Finance Commission of India

The Finance Commission is established every five years or sooner by the President, as per Article 280 of the Indian Constitution. Due to significant regional diversity and the uneven distribution of natural resources in India, the capacity of states to generate resources for development varies widely. However, within a federal structure, the principles of equalization necessitate that states from different regions with varying revenue-raising capabilities should be able to deliver at least a basic level of public services to their citizens. Thus, the revenue needed to provide these services should be devolved to all regions. The Finance commission determines this financial devolution of revenue and is therefore referred to as the ‘balancing wheel of fiscal federalism in India.

Evolution of Finance Commission of India

Like other federations, India faces issues of vertical and horizontal imbalances between the Union and the States. By recognizing these challenges, the Constituent Assembly included several provisions aimed at reducing financial disparities between the Union and the States. Eg. Article-270 provides for distribution of tax revenue between the centre and states and article-275 provides for grants from the centre to certain states.

• Interim Finance Commission: Discussions and differing opinions concerning revenue sharing between the Central government and the States are prevalent in the Constituent Assembly debates. In 1949, an Interim Finance Commission was established, chaired by C.D. Deshmukh, to evaluate the allocation of resources between the Central government and the States.
• First Finance Commission of Independent India: After interim Commission, the first Finance Commission was constituted on 22nd November 1951 and was chaired by K.C. Neogy. Since then, 15 Finance Commissions have been formed. 

Constitution and Composition of Finance Commission of India

• The President of India establishes the Finance Commission every fifth year or at an earlier time if deemed necessary.
• Composition: The Finance Commission consists of a chairman and four other members.

Appointment and qualifications of Finance Commission of India

The President appoints the Chairman and members of the Finance Commission. 

• The Constitution empowers Parliament to set the qualifications for the Chairman and members, as well as the procedures for their selection.   

Consequently, Parliament, through The Finance Commission (Miscellaneous Provisions) Act, 1951, has defined the following qualifications for the Chairman and members of the Finance Commission:

• For chairman: The Chairman must have experience in public affairs.
• For members:  The other four members should be chosen from individuals who:
  • Are or have been, or are eligible to be appointed as judges of a High Court,
  • Possess specialized knowledge of government finance and accounts,  
  • Have extensive experience in financial affairs and administration.
  • Have special knowledge of economics.

Tenure and removal of Finance Commission of India

• The chairman and members of Finance Commission hold office for the period as specified by President in his order. The Constitution does not specify a set tenure.
• Any member can resign from their position by submitting a letter to the President.
• There are no specific grounds for the removal of the Chairman and members outlined in the Constitution. However, according to The Finance Commission (Miscellaneous Provisions) Act, 1951, a person shall be disqualified from being appointed as or serving as a Chairman or member if certain conditions are met:
  • He/she is of unsound mind.
  • He/she is an undischarged insolvent.
  • He/she has been convicted of an offence involving moral turpitude.
  • He/she has such financial or other interests as is likely to affect prejudicially his/her function as a member of the commission.