The Finance Commission of India was established on 22nd November, 1951. It was established under Article 280 of the Indian Constitution by the President of India. It was formed to describe the financial relations between the centre and the state.

The Finance Commission has been provided for the Indian constitution as part of the scheme of division of financial resources between the two different sets of governments. Finance Commission also serves as as a constitutional body for the purpose of allocation of certain resources of income between the Union and the State Governments.

Key role

1. The key role Finance Commission in India is to act as an instrument to divide proceeds of divisible taxes between the states and the Union government or in cases of taxes that are collected by the centre but the proceeds of which are allocated between the states, to determine the principles of such allocation.
2. The Finance Commission of India also determines the principles of governing the grants in aids of the revenues of states out of the consolidated fund of India. It is an important function of the Indian Finance Commission. The commission has the responsibility of considering any matter referred to the commission by the President in the interest of sound finance.
3. The President under Article 280 lays the recommendations of the finance commission before each House of the Parliament with an explanatory note as to the action to be taken on the recommendations.
4. The Finance Commission distributes of proceeds of Income-tax between the union and the states. But taxes on the payments of the central government are attributable only to the union territories.

Under Article 280 (C), the President may refer any matter to the Finance Commission in the interest of “sound finance”. Till now the President of India has asked the commission to make recommendations on the principles governing distribution of the net proceeds of estate duty in respect of Property Tax on Railway fare and excise duties on sugar and tobacco. The President also sought recommendations on the rates of interest, and terms of repayment of loans to the various states by the Government of India.

Finance Commissions mainly focuses on the financial relations between the State government and the Central government. These recommendations progressively increase share of the state governments in the proceeds of the income tax. They also increased gradually the amount of grants-in-aids to be given to the states. As a result the states now enjoy considerable degree of financial autonomy so necessary for the proper functioning of the federation.

It can be said that the Finance Commission as an autonomous body has served a wonderful purpose. In, as complex a society as India is, it acted as an agency to bring about coordination and cooperation for smooth working of a federal system.

Under the Constitution, the basis for sharing of divisible taxes by the Centre and the States and the principles governing grants-in-aid to the states have to be decided by the Commission every five years. The President can refer to the Commission any other matter in the interest of sound finance.

The recommendations of the Commission together with an explanatory memorandum as to the action taken by the Government on them are laid before each house of Parliament. The Commission has to assess the increase in the Consolidated Fund of a state to affix the resources of the Panchayat in the state. It also has to evaluate the increase in the Consolidated Fund of a state to affix the resources of the Municipalities in the state.

The Commission has been given passable powers to perform its function and within its area of activity. It has all the powers of the Civil Court as per the Code of Civil Procedure, 1908. It can call any witness, or can ask for the production of any public record or document from any court or office. It can ask any person to give information or document on matters as it may feel to be useful or relevant. It can function as a civil court in discharging its duties.

Key functions

The Commission makes recommendations to the president with regard to:

1. The distribution of the proceeds of taxes between the union and the states.
2. The principles which should govern the grants-in-aid to be given to the states.
3. Any other matter referred to the Commission by the President in the interest of sound finance.
4. The recommendations of the commission are generally accepted by the Union Government as well as by the parliament.