Answer:
Constitutional Framework
- Under Article 280 of the Indian Constitution, the President constitutes the Finance Commission every 5 years as a constitutional and quasi-judicial body. It consists of a Chairman and four other members.
Qualifications of Members (As per the Finance Commission Act, 1951)
- Chairman: A person having experience in public affairs.
- Four Members:
- A person qualified to be appointed as a High Court judge.
- A person having specialized knowledge of finance and accounts of the government.
- A person having wide experience in financial matters and administration.
- A person having specialized knowledge of economics.
Role in Mitigating Fiscal Imbalances
- Vertical Imbalance: Bridging the gap between the Centre's higher tax collection capacity and the states' extensive socio-developmental expenditure obligations.
The 16th Finance Commission recommended a 41% share of the Divisible Pool to the states. - Horizontal Imbalance: Providing basic services to all citizens by reducing disparities in income, natural resources, and revenue generation capacity across different states.
Economic Criteria for Tax Devolution (16th FC)
Six objective criteria have been established for tax distribution among states:
- Income Distance – 42.5%
- Area – 10%
- Population (2011) – 17.5%
- Demographic Performance – 10%
- Forest and Ecology – 10%
- Contribution to GDP – 10%
Grants-in-Aid (Article 275)
- To bridge remaining fiscal gaps after tax devolution, the Commission recommends Post-Devolution Revenue Deficit (PDRD) grants, untied grants to local bodies (Panchayati Raj Institutions and Urban Local Bodies), and specific disaster management allocations (SDRF/NDRF).
- The Finance Commission serves as the "balancing wheel" of Indian cooperative federalism through equitable and transparent resource distribution.