Chapter 42: FINANCE COMMISSION
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.
has chairman and four members appointed by the president.
Their term is decided
by the president and they are eligible for re appointment.
authorises parliament to decide qualification of members.
chairman to be a person of experience in public affairs.
Other members should
be selected from amongst following:
of HC or one qualified to be appointed as one.
with specialised knowledge of finance and accounts.
with experience in financial matters and administration.
with specialised knowledge of economics.
of net proceeds of tax between centre and states and
allocation of it between
governing grants in aid to states from centre
needed to augment consolidated fund of states to
supplement resources of
panchayats and municipality as recommended by State
other matter specified to it by president in interest of
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
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
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.
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.
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
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
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
(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
(iii) to reserve for the consideration of the President all money and
financial Bills, after they are passed by the Legislature of the State
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
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
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
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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