Question

Which of the following statements about the State Finance Commission’s functions are correct?

It recommends the sharing of net tax proceeds between the state government and panchayats.

It determines taxes that panchayats can levy and expend.

It submits its recommendations to the State Legislative Assembly directly.

It reviews the financial position of panchayats and municipalities.

• A. 1, 2, and 4
• B. 1 and 3
• C. 2 and 3
• D. 3 and 4

Answer 1

Answer:

A. 1, 2, and 4

State Finance Commission

• Constitutional Mandate: The establishment and functions of the State Finance Commission (SFC) are primarily derived from Article 243-I and 243-Y of the Indian Constitution, which were inserted by the 73rd and 74th Constitutional Amendments in 1992. These articles mandate the creation of SFCs in each state.

• Key Recommendations: The SFC makes recommendations on several crucial financial matters related to local self-government bodies, including:

  • The distribution of the net proceeds of taxes levied by the state, which are to be assigned to or shared between the state government and the Panchayats (and Municipalities).

  • The principles that should govern the grants-in-aid from the state revenues to Panchayats (and Municipalities).

  • Measures needed to augment the consolidated fund of a Panchayat (or Municipality) to supplement the resources of the Panchayats (and Municipalities) based on the recommendations of the Finance Commission of India.

• Panchayat Taxation Powers: An SFC also determines which taxes, duties, tolls, and fees can be assigned to Panchayats and can be levied and collected by them. This empowers local bodies financially.

• Financial Position Review: The SFC is responsible for reviewing the overall financial position of Panchayats and Municipalities and suggesting ways to improve their fiscal health.

• Reporting Mechanism: The SFC submits its report, containing its recommendations, to the Governor of the State. The Governor then causes these recommendations, along with an explanatory memorandum on the action taken, to be laid before the State Legislative Assembly. It is crucial to note that the report is submitted to the Governor, not directly to the Assembly for immediate action.

• Quinquennial Review: Similar to the Union Finance Commission, the SFC is typically constituted every five years to ensure a regular review and adjustment of financial devolution to local bodies.

• Role in Decentralization: The SFC plays a vital role in strengthening fiscal decentralization in India, ensuring that local bodies have adequate financial resources to perform their duties effectively and deliver services to the citizens.