The finance commission is constituted to define financial relations between the centre and states. It is established by the president of India under the provision of article 280 of the Indian constitution for five years. It decides the share of states in the total tax collection of the central government. Currently the tenure of 14^th finance commission is in progress which is headed by the former RBI governor Mr. Y.V. Reddy. The duration of 14^th finance commission is 2015 to 2020.

(Mr. Y.V. Reddy: Chairman of 14^th fiancé commission)

Fiscal federalism is defined as financial relations between units of governments in a federal government system. Fiscal federalism is part of broader public finance discipline. The term was introduced by the German-born American economist Richard Musgrave in 1959. Fiscal federalism deals with the division of governmental functions and financial relations among levels of government.

What is Finance Commission?

It is a commission formed by the president of India under the provision of article 280 of the Indian constitution for five years. It decides the share of states in the total tax collection of the centre government. Currently the tenure of 14^th finance commission is in progress which is headed by the former RBI governor Mr. Y.V. Reddy. The duration of 14^th finance commission is 2015 to 2020.

What are the Functions of Finance Commission?

Main functions of finance commission are

(i) The distribution of the net proceeds of the taxes to be shared between the union and states and allocation of such proceeds among the states.

(ii) The principles which should govern the payments of grants- in aid by the centre to the states.

(iii) Any other matter concerning financial relations between the centre and the states.

So its main function is to recommend how the Union government should share taxes levied by it with the states. These recommendations cover a period of five years. The commission also lays down rules by which the centre should provide grants-in-aid to states out of the Consolidated Fund of India. It is also required to suggest measures to augment the resources of states and ways to supplement the resources of Panchayats and Municipalities.

Which finance commission is in progress?

Currently, the tenure of 14^th finance commission is in progress. This is lead by the former RBI Governor Mr. Y.V. Reddy. This finance commission recommends that the states should be given the 42% shares of the tax collection of the centre government.

How does finance commission ensures the fiscal federalism in the country?

Under the federal structure envisaged in the Constitution, most of the taxation powers are with the Centre but the bulk of spending is done by the states. Such a federal structure requires transfer of resources from the Centre, which levies and collects the big taxes such as income tax and indirect taxes like excise and customs, to the states.  So with the help of proper allocation of resources among the different states on the basis of population of the state, fiscal condition of the state, forest cover of the states, income distance and area of the states. So by this proper bifurcation the finance commission avoids the confrontation between the states and centre.

What is the force of the commission’s recommendations?

The Constitution does not make the recommendations of the Finance Commission binding on the government of the day. However, there is a strong precedent that governments generally go by the suggestions as far as sharing of revenues is concerned. These recommendations relating to distribution of Union taxes and duties and grants-in-aid are usually implemented by a presidential order.

What are the main recommendations of the 14^th finance commission?