Finance Commission

Background and evolution

India's Constitution hands the Union the most buoyant taxes (income tax on non-agricultural income, corporation tax, customs, and now the central share of GST), while most spending responsibilities on health, police, agriculture and local services fall on states. Economists call this gap vertical fiscal imbalance. The framers did not want the Union to close the gap at its own discretion, so they borrowed and expanded an idea from the Government of India Act 1935 (the Niemeyer Award of 1936 had divided income tax between the Centre and provinces) and created a periodic, expert body that would recommend the split afresh every few years.

The first Commission, chaired by K. C. Neogy, was constituted in 1951. Since then the body has been appointed roughly every five years, and its role has grown in three phases. In the early decades it mostly decided shares of individual taxes such as income tax and Union excise duties. The 80th Amendment (2000), which followed the Tenth Commission's "alternative scheme of devolution", replaced this tax-by-tax approach with a share of the whole divisible pool of central taxes. The 73rd and 74th Amendments (1992) added a third job: suggesting measures to augment the consolidated funds of states so that panchayats and municipalities can be supported, drawing on the reports of State Finance Commissions. From the Thirteenth Commission onward, disaster-relief financing and performance-linked grants became regular features too.