President appoints this every five years or earlier if necessary. It a quasi judicial body under Article 280. Recommendations of the finance commission are not binding. Fourteenth finance commission under V. Y. Reddy submitted report on 2014 implementation time is 2015-2020.



1.    Commission has chairman and four members appointed by the president. Their term is decided by the president and they are eligible for re appointment.


Constitution authorises parliament to decide qualification of members. Parliament specifies chairman to be a person of experience in public affairs. Other members should be selected from amongst following:


        1.      Judge of HC or one qualified to be appointed as one.

   2.      Person with specialised knowledge of finance and accounts.

   3.      Person with experience in financial matters and administration.

Person with specialised knowledge of economics.


1.      Distribution of net proceeds of tax between centre and states and allocation of it between states.

2.      Principles governing grants in aid to states from centre

     3.    Measures needed to augment consolidated fund of states to supplement resources of panchayats and municipality as recommended by State finance commissions.

       4.    Any other matter specified to it by president in interest of sound finance.

  • NO system of federation can be successful unless both the Union and the States have at their disposal adequate financial resources to enable them to discharge their respective responsibilities under the Constitution.

  • Before entering into these elaborate provisions which set up a complicated arrangement for the distribution of the financial resources of the country, it has to be noted that the object of this complicated machinery is an equitable distribution of the financial resources between the two units of the federation, instead or dividing the resources into two watertight compartments, as under the usual federal system.

  • The Constitution makes a distinction between the legislative power to levy a tax and the power to appropriate the proceeds of a tax so levied. In India, the powers of a Legislature in these two respects are not identical.

  • The legislative power to make a law for imposing a tax is divided as between the Union and the States by means of specific Entries in the Union and State Legislative Lists

  • Thus, while the State Legislature has the power to levy an estate duty in respect of agricultural lands The power to levy an estate duty in respect of non-agricultural land belongs to Parliament [Entry 87 of List 1].

  • Similarly, it is the State Legislature which is competent to levy a tax on agricultural income [Entry 46 of List IIJ.

  • While Parliament has the power to levy income-tax on all incomes other than agricultural

  • The residuary power as regards taxation (as in general legislation) belengs to Parliament and the Gift tax and Expenditure tax have been held to derive their authority from this residuary power.

  • There is no concurrent sphere in the matter of tax legislation.

  • Before leaving this topic, it should be pointed out that though a State Legislature bas the power to levy any of the taxes enumerated in the State Legislative List, in the case of certain taxes, this power is subject to certain limitations imposed by the substantive provisions of the Constitution.

  • he First Finance Cornmtsslon was constituted in 1951, with Sri Neogy as the Chairman, and It submitted its report in 1953. Its recommendations were :

    1. 55 per cent of the net proceeds of income-tax shall be assigned by the Union to the States and that it shall be distributed among the States In the shares prescribed by the Commission.

    2. The Commisstion laid down the principles for guidance of the Government of India in the matter of making general grants-in-aid to States which require financial assistance and also recommended specific sums to be given to certain States such as West Bengal. Punjab, Assam, during the five years from 1952 to 1957.

  • A Second Finance Commission, with Sri Santhanam as the Chairman. A Third Finance Commission, with Sri AK. Chanda as its Chairman, was appointed. The Fourth Finance Commission with Dr. RAJAMANNAR, retired Chief Justice of the Madras High Court, as its Chairman, was constituted in May, 1964.

  • A Fifth Finance Commission, headed by Sri Mabavir Tyagi, was constituted in March. 1968. It submitted its final report in July 1969, and recommended that the States' share of Income-tax should be raised to 75 per cent and of Union Excise duties should be raised to 20 per cent.

  • The Sixth Finance Commission, beaded by Sri Brahmananda Reddy, submitted its Report in October, 1973. This Commission was, for the first time, required to go into the debt position of states.

  • The Eighth Finance Commission was set up in 1982, with ex-Minister, Shri Y.B. Chavan as its head.

  • The Eighth Finance Commission submitted its report in 1984. but its recommendations, granting moneys to the States, were not implemented by the Government of India, on the ground of financial difficulties and late receipt of the Commission's Report

  • ObviOusly, this placed some of the States in financial difficulty and the State of West Bengal raised vehement protest against this unforeseen situation.

  • Responsible authorities in West Bengal threatened litigation but eventually nothing was done presumably because the matter was non-justiciable.

  • Article 280(3) enjoins the Finance Commission to make 'recommendations' to the President and the only duty imposed on the President, by Art. 281, is to lay the recommendations of the Commission before each House of Parliament.

  • It is nowhere laid down in the Constitution that the recommendations of the Commission shall be binding upon the Government of India or that it would give rise to a legal right In favour of the beneficiary States to receive the moneys recommended to be offered to them by the Commission.

  • Of course. non-Implementation would cause grave dislocation in States which might have acted upon their anticipation founded on the Commission's Report.

  • The remedy for such dislocation or injustice lies only in the ballot box.

  • (a) While a Proclamation of Emergency is in operation, the President may by order direct that, for a period not extending beyond the expiration of the financial year in which the Proclamation ceases to operate, all or any of the provisions relating to the division of the taxes between the Union and the States and grants-in-aid shall be suspended

  • In the result, if any such order is made by the President, the States will be left to their narrow resources from the revenues under the State list, without any augmentation by contributions from the Union.

  • (b) While a Proclamation of Financial Emergency is made by the President, it shall be competent for the Union to give directions to the States-

  • (i) to observe such canons of financial propriety and other safeguards as may be specified In the directions;

  • (ii) to reduce the salaries and allowances of all persons serving in connection with the affairs of the State. including High Court Judges;

  • (iii) to reserve for the consideration of the President all money and financial Bills, after they are passed by the Legislature of the State (Art. 360]

  • The Union shall have unlimited power of borrowing, upon the security of the revenues of India either within India or outside. The Union Executive shall exercise the power subject only to such limits as may be fixed by Parliament from time to time

  • The borrowing power of a State is, however, subject to a number of constitutional limitations:

  • It cannot borrow outside Iodia. Under the Govt of India Act, 1935, the States had the power to borrow outside India with the consent of the Centre. But this power is totally denied to the States by the Constitution; the Union shall have the sole right to enter. into the international money market in the matter of borrowing.

  • The State Executive shall have the power to borrow, within the territory of India upon the security of the revenues of the State; subject to the following conditions:

  • Limitations as may be imposed by the State Legislature.

  • If the Union has guaranteed an outstanding loan of the State, no fresh loan can be raised by the State without consent of the Union Government

  • The Government of India may itself offer a loan to a State, under a law made by Parliament So long as such a loan or any part thereof remains outstanding, no fresh loan can be raised by the State without the consent of the Government of India. The Government of India may impose terms in giving Its consent as above


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