Which of the following are the roles of the Finance Commission in India ? 1. The distribution of money collected through taxes 2. Evaluation of Centrally sponsored schemes 3. Evolve principles based on which funds are allotted among States 4. To develop Five Year Plans Select the correct answer using the codes given below :

Correct — B, (b) 1 and 3 only.

The Finance Commission's functions are set out in ARTICLE 280(3), and the two statements that survive are almost paraphrases of its two principal clauses. The two that fail belong to a different institution altogether.

STATEMENT 1 — 'The distribution of money collected through taxes.' CORRECT. Article 280(3)(a) makes it the Commission's duty to recommend 'the distribution between the Union and the States of the net proceeds of taxes which are to be, or may be, divided between them ... and the allocation between the States of the respective shares of such proceeds'. Those are the two dimensions of tax devolution: the VERTICAL share, how much of the divisible pool goes to the States as a whole, and the HORIZONTAL share, how that amount is divided among them. This is the Commission's core work.

STATEMENT 3 — 'Evolve principles based on which funds are allotted among States.' CORRECT. Article 280(3)(b) makes it the Commission's duty to recommend 'the principles which should govern the grants-in-aid of the revenues of the States out of the Consolidated Fund of India'. Note the wording of the Article and of the statement alike: the Commission's task is to lay down PRINCIPLES, not to disburse money. It designs the formula — population, area, income distance, demographic performance, forest cover and so on — by which shares are worked out, and the Government then makes the transfers accordingly.

STATEMENT 2 — 'Evaluation of Centrally sponsored schemes.' INCORRECT. Evaluating the design and performance of centrally sponsored schemes was the Planning Commission's work while it existed, and it now belongs to NITI Aayog, whose Development Monitoring and Evaluation Office does it. The Finance Commission is a periodic, constitutionally constituted body that recommends the sharing of resources; it is not a standing evaluator of programmes.

STATEMENT 4 — 'To develop Five Year Plans.' INCORRECT, and plainly so. Five Year Plans were the work of the Planning Commission, created by a Cabinet resolution in 1950 and dissolved in 2014 in favour of NITI Aayog. The Finance Commission has never formulated plans.

Notice that BOTH false statements name functions of the SAME wrong body. That is the design of the question: it is testing whether a candidate can tell the Finance Commission from the Planning Commission, which are easy to confuse because both dealt with money going from the Centre to the States. The distinction is that the Finance Commission is CONSTITUTIONAL, periodic and concerned with SHARING RESOURCES by principle, while the Planning Commission was an executive creation, permanent, and concerned with PLANNING EXPENDITURE on programmes.

The four statements are not grammatically parallel as printed — 1 and 2 are noun phrases, 3 is an imperative and 4 an infinitive — and none ends in a full stop; both are as the booklet sets them.

Why the others are wrong

• (a)1 and 4 only — This keeps the correct statement about tax distribution and pairs it with the formulation of Five Year Plans, which was never a Finance Commission function. Plans were prepared by the Planning Commission, a body created by a Cabinet resolution in March 1950 with no constitutional or statutory basis, and dissolved in 2014 when NITI Aayog replaced it. The pairing is a natural one for a candidate who groups every body that moves money from the Centre to the States into one category, and it is exactly the confusion the item is built on.
• (c)2 and 4 only — This selects both of the false statements and none of the true ones, which means it describes the PLANNING COMMISSION rather than the Finance Commission. Evaluating centrally sponsored schemes and formulating Five Year Plans were both its work, and neither has ever fallen to the Finance Commission. The option is useful as a diagnostic: a candidate drawn to it has the two bodies transposed entirely, and the fix is to hold on to the single distinction that the Finance Commission is a creature of Article 280, constituted afresh every fifth year, whose output is a set of recommendations on sharing resources.
• (d)2 and 3 only — This keeps the correct statement about evolving the principles of allocation and adds the evaluation of centrally sponsored schemes, while dropping the Commission's single most important function — recommending the distribution of the net proceeds of taxes between the Union and the States and among the States. An account of the Finance Commission that omits tax devolution has left out what it is for. Evaluation of schemes belongs to NITI Aayog's Development Monitoring and Evaluation Office, and is a continuing administrative function rather than a periodic constitutional recommendation.

THE FINANCE COMMISSION is the constitutional mechanism for correcting the vertical imbalance built into Indian federalism — the Union raises a larger share of revenue than it spends, and the States spend a larger share than they raise.

CONSTITUTION AND COMPOSITION. Under ARTICLE 280(1), the President constitutes a Finance Commission of a Chairman and four other members, within two years of the commencement of the Constitution and thereafter at the expiration of every fifth year, or earlier if the President considers it necessary. Under ARTICLE 280(2), PARLIAMENT may by law determine the qualifications for appointment and the manner of selection; the law made under it is the Finance Commission (Miscellaneous Provisions) Act, 1951, whose section 3 requires the Chairman to be a person with experience in public affairs and the four other members to be drawn from persons with judicial experience, special knowledge of government finance and accounts, wide experience in financial matters and administration, or special knowledge of economics. Under ARTICLE 280(4) the Commission determines its own procedure.

DUTIES under Article 280(3): to recommend the distribution of the net proceeds of shareable taxes between the Union and the States and their allocation among the States; the principles governing grants-in-aid of the revenues of the States out of the Consolidated Fund of India; the measures needed to augment a State's Consolidated Fund to supplement the resources of Panchayats and Municipalities, on the basis of the recommendations of the State Finance Commission; and any other matter referred to it by the President in the interests of sound finance.

ARTICLE 281 requires the President to cause every recommendation of the Commission, together with an explanatory memorandum on the action taken on it, to be laid before each House of Parliament. The recommendations are ADVISORY and not binding, though by convention the core devolution recommendations have been accepted.

VERTICAL AND HORIZONTAL DEVOLUTION. The vertical share is the percentage of the divisible pool that goes to the States collectively — the Fifteenth Finance Commission under N. K. Singh recommended 41 per cent for 2021-26, against the Fourteenth Commission's 42 per cent. The horizontal share divides that amount among the States by a formula built from indicators such as population, area, income distance, demographic performance and forest and ecology.

THE OTHER FINANCE COMMISSIONS. Article 243-I requires the GOVERNOR of a State to constitute a State Finance Commission every fifth year to review the financial position of the Panchayats, and Article 243-Y makes comparable provision for Municipalities. So the same device operates at two levels: Union to State, and State to local body.

WHAT CHANGED AFTER 2014. With the Planning Commission dissolved and the plan and non-plan distinction in expenditure discontinued, the old division of labour — the Planning Commission handling plan transfers and the Finance Commission handling the rest — came to an end, and the Finance Commission became the principal channel for transfers from the Union to the States.

Key facts

• Article 280(1): the President constitutes a Finance Commission of a Chairman and four other members, within two years of commencement and at the expiration of every fifth year thereafter.
• Article 280(3)(a): the Commission recommends the distribution between the Union and the States of the net proceeds of shareable taxes, and the allocation of those shares among the States.
• Article 280(3)(b): it recommends the principles which should govern the grants-in-aid of the revenues of the States out of the Consolidated Fund of India.
• Article 280(2) lets Parliament fix the qualifications of members; the Finance Commission (Miscellaneous Provisions) Act, 1951, section 3, requires public affairs experience for the Chairman and judicial, finance, administrative or economics backgrounds for the four members.
• Article 281 requires every recommendation, with an explanatory memorandum on the action taken, to be laid before each House of Parliament; the recommendations are advisory, not binding.
• Vertical devolution is the share of the divisible pool going to the States collectively — the Fifteenth Finance Commission recommended 41 per cent for 2021-26, against 42 per cent recommended by the Fourteenth.
• Five Year Plans and the evaluation of centrally sponsored schemes were Planning Commission functions; the Planning Commission was created by a Cabinet resolution in 1950 and dissolved in 2014, and NITI Aayog now performs the evaluation function.
• Article 243-I requires the Governor to constitute a State Finance Commission every fifth year to review the financial position of the Panchayats.

Common traps

• Attributing Five Year Plans to the Finance Commission. They were the Planning Commission's work, and both false statements in this item belong to that body.
• Attributing scheme evaluation to the Finance Commission. It is a continuing administrative function, now with NITI Aayog's evaluation office.
• Dropping tax devolution from the Commission's functions. It is the core duty under Article 280(3)(a) and the reason the body exists.
• Reading the Commission as a disbursing authority. It recommends the PRINCIPLES of allocation; the Government makes the transfers.

• practice — not a real PYQ

  The recommendations of the Finance Commission are

  • (a)binding on the Union Government
  • (b)binding on the State Governments only
  • (c)advisory, and laid before each House of Parliament with a memorandum on the action taken
  • (d)binding only in respect of grants-in-aid

  Answer(c) advisory, and laid before each House of Parliament with a memorandum on the action taken — Article 281 requires the President to cause every recommendation, together with an explanatory memorandum on the action taken on it, to be laid before each House. The recommendations are not legally binding, though the core devolution recommendations have by convention been accepted.

• practice — not a real PYQ

  Under Article 280 of the Constitution, the Finance Commission consists of

  • (a)a Chairman and two other members
  • (b)a Chairman and four other members
  • (c)a Chairman and six other members
  • (d)a Chairman and such number of members as Parliament may from time to time determine

  Answer(b) a Chairman and four other members — Article 280(1) provides that the President shall constitute a Finance Commission consisting of a Chairman and four other members, appointed by the President, at the expiration of every fifth year or earlier if he considers it necessary. Parliament's role under Article 280(2) is to fix their qualifications and the manner of selection, not the number.