Central Finance Commission (CFC)

Finance Commission of India: The Finance Commission is a constitutional body, that determines the method and formula for distributing the tax proceeds between the Centre and states, and among the states as per the constitutional arrangement and present requirements.

The Finance Commissions are commissions periodically constituted by the President of India under Article 280 of the Indian Constitution to define the financial relations between the central government of India and the individual state governments. The CFC is constituted every five years under Article 280 of the Indian Constitution.

The 15^th Finance Commission (Chair: Mr N. K. Singh) set up to give recommendations for devolution of taxes and other fiscal matters for five fiscal years, commencing 1 April 2020. The main tasks of the commission were to “strengthen cooperative federalism, improve the quality of public spending and help protect fiscal stability“

The primary responsibilities of the CFC include the following:

1. Recommending the distribution of net proceeds of taxes between the central government and the state governments.
2. Determining the principles that govern the distribution of funds and grants-in-aid to the state governments.
3. Reviewing the state of the public finances of the central government and the state governments.
4. Making recommendations on any matter referred to it by the President of India or the Governor of a state.

The recommendations of the CFC are binding on the central government and the state governments, and they are intended to ensure that the financial resources of the country are distributed fairly and efficiently among all levels of government. The CFC is an important mechanism for promoting fiscal federalism and ensuring that the states have the resources they need to provide basic services to their citizens and promote economic development.

The recommendations of the CFC are also based on a detailed analysis of the financial needs and capacities of the central government and the state governments. This includes factors such as population, area, revenue-raising capacity, expenditure needs, and debt burden. The CFC also takes into account the priorities of the central government and the state governments, as well as the broader economic and social context in which they operate.

Devolution of taxes to states: The share of states in the centre’s taxes is recommended to be decreased from 42% during the 2015-20 period to 41% for 2020-21.  The 1% decrease is to provide for the newly formed union territories of Jammu and Kashmir, and Ladakh from the resources of the central government.  

The commission’s challenges was to find a balance between equity and efficiency, adding that urban and rural local bodies—the constitutionally-mandated third-tier of government in India—needed to be further empowered to stimulate added economic growth.

Overall, the CFC is an important institution for ensuring that financial resources are allocated in a fair and equitable manner between the central government and the state governments, and for promoting fiscal federalism and economic development in India.

State Finance Commission (SFC)

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