Constitutional Mandate: Article 280 of the Indian Constitution provides for the establishment of a Finance Commission.
Formation Frequency: The President is empowered to constitute the Finance Commission either every five years or at an earlier interval if they consider it necessary. This ensures timely review and adjustment of financial matters.
Selection and Qualifications: Parliament, through legislation (like the Finance Commission (Qualifications, Selection and Terms of Office) Rules, 1951), determines the criteria for appointing the Chairman and members of the Finance Commission. The qualifications are designed to ensure that the members possess relevant expertise in finance, economics, public administration, and law.
Role and Recommendations: The Finance Commission is primarily an advisory body. Its recommendations on the distribution of taxes between the Union and states, and the allocation of funds to states, are highly influential but not legally binding on the government. However, the government usually accepts most of the recommendations.
Support for Local Bodies: A significant function of the Finance Commission is to recommend measures to augment the Consolidated Fund of a State to supplement the resources of the Panchayats and Municipalities, based on the recommendations made by the State Finance Commissions. This is a crucial aspect for strengthening the financial autonomy of local self-governing institutions.
Key Recommendations Areas:
The distribution between the Union and the States of the net proceeds of taxes which are to be, or may be, divided between them and the allocation between the States of the respective shares of such proceeds.
The principles which should govern the grants-in-aid of the revenues of the States out of the Consolidated Fund of India.
Measures to increase the Consolidated Fund of a State to supplement the resources of the Panchayats and Municipalities in the State.
Composition: The Commission consists of a Chairman and four other members appointed by the President.
