History: Genesis of The Finance Commission
The Indian State, like all other federations, is also ridden by the problems of Vertical and Horizontal Imbalances. Vertical Imbalances result because states are assigned responsibilities and in the process of fulfilling those, they incur expenditures disproportionate to their sources of revenue. This is because the states are able to gauge the needs and concerns of their people more effectively, and hence, are more efficient in addressing them. Factors like historical backgrounds, differences in resource endowments etc. lead to widening Horizontal Imbalances. The Constitution of India, in recognition of these two problems, has made several provisions to bridge the gap of finances between the Centre and the States. These include various articles in the constitution like Article 268, which facilitates levy of duties by the Centre but equips the states to collect and retain the same. Similarly, there are Articles 269, 270, 275, 282 and 293 all of which specify ways and means of sharing resources between Union and States. Apart from the above- mentioned provisions, The Indian Constitution provides an institutional framework to facilitate Centre- State Transfers. This body is the Finance Commission, which came into existence in 1951, under Article 280 of the Indian Constitution, which states:
- The President will constitute a Finance Commission within two years from the commencement of the Constitution and thereafter and at the end of every fifth year or earlier, as the deemed necessary by him/her, which shall include a Chairman and four other members.
- Parliament may by law determine the requisite qualifications for appointment as members of the Commission and the procedure of selection.
- The Commission is constituted to make recommendations to the President about the distribution of the net proceeds of taxes between the Union and States and also the allocation of the same amongst the States themselves. It is also under the ambit of the Finance Commission to define the financial relations between the Union and the States. They also deal with devolution of non-plan revenue resources.
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