4.2. Functions

The Finance Commission is required to make recommendations to the President on following matters:

1) The distribution of the net proceeds of taxes to be shared between the Centre and the states, and the allocation between the states of the respective shares of such proceeds.

2) The principles that should govern the grants-in-aid (under Article 275 of the Constitution) to the states by Centre out of Consolidated Fund of India.

3) The measures needed to augment the Consolidated Fund of a state to supplement the resources of the Panchayats and the municipalities in the state on the basis of recommendations made by the State Finance Commission.

4) Any other matter referred to it by the President in the interests of sound finance.

The Commission submits its report to the President. He lays it before both the Houses of the Parliament along with an explanatory memorandum as to the action taken on its recommendations.

The recommendations made by the Finance Commission are only of advisory nature and hence not binding on government. It is up to the union government to implement its recommendations on granting money to states. However, as a convention, its recommendations are accepted by the government.