The Finance Commission of India came into existence in 1951. It was established under Article 280 of the Indian Constitution by the President of India. It was formed to define the financial relations between the centre and the state. Finance Commission is a statuary, independent, semi judicious non-political body to be set up by President of India for every five years (or earlier) under Article 280 of the Commission.

Functions of the Finance Commission

The Finance Commission consists of a Chairman and four other members to be appointed by the President of India. The Constitution has not mentioned the qualifications of either the Chairman or its member; they are to be determined by the Parliament.


The Parliament can also lay down the manner in which they shall be selected. That is the reason why the Chairmen of the Finance Commissions have been reputed politicians, former justices, economists, technocrats and reputed public personalities.

Article 280 (3) speaks about the functions of the Finance Commission. The Article states that it shall be the duty of the Commission to make the recommendations to the President as to:

i. The distribution between the Union and the States of the net proceeds of taxes, which are to be, or may be, divided between them and the allocation among the states of the respective shares of such proceeds;

ii. To determine the quantum of grants-in-aid to be given by the Centre to states [Article 275 (1)] and to evolve the principles to govern the eligibility of the state for such grant-in-aid

iii. Any other matter referred to the Commission by the President of India in the interest of sound finance. Several issues like debt relief, financing of calamity relief of states, additional excise duties, etc. have been referred to the Commission invoking this clause.

The Commission shall determine its procedure and shall exercise such powers in the performance of its functions, as the Parliament may, confer on it by law. The President shall place the Report of the Commission together with an Explanatory Memorandum before each house of Parliament. In practice, the recommendations of Finance Commission are accepted by the Government of India for the distribution of shared tax revenue, as well as for grant-in-aid

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