Question

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

1. It recommends measures to augment the Consolidated Fund of a state to support panchayats and municipalities.

2. It determines the principles governing grants-in-aid to states from the Centre.

3. It directly allocates funds to local bodies like panchayats and municipalities.

• A. 1 and 2
• B. 1 and 3
• C. 2 and 3
• D. All are correct

Answer 1

Answer:

A. 1 and 2

The Finance Commission

Constitutional Mandate

• 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 times as he considers necessary.

• Its primary role is to advise on the distribution of financial resources between the Union and the states, and among the states themselves.

Key Functions and Recommendations

• Revenue Distribution: The Commission recommends the distribution of net proceeds of taxes to be shared between the Union and the states. This includes recommending the share of states in the central taxes.

• Grants-in-Aid: It determines the principles which should govern the grants-in-aid to states out of the Consolidated Fund of India. These grants are crucial for states facing revenue deficits.

• Augmenting State Resources: The Finance Commission recommends measures needed to augment the Consolidated Fund of a State to supplement the resources of Panchayats and Municipalities in the state, based on the recommendations made by the State Finance Commissions. This does not involve direct allocation of funds by the Union Finance Commission to local bodies, but rather providing recommendations to strengthen the financial position of states for devolution to local bodies.

• Other Recommendations: It can also make recommendations with regard to any other matter referred to it by the President in the interests of sound financial management.

Distinction from State Finance Commissions

• State Finance Commissions are constituted under Article 243-I and Article 243-Y of the Constitution to review the financial position of Panchayats and Municipalities and recommend devolution of funds from the state consolidated fund to these local bodies.

• The Union Finance Commission's recommendations regarding augmenting the Consolidated Fund of a state for local bodies are based on the reports of these State Finance Commissions.

Significance for Competitive Exams

• Understanding the constitutional basis (Article 280) is crucial.

• Be aware of the five-year periodicity of its constitution.

• Distinguish between the roles of the Union Finance Commission and State Finance Commissions, particularly concerning local bodies.

• Focus on its advisory role in revenue sharing and grants-in-aid, rather than direct fund allocation to local bodies by the Union FC