EPFO APFC 2023 General Studies · Question 95 of 120

Correct — C, (c) Both 1 and 2. Statement 1 is the State Finance Commission's defining function and is taken almost word for word from the Constitution. Article 243-I requires the Governor of a State to constitute a Finance Commission at the expiration of every fifth year to review the financial position of the panchayats and to make recommendations on the principles governing the distribution between the State and the panchayats of the net proceeds of the taxes, duties, tolls and fees leviable by the State, on the allocation between panchayats at all levels of their respective shares, on the taxes and fees that may be assigned to or appropriated by the panchayats, on grants-in-aid from the Consolidated Fund of the State, and on any measures needed to improve the panchayats' financial position. Article 243Y then provides that the very same Commission constituted under Article 243-I shall also review the financial position of the municipalities and make corresponding recommendations. So one body, appointed once, reviews the finances of every local government in the State, rural and urban alike, which is exactly what statement 1 says. Statement 2 follows from that single-body design. Because the same Commission recommends how much of the State's devolvable resources goes to panchayats and how much to municipalities, deciding the shares necessarily means apportioning the pool between the rural and the urban local governments and then between the tiers within each. Rural-urban distribution is not a phrase printed in either Article, but it is the combined effect of the two, and every State Finance Commission report deals with it as a central question — how to weigh a predominantly rural population against the higher per-head cost of urban services. Both statements are therefore correct and the code taking both is the answer.

• (a)1 only — This code accepts the review of the financial position and rejects the rural-urban distribution, and the rejection does not survive an examination of how the Commission is constituted. There is only one Finance Commission in a State: Article 243-I creates it for the panchayats and Article 243Y directs that the same body shall also review the finances of the municipalities. A single Commission recommending what share of the State's taxes and grants should go to local government has no way of avoiding the question of how that share divides between the rural bodies and the urban ones, and its report has to answer it explicitly for the State to act on it. The rejection usually comes from a strict reading of Article 243-I alone, which speaks of distribution between the State and the panchayats and of allocation between panchayats at all levels. That reading takes one Article of the pair and stops there.
• (b)2 only — This code rejects statement 1, which is the least rejectable statement in the question, since reviewing the financial position of the local governments is the very words in which the Constitution describes what the Commission is constituted to do. Article 243-I says the Governor shall constitute a Finance Commission to review the financial position of the panchayats, and Article 243Y says the same Commission shall also review the financial position of the municipalities. A candidate who lands here has generally confused the State Finance Commission with the State's accounting or audit machinery, and reasoned that reviewing financial position is the work of an auditor. The two are different: an audit examines whether money already spent was spent lawfully and correctly, while this review examines whether local governments have enough resources for the functions given to them and recommends how the gap should be met.
• (d)Neither 1 nor 2 — This code rejects both statements and therefore describes a body with no discernible function, which cannot be right of an institution the Constitution requires every State to appoint every fifth year. Reviewing the financial position of local governments is the express purpose for which Article 243-I creates the Commission, and recommending how resources are shared between the State and its local governments, and among those local governments, is the substance of the recommendations it must make. A candidate arriving here has usually confused the State Finance Commission with the Union Finance Commission and concluded that a State body cannot be doing what a central one already does. The two are distinct and connected: the Union Commission under Article 280 recommends measures to augment a State's Consolidated Fund so as to supplement the resources of panchayats and municipalities, and it is directed to do so on the basis of the recommendations of that State's own Finance Commission.

The seventy-third and seventy-fourth amendments did two things for local government: they gave panchayats and municipalities a constitutional existence, and they created machinery to work out what they should be paid. The second is the State Finance Commission. Article 243-I requires the Governor to constitute one within a year of the amendment's commencement and thereafter at the expiration of every fifth year, to review the financial position of the panchayats and to recommend the principles governing four things: the distribution between the State and the panchayats of the net proceeds of taxes, duties, tolls and fees leviable by the State, and the allocation of those shares between panchayats at all levels; the taxes and fees that may be assigned to or appropriated by the panchayats; the grants-in-aid payable to them from the Consolidated Fund of the State; and the measures needed to improve their financial position. It may also advise on any other matter referred to it by the Governor in the interests of sound local finance. The State legislature provides by law for the Commission's composition, the qualifications of its members and the manner of their selection, and the Governor must lay every recommendation before the legislature together with an explanatory memorandum on the action taken. Article 243Y makes the same Commission responsible for the municipalities, which is why there is one State Finance Commission and not two. The institution mirrors the Union Finance Commission under Article 280 one level down, and the two are deliberately linked: the Union Commission is required to recommend the measures needed to augment a State's Consolidated Fund so as to supplement the resources of its panchayats and municipalities on the basis of the recommendations made by the State's own Commission. In both cases the recommendations are advisory rather than binding, which is a large part of why the record of implementation across States is uneven.

Local government finance is a favourite of this paper's polity block, and it is asked from both ends within a few questions of each other — the Union Finance Commission's grants to rural local bodies in one item and the State Finance Commission's functions in the next. That pairing is worth taking as a study instruction, because the two institutions are constantly mistaken for one another. The Union body is appointed by the President under Article 280 and deals with the Union's taxes and with augmenting State funds; the State body is appointed by the Governor under Article 243-I, deals with the State's own taxes, tolls and fees, and covers both panchayats and municipalities. The format here is the paper's commonest statement format, with two numbered statements and the code set of first only, second only, both and neither, which appears eleven times in these one hundred and twenty questions. Its arithmetic favours the prepared candidate: certainty about either statement eliminates two of the four codes at once. The difficulty in this particular item is of a specific kind and worth naming. Statement 1 is close to the constitutional text and is easy; statement 2 describes something the Constitution does not spell out in those words but which follows from the way the institution is built, since one Commission serves both rural and urban bodies. A candidate testing statements only against remembered phrasing will hesitate over it. The better test is to ask whether the body actually does the thing described, and a State Finance Commission that did not apportion resources between rural and urban local governments would have left its main question unanswered.

• Article 243-I requires the Governor of a State to constitute a Finance Commission at the expiration of every fifth year to review the financial position of the panchayats and to make recommendations to the Governor on the principles governing the sharing of the State's tax revenues with them, the taxes assignable to them, the grants-in-aid payable to them from the Consolidated Fund of the State, and the measures needed to improve their finances.
• Article 243Y provides that the Finance Commission constituted under Article 243-I shall also review the financial position of the municipalities and make corresponding recommendations. There is therefore one State Finance Commission covering rural and urban local government alike, which is why apportioning resources between the two falls to it.
• The State legislature may by law provide for the Commission's composition, the qualifications required of its members and the manner of their selection, and the Governor must lay every recommendation before the legislature together with an explanatory memorandum on the action taken on it.
• The State Finance Commission is the mirror at State level of the Union Finance Commission constituted by the President under Article 280, and the two are linked by design: the Union Commission recommends measures to augment a State's Consolidated Fund to supplement the resources of its panchayats and municipalities on the basis of the State Commission's own recommendations.
• The recommendations of a Finance Commission, whether of the Union or of a State, are advisory and not binding on the government to which they are made, which is one reason the record of constituting these Commissions on time and acting on their reports varies widely across States.
• Reviewing the financial position of local governments is not auditing them. An audit asks whether money already spent was spent lawfully; this review asks whether the local governments have resources adequate to the functions assigned to them and recommends how any shortfall should be met.

• Confusing the State Finance Commission with the Union Finance Commission. One is appointed by the Governor under Article 243-I and deals with the State's own revenues; the other is appointed by the President under Article 280.
• Rejecting a statement because its exact words do not appear in the constitutional text. Distribution between rural and urban local governments follows from a single Commission serving both under Articles 243-I and 243Y.
• Confusing financial review with audit. Reviewing the financial position of local governments means assessing the adequacy of their resources, not examining the regularity of their past expenditure.
• Assuming there are separate Commissions for panchayats and municipalities. Article 243Y deliberately gives the municipal function to the Commission already constituted under Article 243-I.
• Treating the recommendations as binding. They are advisory in both the Union and the State cases, though the Governor must lay them before the legislature with a memorandum on the action taken.

The State Finance Commission is asked in three ways in this exam. The first is the functional question set here, testing what the Commission does, usually in a two-statement code format where one statement is drawn from the constitutional text and the other describes something that follows from the institution's design. The second is the identification question: which Article provides for it, who constitutes it, how often, and before whom its report is laid. The third is comparative, setting the State Commission against the Union Commission and asking which of them does a particular thing, or how the two are linked through the Union Commission's duty to recommend measures augmenting a State's Consolidated Fund on the basis of the State Commission's recommendations. All three are answered from a compact set of facts: the two Articles, the four heads of recommendation, the every-fifth-year requirement, the laying of the report with an explanatory memorandum, and the advisory character of the recommendations. Expect the two Commissions to be mixed deliberately within a single option set, because that confusion is what these questions are built to detect.

No directly related past PYQ was found.

• practice — not a real PYQ

  Under which Article of the Constitution is the Governor of a State required to constitute a Finance Commission to review the financial position of the panchayats?

  • (a)Article 243D
  • (b)Article 243-I
  • (c)Article 243Y
  • (d)Article 280

  Answer(b) Article 243-I — it requires the Governor to constitute a Finance Commission at the expiration of every fifth year to review the financial position of the panchayats and to recommend the principles of revenue sharing, assigned taxes and grants-in-aid. Article 243Y directs that the same Commission shall also review the municipalities, Article 243D deals with reservation of seats in panchayats, and Article 280 provides for the Union Finance Commission appointed by the President.

• practice — not a real PYQ

  Article 280 requires the Union Finance Commission to recommend the measures needed to augment the Consolidated Fund of a State so as to supplement the resources of its panchayats and municipalities. That recommendation is to be made

  • (a)on the basis of the recommendations made by the Finance Commission of the State
  • (b)on the basis of the audit reports of the Comptroller and Auditor General of India
  • (c)on the basis of proposals submitted directly by each panchayat and municipality
  • (d)at the sole discretion of the Union Finance Commission, without reference to any State body

  Answer(a) on the basis of the recommendations made by the Finance Commission of the State — the Constitution deliberately links the two levels, so the Union Commission's local-body recommendations build on the State Commission's own assessment rather than displacing it. This is also the practical reason a State that fails to constitute its Finance Commission on time weakens its own case at the Union level.