Part XII - Finance • Article

Article 280 Simplified: Finance Commission

Article 280 mandates the President to appoint an independent 'Finance Commission' every 5 years. This crucial expert body (comprising a Chairman and 4 members) recommends: (a) vertical sharing of central taxes between the Union and States, (b) horizontal sharing among states, (c) rules governing grants-in-aid, and (d) measures to augment state consolidated funds for Panchayats and Municipalities based on state Finance Commission reports.

Official Text

(1) The President shall, within two years from the commencement of this Constitution and thereafter at the expiration of every fifth year or at such earlier time as the President considers necessary, by order constitute a Finance Commission which shall consist of a Chairman and four other members to be appointed by the President. (2) Parliament may by law determine the qualifications which shall be requisite for appointment as members of the Commission and the manner in which they shall be selected. (3) It shall be the duty of the Commission to make recommendations to the President as to- (a) the distribution between the Union and the States of the net proceeds of taxes which are to be, or may be, divided between them under this Chapter and the allocation between the States of the respective shares of such proceeds; (b) the principles which should govern the grants-in-aid of the revenues of the States out of the Consolidated Fund of India; [(bb) the measures needed to augment the Consolidated Fund of a State to supplement the resources of the Panchayats in the State on the basis of the recommendations made by the Finance Commission of the State;] [(c) the measures needed to augment the Consolidated Fund of a State to supplement the resources of the Municipalities in the State on the basis of the recommendations made by the Finance Commission of the State;] [(d)] any other matter referred to the Commission by the President in the interests of sound finance. (4) The Commission shall determine their procedure and shall have such powers in the performance of their functions as Parliament may by law confer on them.. Sub-clause (c) re-lettered as sub-clause (d) by s. 3,ibid. (w.e.f. 1-6-1993). [Note: The Finance Commission is appointed every five years.]

Simple Meaning

Explain Like Ten

Every five years, the President picks a team of five experts (the Finance Commission). They look at the country's tax bucket and write a guide on how to divide that money fairly between the center and state governments.

Student Mode

Article 280 is the bedrock of vertical and horizontal tax devolution in Indian fiscal federalism. It requires the President to constitute a Finance Commission every fifth year (or earlier). The Commission consists of a Chairman and four other members. It recommends: (a) distribution of net tax proceeds, (b) principles for grants-in-aid under Article 275, and (c) measures to augment the State Consolidated Fund to assist Panchayats and Municipalities (inserted by the 73rd and 74th Amendments).

Example

The 15th Finance Commission set the formula for distributing 41% of central taxes to state governments, adjusting the shares of individual states based on population, area, forest cover, and tax effort.

Key Takeaway

The Finance Commission is an independent body appointed every 5 years to recommend fair tax and grant distribution between the Center and States.

FAQs

What was added to Article 280 by the 73rd and 74th Amendments in 1992?

Sub-clauses (bb) and (c) were added, requiring the Central Finance Commission to suggest measures to augment state funds to support local Panchayats and Municipalities based on state Finance Commission reports.

How are the qualifications of Finance Commission members decided?

Article 280(2) empowers Parliament to determine the qualifications and selection criteria by law. This was enacted through the Finance Commission (Miscellaneous Provisions) Act, 1951.

Are the recommendations of the Finance Commission binding on the Government?

No, they are technically advisory. However, by convention, the government accepts its main tax devolution recommendations.

Who was the Chairman of the 15th Finance Commission?

N.K. Singh. The 15th Finance Commission recommended a vertical devolution share of 41% to states for the period 2020-2026.

Quiz

How often is the Finance Commission constitutionally required to be constituted?

Answer: Every 5 years

Which amendments added local bodies (Panchayats and Municipalities) to the scope of Article 280?

Answer: 73rd and 74th Amendments

Who has the power to determine the qualifications required for appointment as members of the Finance Commission?

Answer: Parliament by law

The Finance Commission consists of a Chairman and how many other members?

Answer: Four