How is the Finance Commission of India constituted? What do you about the terms of reference of the recently constituted Finance Commission? Discuss. (15 Marks)

Mentors Comments:
  • 1. Introduce with Art 280 and briefly mention the functions of Finance Commissions.
  • 2. Explain how it is constituted.
  • 3. Discuss the ToR of 15th FC and its challenges.


The Finance Commission is constituted by the President under article 280 of the Constitution, mainly to give its recommendations on the distribution of tax revenues between the Union and the States and amongst the States themselves.

Two distinctive features of the Commission’s work involve redressing the vertical imbalances between the taxation powers and expenditure responsibilities of the centre and the States respectively and equalization of all public services across the States.

The 15th Finance Commission’s terms of reference are as follows:  

  • Recommend a fiscal consolidation roadmap for sound fiscal management.
  • Take into account the responsibility of the Central Government and State Governments to adhere to appropriate levels of general and consolidated government debt and deficit levels.
  • Foster higher inclusive growth in the country, guided by the principles of equity, efficiency and transparency.
  • Examine whether revenue deficit grants be provided at all.
  • Review the present arrangements on financing Disaster Management initiatives, with reference to the funds constituted under the Disaster Management Act, 2005 (53 of 2005), and make appropriate recommendations thereon.
  • Impact of the GST, including payment of compensation for possible loss of revenues for 5 years, and abolition of a number of cesses, earmarking thereof for compensation and other structural reforms programme, on the finances of Centre and States.

Major issues revolving around 15th Finance Commission’s Terms of References are as follows:

  • While the terms of reference for the 14th Finance Commission were to use the 1971 Census data for determining devolution of taxes, duties and grants-in-aid.
  • The Central government asked the 15th Finance Commission’s ToR to use the 2011 data. 
  • This move would result in lower resource allocation to the Southern States.

The need of the hour is to address the concerns of stakeholders and evolve principles that lead to an equitable distribution of resources between states and between centre and states.

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