Article 280 of the Constitution of India provides for a Finance Commission as a quasi judicial body. It is constituted by the president of India every fifth year or at such earlier time as he considers necessary.


The Finance Commission consists of a chairman and four other members to be appointed by the president. They hold office for such period as specified by the president in his order. They are eligible for reappointment.

The Constitution authorises the Parliament to determine the qualifications of members of the commission and the manner in which they should be selected. Accordingly, the Parliament has specified the qualifications of the chairman and members of the commission'. The chairman should be a person having experience in public affairs and the four other members should be selected from amongst the following:

  1. A judge of high court or one qualified to be appointed as one.
  2. A person who has specialised knowledge offinance and accounts of the government.
  3. A person who has wide experience in financial matters and in administration.
  4. A person who has special knowledge of economics.


The Finance Commission is required to make recommendations to the president of India on the following matters:

  1. The distribution of the net proceeds of taxes to be shared between the Centre and the states, and the allocation between the states of the respective shares of such proceeds.
  1. The principles that should govern the grants-in-aid to the states by the Centre (i.e., out of the consolidated fund of India).
  2. The measures needed to augment the consolidated fund of a state to supplement the resources of the panchayats and the municipalities in the state on the basis of the recommendations made by the state finance commissiorr'.
  3. Any other matter referred to it by the president in the interests of sound finance.

Till 1960, the commission also suggested the grants given to the States of Assam, Bihar, Odisha and West Bengal in lieu of assignment of any share of the net proceeds in each year of export duty on jute and jute products. These grants were to be given for a temporary period of ten years from the commencement of the Constitution.

The commission submits its report to the president. He lays it before both the Houses of Parliament along with an explanatory memorandum as to the action taken on its recommendations.


It must be clarified here that the recommendations made by the Finance Commission are only of advisory nature and hence, not binding on the government. It is up to the Union government to implement its recommendations on granting money to the states.

To put it in other words, 'It is nowhere laid down in the Constitution that the recommendations of the commission shall be binding upon the Government of India or that it would give rise to a legal right in favour of the beneficiary states to receive the money recommended to be offered to them by the Commission':'.

As rightly observed by Dr. P.Y: Rajamannar, the Chairman of the Fourth Finance Commission, "Since the Finance Commission is a constitutional body expected to be quasi-judicial, its recommendations should not be turned down by the Government of India unless there are very compelling reasons".


The Constitution of India envisages the Finance C01111111SSlon as the balancing wheel of fiscal federalism in India. However, its role in the Centre-state fiscal relations has been undermined by the emergence of the Planning Commission, a non-constitutional and a non-statutory body. Dr P V Rajamannar, the Chairman of the Fourth Finance commission, highlighted the overlapping of functions and responsibilities between the Finance Commission and the Planning Commission in federal fiscal transfers in the following way":

It is the setting up of the Planning Commission that has in practice restricted the scope and functions of the Finance Commission. I say 'in practice' because there has been no amendment of the Constitution to confine the functions of the Finance Commission to merely ascertain and cover the revenue gap of each state, on a review of the forecast of revenue and expenditure furnished by the state.

The reference in Article 275 to grants-in-aid to the revenues of states is not confined to revenue expenditure only. There is no legal warrant for excluding from the scope of the Finance Commission all capital grants; even the capital requirements of a state may be properly met by

grants-in-aid under Article 275, made on the recommendations of the Finance Commission.

The legal position, therefore, is that there is nothing in the Constitution to prevent the finance commission from taking into consideration both capital and revenue requirements of the states in formulating a scheme of devolution and in recommending grants under Article 275 of the Constitution. But the setting up of Planning Commission in-evitably has led to a duplication and overlapping of functions, to avoid which a practice has grown which has resulted in the curtailment of the functions of the finance commission.

As the entire plan, with regard to both policy and programme, comes within the purview of the Planning Commission and as the assistance to be given by the Centre for plan projects either by way of grants or loans is practically dependent on the recommendations of the Planning Commission, it is obvious that a body like the Finance Commission cannot operate in the same field. The main functions of the Finance Commission now consist in determining the revenue gap of each state and providing for filling up the gap by a scheme of devolution, partly by a distribution of taxes and duties and partly by grants- in-aid.

We, therefore, recommend that in future the Finance Commission may be asked to make recommendations on the principles which should govern the distribution of plan grants to the states. In order that the Finance Commission may be able to make such recommendations, it will be necessary that it should have before it an outline of the Five Year Plan as prepared by the Planning Commission. The appointment of the Finance Commission will, therefore, have to be so timed that it will have before it this outline before it finalises its recommendations. While the principles governing the distribution of the plan grants will be set out by the Finance Commission, the application of these principles from year to year will be left to the Planning Commission and the Government.


Till now, fourteen finance commissions have been constituted. The name of the commission, the years in which they were constituted and submitted their reports, and the name of the chairman are given in Table 41.1.

Table 41.1 Finance Commissions Appointed so far

Finance Commission Chairman Appointed in Submitted Report in Period of implementation of Report
First K.C. Neogy 1951 1952 1952-57
Second K. Santhanam 1956 1957 1957-62
Third A.K. Chanda 1960 1961 1962-66
Fourth Dr. P. V. Ra jamannar 1964 1965 1966-69
Fifth Mahavir Tyagi 1968 1969 1969-74
Sixth Brahamananda Reddy 1972 1973 1974-79
Seventh lM. Shelat 1977 1978 1979-84
Eighth Y.B. Chavan 1982 1984 1984-89
Ninth N.K.P. Salve 1987 1989 1989-95
Tenth K.C. Pant 1992 1994 1995-2000
Eleventh A.M. Khusro 1998 2000 2000-2005
Twelfth Dr. C. Rangarajan 2002 2004 2005-2010
Thirteenth Dr. Vijay Kelkar 2007 2009 2010-2015
Fourteenth Y.V. Reddy 2013 2014 (expected) 2015-2020

Table 41.2 Articles Related to Finance Commission at a Glance

Article No. Subject-matter
280. Finance Commission
28I. Recommendations of the Finance Commission

  1. Vide the Finance Commission Act, 1951.
  2. This function was added by the 73rd and 74th Constitutional Amendment Acts of 1992, which have granted constitutional status and protection on the panchayats and the municipalities respectively.
  3. D D Basu, Introduction to the Constitution of India, Wadhwa 19th Edition, 2001, p. 331.
  4. Report of the Fourth Finance Commission, New Delhi, Government of India, 1965, p. 88-90.