FINANCE COMMISSION

OF INDIA
-A COMPARATIVE STUDY
BY-ASISH ANSUMAN MISHRA
2019LLB036
SEMESTER-03
WHAT IS FINANCE COMMISSION

• Finance commission is one of the most important constitutional body of India.

• Every federal state has a necessary requirement of allocation of taxes and resources for
the effective administration of country as whole. When a country is divided into various
states the overall development of a country is not possible without the proper allocation
of resources to various states.
• According article 280 of Indian constitution gives provision for establishment of Finance
commission of India. It is a quasi-judicial body which can conduct investigation and hold
hearings. The Finance commission of India is constituted by president of India every fifth
year or at any such time he thinks it is necessary
COMPOSITION OF FINANCE COMMISSION

• According to the Indian constitution the finance commission should have a chairman and four
other members.
• All the members of a finance commission must be appointed by the President of India. All the
members of the finance commission can be reappointed.
• The constitution empowers the parliament to make rules regarding qualifications, service
conditions and power of the finance commission. The parliament enacted an act called the finance
commission (Miscellaneous Provisions Act, 1951).
• The act was enacted to determine the qualifications of members of the finance commission and the
powers of the finance commission.
QUALIFICATIONS OF MEMBERS-

• The qualifications required to be the member of finance commission are-

• The chairman of the finance commission should have experience in the field of public
affairs. The other four members can be selected out of the persons who have-
• Been judges of high court or qualified to be appointed as judges of high court
• Special knowledge regarding the finance and accounts of the government.
• Wide experience in administration and financial matters
• Knowledgeable person in Economics.
FUNCTIONS OF THE FINANCE COMMISSION-

• The finance commission most important function is to give recommendations regarding the
distribution of union tax revenues between states and center or to decide the horizontal and vertical
tax devolution.
• The commission also need to recommend regarding the principle which should govern the grants in
aid of the revenues of the state out of the consolidated fund of India.
• The steps that are needed to be taken to support the consolidated funds of states and to help the
resources of municipal bodies and Panchayati Raj institutions.
• The commission is also needed to make recommendations regarding any such matter which are
referred to it by the President of India for sound finance in the country.
POWERS OF THE FINANCE COMMISSION

• The finance commission can determine their own procedure and shall have a power of a
civil court while undertaking their functions. But this power is only limited to summoning
witnesses within the territory of India, Production of any document before them, asking
for any public record of any office or courts.
• The commission can summon any person regarding any matters which are relevant and
important to the commission.
• Hence it is also a quasi-judicial body.
COMPARISON BETWEEN 12TH, 13TH AND 14TH
FINANCE COMMISSION
WAS SERVICE TAX BEING UNDER THE JURISDICTION OF
THE FINANCE COMMISSION TO DECIDE ITS ALLOCATION
AMONG ALL STATES OTHER THAN JAMMU & KASHMIR

• 12TH- YES
• 13TH-YES
• 14TH-YES
SHARE OF STATES IN THE DIVISIBLE POOL OF
TAXES
• 12TH-30.5%
• 13TH- 32%
• 14TH-42%
WAS THERE ANY CONDITION ON SHARE OF
STATES IN THE SHAREABLE POOL OF TAXES
• 12TH-Yes, if the states can collect sales tax on sugar, textiles and tobacco then the share of
states should be reduced to 29.5%.
• 13TH-No, there was no such conditions.
• 14TH-No, there was no such conditions.
OVERALL TRANSFER TO THE STATES OUT OF
THE CENTRAL GROSS REVENUE RECEIPTS
• 12TH-38%
• 13TH-39%
• 14TH-49%
CRITERIA CONSIDERED BY THE COMMISSION WHILE
DETERMINING THE HORIZONTAL TAX DEVOLUTION

• 12TH-Population, Per capita income distance, Area, Tax effort, Fiscal discipline
• 13th- Population, Area, Fiscal capacity distance, Fiscal discipline
• 14th-Population of 1971, Demographic changes in 2011, Area, Forest cover, Income
Distance
WAS THERE ANY DISTINCTION BETWEEN SPECIAL AND GENERAL CATEGORY
STATES WHILE DETERMINING THE INCOME DISTANCE, FISCAL CAPACITY
DISTANCE OR PER CAPITA INCOME DISTANCE

• 12th- No
• 13th-Yes
• 14TH- No
WEIGHTAGE GIVEN EACH CRITERION WHILE
DETERMINING THE HORIZONTAL DEVOLUTION
•12th-Population-25%
•2. per capita Income distance-50%
•3. Area-10%
•4.Tax effort-7.5%
•5.Fiscal discipline-7.5%

•13th-Population-25%
•2.Area—10%
•3.Fiscal capacity distance-47.5%
•4.Fiscal discipline-17.5%
CONTINUED

• 14th-Population of 1971-17.5%
• 2.Demographic changes by 2011-10%
• 3.Forest cover-7.5%
• 4.Area-15%
• 5.Income distance-50%
GRANTS IN AID-

• The finance commission’s terms of reference mentioned about recommend the principles
and amounts of grants in aid for revenues of states which are in need assistance as per
article 275 of Indian constitution
COMPARISON

PARAMETE 12TH 13TH 14TH

R FINANCE FINANCE FINANCE
COMMISSIO COMMISSIO COMMISSIO
N N N

TOTAL 142460 318581 537354

GRANTS CRORES CRORES CRORES
POST DEVOLUTION NON-PLAN REVENUE
DEFICIT GRANTS
12TH 13TH 14TH

56856 CRORES 51800 CRORES 287436 CRORES

 WAS THERE ANY DISTINCTION BETWEEN PLAN AND NON-PLAN REVENUE
EXPENDITURES OF THE STATES WHILE DETERMINING POST DEVOLUTION
NON-PLAN REVENUE DEFICIT GRANTS

12TH 13TH 14TH

YES YES No, the total revenue

expenditure of the
states was considered
rather than making
distinction
 STATE SPECIFIC GRANTS

12TH 13TH 14TH

7100 CRORES 27945 CRORES 0

MAINTENANCE OF ROADS AND BRIDGES

12TH 13TH 14TH

15000 crore excluding 19930 crores including 0

rural roads the rural roads
HEALTH

12TH 13TH 14TH

5887 CRORES 0 0
 EDUCATION

12TH 13TH 14TH

10172 CRORES 24068 crores for 0

elementary education and
implementing the SSA
scheme and Right to
education Act, 2009
PERFORMANCE INCENTIVE

12TH 13TH 14TH

0 1500 CRORES 0
 IMPROVEMENT OF SUPPLY OF JUSTICE

12TH 13TH 14TH

0 5000 CRORES 0
RENEWABLE ENERGY

12TH 13TH 14TH

0 5000 CRORES 0
WATER SECTOR MANAGEMENT

12TH 13TH 14TH

0 5000 CRORES 0
STATISTICAL SYSTEM AND DEVELOPING DATA
BASE
12TH 13TH 14TH

0 1241 CRORES 0
SECTOR SPECIFIC GRANTS

12TH 13TH 14TH

YES YES NO
FINDINGS FROM THE REPORT

• The role of finance commission in ensuring fiscal federalism in the country is of paramount
importance.
• The central government approves maximum numbers of finance commission’s recommendations
and try to execute it.
• The most important work of finance commission is deciding vertical and horizontal devolution
and the distribution of grants in aid of the revenues of the state.
• There is no efficient monitoring mechanism placed or established by finance commission which is
of permanent nature which will help in monitoring the use of finance commission grants by the
states.
CONTINUED

• There is no certain set of criteria established which is common for all the finance
commission while determining the horizontal devolution, every finance commission has
different set of criteria with different weightage attached to the criteria.
• All finance commission have given certain weightage to the 1971 population of each state
while determining the horizontal devolution. The weightage given to the area and
population in the horizontal devolution formula were not the highest in case of finance
commissions.
CONTINUED

• There is also no formula that has been fixed by the commission while determining the
vertical devolution.
• There was also indicative ceiling recommended by the 12th and 13th finance
commissions regarding overall transfers to the states out of the central gross revenue
receipts. The 14th finance commission recommended no indicative ceiling but
recommended that overall transfers should be on average of 49% during the entire five-
year award period
CONTINUED

• The 12th and 13th finance commission recommended grants in aid in state specific and
sector specific manner but the 14th finance commission recommended a separate
institution for these purposes.
• The 14th finance commission approach is in the best interest of the union and states.
While determining the non-plan revenue deficit grants the 12th and 13th finance
commission distinguished between plan and non-plan expenditures of the states, but the
14th finance commission has made no distinction and considered the total revenue
expenditure while determining the non-plan revenue deficit grants.
CONTINUED

• The 13th finance commission made a distinction between general and special category
states while considering some of the criteria under horizontal devolution. The 13th
finance commission also recommended grant of incentives to the special category states
which were no longer having revenue deficits but the general category states which had
made progress related to elimination of revenue deficit were not rewarded. No general
category states have been awarded for better fiscal performance during the previous
award period.
RECOMMENDATIONS-

• There must be a provision in finance commission’s terms of reference to give more importance
to the environment and natural resource management when they are determining the share of
states in tax revenues or the grants in aid
• There should be an efficient monitoring mechanism that has to be put in place to verify whether
the finance commission grants are utilised for the purpose they are recommended or in the
manner they are recommended.
• While determining the share of states in tax revenues and grants in aid of the revenues of the
states the finance commission should give importance to ensure that sufficient powers are given
o the states and they have certain autonomy regarding the expenditure of the grants.
CONTINUED

• All the finance commission should follow a common set of criteria while determining the
horizontal devolution to avoid significant fluctuations in the shares of states and there
must be a certainty in considering the criteria for devolution.
• The finance commission should not make any distinction between special and general
category states while giving weightage under any criterion which is used to determine the
horizontal devolution or the shares of states in the union tax revenues.
CONTINUED

• The population and area of the state should be given utmost importance in place of other
criterion used for horizontal devolution because the population decides the quantity of goods
and services requires and the area decides the cost of providing services to the people at each
and every corner of the state.
• The most recent census should be followed while considering the population as a criterion to
determine horizontal devolution. The 2011 census or the most recent one must be used instead
of 1971 population.
• There should be a fixed formula for deciding vertical devolution like there is formula to
determine the horizontal devolution.
CONTINUED

• The finance commission should decide a floor percentage for overall transfers to the states from
central gross revenue receipts instead of an indicative ceiling because the transfers from the union
to the states is most of the time more than indicative ceiling recommended by the commission.
• 14th finance commission step regarding the state specific and sector specific grants should be
followed, and a separate institutional arrangement must be created with the collaboration of union
and states to determine the sector specific and state specific allocation and their proper monitoring.
• While deciding the non-plan revenue deficit grants the finance commission must consider the total
revenue expenditure of the state instead of making a distinction between plan and non-plan
expenditure.
CONTINUED

• Incentive grants should be provided to the states without making any distinction between special and
general category states, which comes out of the category of states having non-plan revenue deficits to
encourage those states to remain in that path and keep bettering their fiscal performance. This will be
a boost for the states.
• There must be enforceability of most of the finance commission’s recommendations. The state and
central governments should analyse and give importance to the finance commission reports because
all these recommendations are drafted by the commission after undertaking mass researches,
undertaking multiple number of meetings with the central and state governments and visits to all the
states. A lot of effort is given by the finance commission for better financial health of the country it
should be followed by the states and centre to ensure the fiscal federalism in the union of India.
THANK YOU