscal strength, can provide basic public services.

Other Important Functions of the Finance Commission

• Recommending the principles that should govern the grants-in-aid of the revenues of the states out of the Consolidated Fund of India.
• Recommending measures to augment the consolidated fund of a State to supplement the resources of the Panchayats and Municipalities in the State on the basis of the recommendations made by the State Finance Commission.
• Making recommendations on any other matter referred to it by the President in the interest of sound finance.

Significance for Competitive Exams

• Understanding the Finance Commission's role is vital for exams like UPSC Civil Services, State PSCs, etc., as questions frequently appear on its composition, functions, and recommendations.
• Pay close attention to the distinction between vertical and horizontal devolution of taxes.
• Note the constitutional article (Article 280) and the periodicity of its appointment.