4 Functions of the Finance Commission of India

Article 280 of the Indian Constitution mentions the National Finance Commission which is functioning as a quasi-judicial body. The President of India appoints this Commission every 5 years or before if felt necessary. As of today, there have been 15 Finance Commissions have been formed. Furthermore, the Commission gives its report to the President, who then submits it to both the Houses of Parliament.  Moreover, this report includes a descriptive memorandum with details of the actions taken based on the recommendations. Read on to learn more about the Functions of the Finance Commission of India.

Functions of the Finance Commission 

The Finance Commission is tasked with giving recommendations to the President of India on the following matters:

Equitable Distribution of Tax Revenue Between Central and State Governments

The net proceeds from taxes are divided between the Central government and the States, with specific shares allocated to each State. 

• This process includes specifying the total tax revenue that is shared and then distributing it accordingly among the States, based on predefined criteria. 
• In addition, the aim is to guarantee a fair and equitable distribution of resources. 
• Hence helping the financial needs of both the Central government and each particular State.

Also Read: How many Members are in the Finance Commission?

Key Principles for Equitable Allocation of Central Grants-in-Aid to Indian States

in this Function of the Finance Commission, the allocation of grants-in-aid from the Central government to the States in India should comply with these principles. 

• First, there must be a clear and objective assessment of the financial needs and fiscal capacities of each State to make sure that there is equitable distribution. 
• Second, the grants should aim to remove regional disparities by giving more resources to less developed States. 
• Third, the allocation process should be transparent and have a well-defined criterion to stop any bias or favouritism. 
• Fourth, the grants should urge States to improve their fiscal management and revenue-generating capabilities. 
• Lastly, there should be a periodic review of the grants’ impact to confirm that they are effectively addressing the intended goals. 

Therefore, these principles help maintain a balanced and fair financial relationship between the Central and State governments. Thus, encouraging overall economic stability and development across the country.

Also Read: What is a Money Bill?

Empowering Local Governments through State Finance Commission Recommendations

To improve the Consolidated Fund of a State, it is important to implement measures that increase the financial resources available to Panchayats and Municipalities. 

• Moreover, this should be done after the guidance provided by the State Finance Commission. 
• The Commission’s recommendations usually focus on equitable distribution and efficient utilization of State funds. Thereby guaranteeing local governments receive sufficient financial support to meet their obligations and deliver public services effectively. 
• Furthermore, by following these recommendations, States can strengthen the fiscal capacity of their local bodies. Hence, promoting balanced regional development and improved governance.

Also Read: What is the Difference between a Financial Bill and a Money Bill?

Additional Cases by the President

Any additional issue referred to the Finance Commission by the President to maintain financial stability and soundness. Moreover, this means that the President can direct the Commission to address any other relevant matters that are important for guaranteeing the stability and soundness of the financial system of India. 

Thus, these are the four Functions of the Finance Commission of India. 

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