Article 280 Finance Commission
Article 280 of the Indian Constitution establishes the Finance Commission as a quasi-judicial body, empowered to make authoritative recommendations on fiscal matters. The President constitutes this commission every five years—or at an earlier time if circumstances warrant—ensuring periodic review of Centre-State financial relations.
Finance Commission Composition and Qualifications
The Finance Commission is constituted by a Chairman and four other members, all appointed by the President of India. Members serve for a term specified in the President's order and remain eligible for reappointment.
Under the Constitution, Parliament holds the authority to prescribe the qualifications for these positions and the procedure for their selection. Accordingly, it has outlined precise criteria: the Chairman must possess substantial experience in public affairs. The four other members are drawn from individuals meeting at least one of the following benchmarks—a High Court judge or someone qualified for such a role; an expert with specialized knowledge of government finance and accounts; a professional with extensive experience in financial matters and administration; or a specialist in economics. This structured composition ensures the Commission's expertise spans judiciary, finance, administration, and economic policy, enabling it to effectively address fiscal federalism.
Functions of the Finance Commission
The Finance Commission, established under Article 280 of the Indian Constitution, plays a pivotal role in maintaining fiscal federalism by advising the President of India on key financial matters. Its core recommendations cover the distribution of net tax proceeds between the Centre and the states, including how these proceeds should be allocated among the states themselves. It also outlines the principles governing grants-in-aid from the Centre to the states, drawn from the Consolidated Fund of India. Beyond this, the Commission suggests measures to bolster a state's Consolidated Fund, enabling it to support local bodies like panchayats and municipalities—drawing on recommendations from the respective State Finance Commission. Finally, it addresses any additional issues referred by the President that pertain to sound fiscal management.
Historically, until 1960, the Commission also recommended special grants to Assam, Bihar, Odisha, and West Bengal. These were provided in lieu of any share in the net proceeds from export duties on jute and jute products, serving as a temporary measure for ten years from the Constitution's commencement.
Once finalized, the Commission submits its report to the President, who tables it before both Houses of Parliament, accompanied by an explanatory memorandum detailing the action taken on its recommendations. This process ensures transparency and parliamentary oversight of intergovernmental fiscal arrangements.
Advisory Role of the Finance Commission
The recommendations of the Finance Commission carry only an advisory character and do not bind the government. Ultimately, the Union government holds the discretion to accept or modify these suggestions regarding financial grants to the states. As the Constitution nowhere mandates that these recommendations must be implemented—or that they confer any legal entitlement on beneficiary states—their enforcement remains a policy choice rather than an obligation.
This advisory framework underscores the Commission's quasi-judicial stature, as emphasized by Dr. P.V. Rajamannar, Chairman of the Fourth Finance Commission. He argued that the government should reject such recommendations only for compelling reasons, preserving the body's integrity. Envisaged in the Constitution as the "balancing wheel" of India's fiscal federalism, the Finance Commission has long played a pivotal role in Centre-state financial relations. Yet, until 2014, its influence was overshadowed by the Planning Commission—a non-constitutional, non-statutory entity that encroached on similar responsibilities, including federal fiscal transfers, as Rajamannar himself noted. This dynamic shifted in 2015 with the Planning Commission's dissolution and replacement by NITI Aayog (National Institution for Transforming India), restoring greater focus to the Finance Commission's constitutional mandate.