The Finance Commission

In one line

The Finance Commission is the constitutional body that decides, every five years, how much of the Union's tax revenue goes to the States and how it is divided among them.

In the wording a student can write in an exam: the Finance Commission is a body constituted by the President under article 280 of the Constitution at the expiration of every fifth year or earlier, consisting of a Chairman and four other members whose qualifications are prescribed by the Finance Commission (Miscellaneous Provisions) Act 1951, whose duty is to recommend the distribution of the net proceeds of shareable taxes between the Union and the States and their allocation among the States, the principles governing grants in aid of the revenues of the States, the measures needed to augment the Consolidated Fund of a State to supplement the resources of Panchayats and Municipalities, and any other matter referred by the President in the interests of sound finance; its recommendations are laid before each House of Parliament with an explanatory memorandum as to the action taken, and are not legally binding.

Article 280 in its parts

280(1): appointment. The President shall, within two years from the commencement of the Constitution and thereafter at the expiration of every fifth year or at such earlier time as the President considers necessary, by order constitute a Finance Commission consisting of a Chairman and four other members appointed by the President.

280(2): qualifications. Parliament may by law determine the qualifications for appointment and the manner of selection. Parliament has done so by the Finance Commission (Miscellaneous Provisions) Act 1951.

280(3): duties. It shall be the duty of the Commission to make recommendations to the President as to:

• (a) the distribution between the Union and the States of the net proceeds of taxes which are to be, or may be, divided between them, and the allocation between the States of the respective shares;
• (b) the principles which should govern the grants in aid of the revenues of the States out of the Consolidated Fund of India;
• (bb) the measures needed to augment the Consolidated Fund of a State to supplement the resources of the Panchayats, on the basis of the recommendations of the State Finance Commission, inserted by the Constitution (Seventy-third Amendment) Act 1992;
• (c) the same in respect of Municipalities, inserted by the Constitution (Seventy-fourth Amendment) Act 1992;
• (d) any other matter referred to the Commission by the President in the interests of sound finance.

280(4): procedure and powers. The Commission shall determine its own procedure and shall have such powers as Parliament may by law confer.

Clause (a) contains both questions in one sentence. The distribution between the Union and the States is the vertical share. The allocation between the States is the horizontal share, and the formula that produces it is where the real argument lies.