Roadmap for Answer Writing

Introduction

• Briefly define the Finance Commission and its constitutional basis (Article 280).
• State the importance of the Finance Commission in the context of Indian federalism.

Key Functions of the Finance Commission

1. Vertical Devolution:
   • Explain how it recommends the distribution of net tax proceeds between the Union and states.
   • Source: Article 280(3) of the Constitution.
2. Horizontal Devolution:
   • Describe the allocation of respective shares among states.
   • Importance of equitable distribution.
3. Grants-in-Aid:
   • Outline the principles governing grants-in-aid to states from the Consolidated Fund of India.
   • Discuss the importance of supporting financially weaker states.
4. Periodic Review:
   • Mention that the Commission reviews recommendations every five years.
   • Highlight the role of the Commission in adapting to changing economic conditions.
5. Legal Powers:
   • Note the powers granted under the Code of Civil Procedure, 1908, allowing the Commission to summon witnesses and demand documents.

Challenges Faced by the Finance Commission

1. Census-based Allocation:
   • Discuss issues related to the use of the 2011 census for resource allocation and its impact on states with lower population growth.
   • Source: 15th Finance Commission report.
2. Nature of Fund Transfers:
   • Explain the shift in transfer types post-14th Finance Commission and its implications for state finances.
3. Demand for Permanent Status:
   • Address the call for a permanent Finance Commission due to inconsistent approaches over time.

Conclusion

• Summarize the crucial role of the Finance Commission in ensuring balanced financial relations between the Union and states.
• Emphasize the need for the Commission to evolve and adapt to changing financial landscapes and developmental needs.

Relevant Facts to Include in the Answer

• The Finance Commission is constituted every five years under Article 280 of the Constitution (Source: Constitution of India).
• It plays a crucial role in the fiscal federalism framework by ensuring fair distribution of resources (Source: Financial relations in federal systems).
• The 14th Finance Commission recommended significant changes in fund distribution, leading to an increased share of unconditional devolution to states (Source: 14th Finance Commission report).
• The 15th Finance Commission raised concerns about the impact of the census on resource allocation, particularly disadvantaging states that have managed population control effectively (Source: 15th Finance Commission report).
• Supreme Court judgments and discussions on the necessity of a permanent Finance Commission in light of the Goods and Services Tax (GST) implementation.

This structured approach will help in crafting a comprehensive answer while ensuring that key aspects of the Finance Commission’s role are effectively addressed.