Constitution of Finance Commission

The Finance Commission is a constitutional body constituted by the President of India every five years to review the financial relations between the Union and the States. The first Finance Commission was constituted in 1951.

The Finance Commission is composed of a chairman and four other members, who are appointed by the President. The chairman is a person who has held high judicial office or who is an eminent economist. The other members are experts in finance, economics, and public administration.

The Finance Commission is entrusted with the following functions:

  • To recommend the sharing of the net proceeds of taxes between the Union and the States.
  • To determine the principles governing the grants-in-aid of the revenues of the States out of the Consolidated Fund of India.
  • To consider the financial position of the States and recommend measures to augment their resources.
  • To make recommendations in regard to any other matter referred to it by the President in the interest of sound financial relations between the Union and the States.

The Finance Commission’s recommendations are binding on the Union and the States. The Union is required to implement the recommendations within one year of their receipt.

MCQs

Here are some MCQs on the topic:

  1. Who appoints the members of the Finance Commission?
    • The Prime Minister
    • The President
    • The Parliament
    • The Supreme Court
  2. What are the functions of the Finance Commission?
    • To recommend the sharing of the net proceeds of taxes between the Union and the States.
    • To determine the principles governing the grants-in-aid of the revenues of the States out of the Consolidated Fund of India.
    • To consider the financial position of the States and recommend measures to augment their resources.
    • All of the above
  3. What is the tenure of the Finance Commission?
    • Five years
    • Six years
    • Seven years
    • Eight years
  4. What happens if the Union does not implement the recommendations of the Finance Commission within one year?
    • The Union is not required to implement the recommendations.
    • The Union can implement the recommendations at its own discretion.
    • The Union can be held liable for contempt of court.
    • The Union can be fined by the Supreme Court.
  5. What is the importance of the Finance Commission?
    • The Finance Commission plays an important role in ensuring the smooth functioning of the federal system in India.
    • The Finance Commission helps to distribute resources fairly between the Union and the States.
    • The Finance Commission helps to promote fiscal discipline in the states.
    • All of the above

The answers are as follows:

  1. (b)
  2. (d)
  3. (a)
  4. (c)
  5. (d)