Question

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

i. It recommends the distribution of net proceeds of taxes between the Centre and the states.

ii. It supervises the tax collection mechanisms of the Union and State Governments.

iii. It suggests measures to augment the Consolidated Fund of a State to support panchayats and municipalities.

• A. i and iii only
• B. i only
• C. ii and iii only
• D. None of the above

Answer 1

Answer:

A. i and iii only

Central Finance Commission:

• Constitutional Mandate: The Finance Commission is a constitutional body established under Article 280 of the Indian Constitution. It is appointed every five years by the President of India.

• Primary Role: Distribution of Taxes

  • The most crucial function is to recommend the distribution of the net proceeds of taxes between the Union (Centre) and the States. This includes the share of taxes that each state will receive.

  • It also recommends the allocation of such proceeds between the States themselves.

• Grants-in-Aid: The Finance Commission recommends the principles governing grants-in-aid of revenues to the States from the Consolidated Fund of India.

• Augmenting State Resources: It suggests measures needed to augment the Consolidated Fund of a State to supplement the resources of Panchayats and Municipalities in the State. This ensures financial stability for local bodies.

• Distinction from Tax Supervision: The Finance Commission does not supervise the tax collection mechanisms of the Union and State Governments. This function typically falls under the purview of tax administration departments and audit bodies.

• Impact on Fiscal Federalism: The recommendations of the Finance Commission play a vital role in shaping India's fiscal federalism by ensuring a balanced vertical and horizontal distribution of financial resources.

• Recent Trends: Recent Finance Commissions have increasingly focused on fiscal consolidation, debt management, and the financial health of local self-governing institutions.