Balancing Wheel: The Finance Commission is often referred to as the 'balancing wheel' of India's fiscal federalism. Its primary role is to ensure a fair distribution of financial resources between the Union government and the State governments, and also among the States themselves.
Constitutional Mandate: Established under Article 280 of the Constitution of India, the Finance Commission is a quasi-judicial body. The President constitutes it every five years or earlier if deemed necessary.
Key Recommendations: The Commission makes crucial recommendations on:
The distribution of net proceeds of taxes to be shared between the Union and the States (vertical and horizontal devolution).
The allocation of the States' share of these taxes among the States.
The principles that should govern Grants-in-Aid to States out of the Consolidated Fund of India.
Measures to augment the Consolidated Fund of a State to supplement the resources of the Panchayats and Municipalities.
Grants-in-Aid: It recommends the principles for determining the need for grants-in-aid to states. These grants are essential for states that may not have sufficient financial resources to meet their needs after devolution of taxes.
Presidential Approval: Recommendations of the Finance Commission are made to the President. The President then lays these recommendations, along with an explanatory memorandum as to the action taken thereon, before both Houses of Parliament. The recommendations are not automatically implemented; they need to be accepted and acted upon by the government.
Parliamentary Laying: As per Article 281, the President lays the report of the Finance Commission, along with the memorandum explaining the action taken on its recommendations, before each House of Parliament. This ensures transparency and parliamentary oversight.
Non-binding Nature: While the recommendations are highly persuasive and usually accepted, they are not legally binding on the government. The government can choose to accept or reject them, but it must explain its reasons to Parliament.
Impact on States: The Finance Commission's recommendations significantly influence the financial autonomy and developmental capabilities of the states, making it a vital institution for cooperative federalism.
