The State Finance Commission (SFC) is an institution created by the 73rd and 74th Constitutional Amendments (CAs) to rationalize and systematize State/sub-State-level fiscal relations in India. It allocates resources of a state to its Panchayati Raj institutions at all three levels in terms of taxes, duties and levies to be collected by the state and the local bodies.
The SFCs are constituted every five years in each state under Article 243-I of the Indian Constitution, and they are responsible for recommending the following:
- Distribution of net proceeds of taxes between the state government and local bodies.
- Determination of the taxes, duties, tolls, and fees that may be assigned to local bodies.
- Grants-in-aid to local bodies from the Consolidated Fund of the State.
- Measures needed to improve the financial position of local bodies, including revenue generation and cost reduction.
- The principles that govern the distribution of funds and grants to local bodies.
The recommendations of the SFCs are binding on the state governments and the local bodies, and they are intended to ensure that the financial resources of the state are distributed fairly and efficiently among all levels of government. The SFCs also provide an opportunity for local bodies to participate in the decision-making process and have a say in how financial resources are allocated within the state.
State Finance Commission’s recommendations are generally based on the following considerations:
a) Financial review of the local bodies for the last six/seven years
b) Recommendations of the previous state finance Commission
c) Recommendations of the central finance commission
d) State‘s financial position
e) Existing system of data collection and its maintenance
f) Revenue resource and its demand for next five years
The SFCs are an important mechanism for promoting fiscal decentralization and strengthening local democracy in India. They help to ensure that local bodies have the resources and autonomy they need to provide basic services to their constituents and promote economic development at the local level.
Central Finance Commission (CFC)
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