Licchavi Lyceum


Licchavi Lyceum

Finance Commission [Short Note]

Finance commission is a constitutional body established under Article 280 of the Indian Constitution. Its recommendation is normally not rejected by the government. However, the recommendation of finance commission is only advisory and not binding.

  1. Purpose: The primary purpose of the Finance Commission is to recommend the distribution of tax revenues between the Union government and the state governments and among the states themselves.
  2. Composition: The Finance Commission is comprised of a Chairman and four other members appointed by the President of India.
  3. Frequency: The Finance Commission is constituted every five years, or at such other intervals as may be specified by the President.
  4. Duties: The Finance Commission’s duties include making recommendations on the distribution of net proceeds of taxes between the Union and the states, the principles governing grants-in-aid to the states from the Consolidated Fund of India, and measures needed to augment the Consolidated Fund of a state to supplement the resources of the panchayats and municipalities.
  5. Impact: The recommendations of the Finance Commission have a significant impact on the financial relationship between the Union government and the state governments and on the fiscal transfers to states.
  6. Independence: The Finance Commission functions independently, without being bound by the government’s directives, and its recommendations are binding on the government.
  • It has 4 members and a chairman.
  • The finance commission submits its report to the president who tables it in parliament.
Finance Commission
Finance Commission

Recommendation of 14th finance commission (2015-20):

  1. It has recommended increasing the tax devolution to states (42 %).
  2. It clearly stated that there should not be any distinction between plan and non-plan expenditure.

What is difference between plan and non-plan expenditure?

Plan expenditure:  The part of govt. spending which is spent in line with the plans formulated by the planning commission. Example: Spending on Pradhan Mantri Gram sadak Yojana.

Non Plan expenditure: Those spending which is not a part of the plan formulated by planning commission.

The parameters taken into account are Population, Income distance, Forest Cover etc.

The criteria used by the 11th to 14thFinance Commissions are:

Population is an indicator of the expenditure needs of a state. The 15th Finance Commission has been mandated to use data from the 2011 Census.

Area is used as a criterion as a state with larger area has to incur additional administrative costs to deliver services.

Income distance is the difference between the per capita income of a state with the average per capita income of all states. States with lower per capita income may be given a higher share to maintain equity among states.

Forest cover indicates that states with large forest covers bear the cost of not having area available for other economic activities. Therefore, the rationale is that these states may be given a higher share.

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