7.1. The Finance Commission

Article 280 of the Constitution provides for a FC as a quasi-judicial body. It is constituted by the President every 5th year or at such earlier time as he considers necessary. The FC makes recommendations to the President on following matters:

♤ The distribution of the net proceeds of taxes between the centre and the states, and the allocation between the states of the respective shares of such proceeds.

♤ The principle that should govern the grants-in-aid to the states by the centre (out of the Consolidated Fund of India).

♤ The measures to augment the Consolidated Fund of a state to supplement the resources of local governments on the basis of recommendations made by the state finance commission.

♤ Any other matter referred to it by the President.

♤ Recommendations made by the FC are only advisory in nature.

♤ The Constitution empowers the FC to go beyond the core issues of how to divide taxes vertically between centre and the states on the one hand and horizontally between states on the other.

♤ It also allows FC to make broader recommendations in the interests of sound finance