Finance Commission — Role and Functions
What is Finance Commission — Role and Functions?
A system of governance where fiscal powers and functions are divided between different levels of government (e.g., central and state) and mechanisms are in place for intergovernmental fiscal transfers.
Key points
- Understand the constitutional basis and appointment of the Finance Commission.
- Identify the key roles and functions of the Finance Commission.
- Differentiate between vertical and horizontal fiscal devolution.
- Recognize the importance of the Finance Commission in India's fiscal federalism.
Common exam trap
Confusing Finance Commission with Planning Commission (now NITI Aayog).
Definitions
- Term
Fiscal Federalism
- Meaning
A system of governance where fiscal powers and functions are divided between different levels of government (e.g., central and state) and mechanisms are in place for intergovernmental fiscal transfers.
- Term
Vertical Devolution
- Meaning
The distribution of net proceeds of taxes levied and collected by the Union Government between the Union and the State Governments.
- Term
Horizontal Devolution
- Meaning
The allocation of the States' share of divisible central taxes among the various State Governments based on specific criteria.
- Term
Grants-in-aid
- Meaning
Financial assistance provided by the Union Government to State Governments, often to cover revenue deficits or specific needs, as recommended by the Finance Commission.
Learning objectives
Understand the constitutional basis and appointment of the Finance Commission.
Identify the key roles and functions of the Finance Commission.
Differentiate between vertical and horizontal fiscal devolution.
Recognize the importance of the Finance Commission in India's fiscal federalism.
Recall the role of the Finance Commission in recommending funds for local self-government.
Prerequisites
Basic understanding of the Indian Constitution.
Knowledge of the Indian federal structure.
Familiarity with Union-State financial relations.
Understanding of basic economic terms like taxes, grants, and revenue.
Common mistakes
Confusing Finance Commission with Planning Commission (now NITI Aayog).
Assuming its recommendations are mandatory.
Not understanding the distinction between vertical and horizontal devolution.
Forgetting its role in recommending funds for local bodies.
Keywords
Finance Commission
Article 280
Fiscal Federalism
Vertical Devolution
Horizontal Devolution
Grants-in-aid
Panchayati Raj
Municipalities
Constitutional Body
Union-State Relations
Practice preview
Under which Article of the Indian Constitution is the Finance Commission constituted?…
easy
What is the primary role of the Finance Commission in India?…
easy
Which of the following is NOT a function of the Finance Commission?…
medium