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Finance Commission – All you need to know

Managing the finance of a country is no child’s play. It requires tremendous effort and planning to do so. That’s why many government bodies have been set up for economic planning and development.

To understand the development process of a country, we should know what is happening behind the scenes. One of the most important organizations among them is the finance commission. 

so what does the finance commission do? who are its members? how does it work? let’s see.

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Put simply, the finance commission is a   constitutional body that determines the method and formula for distributing tax proceeds between state and central government and among the states as per the present requirements and constitutional framework.

The finance commission was created in 1951 under article 280 of the Indian constitution. The finance commission was primarily created to cater to the needs of the center and state governments. In other words, it defines the financial relations between the center and state governments.


As per the Constitution, the Commission is appointed every five years and consists of a chairman and four other members. It is constituted by the president of India, The most recent was constituted in 2017 and is chaired by N. K. Singh, a former member of the Planning Commission.

  • Chairman: Heads the Commission and presides over the activities. He should have had public affairs experience.
  • Four Members: The Parliament determines legally the qualifications of the members of the Commission and their selection methods.


The finance commission and its functions

1) Making recommendations to the legislature on the allocation of revenue resources between the center and state governments and among states


In other words, The key role of the Finance Commission in India is to act as an instrument to divide proceeds of divisible taxes between the states and the Union government.

In cases of taxes that are collected by the center but the proceeds of which are allocated between the states, to determine the principles of such allocation ie, it decides who gets what.

2) Act as a connecting link between central and state government in financial decisions.

The finance commission defines the financial relations between local and state governments.

Finance Commissions mainly focus on the financial relations between the State government and the Central government. The finance commission decides the basis of how the revenue proceeds from its operations are to be shared between local and state governments.

The principles governing the grants-in-aid to the states by the Centre out of the consolidated fund of India. The finance commission has the power for the continuance or modification of any agreement between the state and the union.

 As a result the states now enjoy a considerable degree of financial autonomy, necessary for the proper functioning of the federation.

3) Recommend the goverments in financial matters

The finance commission submits its report to the president of India. 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.

The commission has the responsibility of considering any matter referred to the commission by the President in the interest of sound finance.

The recommendations made by the Finance Commission are of an advisory nature only and therefore, not binding upon the government.

The recommendations of the commission are generally accepted by the Union Government as well as by the parliament.


15th Finance Commission - Formula


A State Finance Commission is similar to the central finance commission.

It reviews the financial position of the panchayats in a state and makes recommendations to the Governor about the principles that should govern the distribution of tax proceeds – taxes, duties, levies, toll fee – collected by the state between the state and its Panchayati Raj Institutions at all three levels – village level, block level, and district level.

The functions of state finance commission are as follows:

  1. Reviewing the economic condition of the various Panchayati raj institutions and municipal bodies that are there in the state.
  2. Taking such steps that help in boosting the financial condition of the various municipal bodies and Panchayati raj institutions in the state.
  3. Allotting the funds to the various Panchayati raj institutions and municipal bodies in the state from the Consolidated Fund of the State.
  4. Acting as an arbiter between the central and the state governments with regard to issues that are of financial nature.
  5. Transferring funds that are granted by the central government to the state government.
  6. Distributing between the various municipal bodies and Panchayati raj institutions that are there within the state and the state government the total proceeds of taxes, fees, tolls, and duties that are charged by the state government.
  7. Determining the taxes, tolls, duties, and fees that may be levied by the various Panchayati raj institutions and municipal bodies that are there within the state.        


The role of economic planning is a crucial part of the development of a country. So we should critically evaluate the works of organizations like the planning commission.

Ashin S Anish

Mr. Ashin S Anish is a financial market analyst, certified from the Indian School of Business. A certified Money manager from the University of California, Irvine, Cybersecurity tools, and cyberattacks specialist certified by IBM, Certified in Artificial Intelligence from deep, Certified in Portfolio and Risk Management from the University of Geneva and Certified in Microeconomics Principles by the University of Illinois. He is also an avid money manager who believes that you have to be agile as a monkey with money matters...

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