Finance Commission

One of the common features of federal governments around the world is the fiscal imbalance between the Centre and the States. While the Central governments have the command over most of the nation-wide resources, the State governments have the responsibilities to implement most of the programmes on social and economic development. This imbalance between the fiscal powers and responsibilities of the Centre and the States has been described as Vertical Fiscal Imbalance. The imbalance is compounded by another imbalance among the States, created due to the interplay of various historical, geographical and economic factors, which place some States ahead of others in development, creating regional disparities among the States, which is described as Horizontal Fiscal Imbalance. Indian federation is no exception - it faces the challenges of both vertical and horizontal imbalance.

In an explicit recognition of the need to correct such imbalances, the Indian Constitution embodies the enabling and mandatory provisions to address them through the transfer of resources from the Centre to the States in Article 268, Article 269, Article 270, Article 275, and Article 293.

In addition the Indian Constitution has provided for an institutional mechanism to facilitate such transfers. The institution assigned with such a task under Article 280 of the Constitution is the Finance Commission. Two distinctive features of the Commission's work involve redressing the vertical imbalances between the taxation powers and expenditure responsibilities of the centre and the States respectively and equalization of all public services across the States.

The First Finance Commission was constituted by Presidential Order dated 22 November 1951 under the chairmanship of Shri K.C. Neogy. Thirteen Finance Commissions have been appointed so far at intervals of every five years. The Thirteenth Finance Commission was constituted on13 November 2007 under the Chairmanship Dr. Vijay Kelkar to make recommendations for the fiscal cycle 2010-15.

The shares of States in tax devolution had gone up from about 10 per cent of the total tax receipts of the Centre in the 1950s to 30.5 per cent during the period of 2005-10 covered by the recommendations of the Twelfth Finance Commission. The thirtieth Finance Commission has recommended share of states in net proceeds of shareable central taxes to be 32 per cent.

There has been considerable expansion in the role of the Commissions from mainly being an arbitrator between the Centre and the States to being an architect of fiscal restructuring.

Fiscal federalism will always remain a work in progress and the institution of the Finance Commission, as in the past, will continue to deal with the changing environment and emerging challenges.

Commission on Centre-State Relations in its report (Volume III- Centre-State Financial Relations and Planning) has recommended that the additional expenditure liabilities on States on account of the implementation of Central legislations should be fully borne by the Central Government and issues giving rise to such liabilities may be included as a part of permanent Terms of Reference of the Finance Commission. Also the ToR of future Finance Commissions should be formulated in such a way that the additional commitments of the States on account of pay revision are fully taken into account.