Finance Commission’s changing roles, challenges over the years

Much has changed since First Commission was set up in 1951 — from scale of transfer of tax proceeds to terms of reference of the body, from nature of Centre-state equations to the Commission’s composition

Written by Shaji Vikraman | Updated: November 2, 2017 9:05 am

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Ensuring inclusiveness is, therefore, a key mandate of the Finance Commission. (Illustration: Subrata Dhar)

The government will soon constitute the Fifteenth Finance Commission, as per normal practice, a couple of years before the end of the five-year period during which the Commission’s recommendations are valid. Article 280 of the Constitution requires that a Finance Commission be constituted to recommend the distribution of the net proceeds of taxes between the Centre and states, and among the states. The framers of the Constitution were seeking to address the vertical imbalance between the taxation powers and expenditure and responsibilities of the federal government and the states, and the horizontal imbalance, or inequality, between states that were at different stages of development. Ensuring inclusiveness is, therefore, a key mandate of the Finance Commission. That means assigning weights to things like population, the fiscal distance between the top ranked states and the others, etc. It is not that the best-performing state will be allocated the highest share — even if delivery execution and governance are better — rather, the effort will be to narrow the development gap between states.