Article 280 of CoI : Article 280: Finance Commission.

Explanation using Example

Example 1:

Scenario: Distribution of Tax Revenue between Union and States

Context: The Finance Commission has been constituted by the President as per Article 280 of the Constitution of India. The Commission is tasked with recommending how the tax revenue collected by the Union government should be distributed between the Union and the States.

Example: The Finance Commission recommends that 42% of the net proceeds of Union taxes should be distributed to the States. This means if the Union government collects ₹100, ₹42 will be distributed among the States based on certain criteria such as population, income distance, area, and forest cover.

Impact: This ensures that States have adequate funds to manage their own budgets and provide public services such as healthcare, education, and infrastructure development.

Example 2:

Scenario: Grants-in-Aid to States

Context: The Finance Commission is also responsible for recommending principles for grants-in-aid to the States from the Consolidated Fund of India.

Example: The Finance Commission recommends a special grant of ₹10,000 crore to a drought-affected State to help it manage the crisis. This grant is over and above the regular share of tax revenue.

Impact: This helps the State government to provide immediate relief to the affected population, such as supplying drinking water, food, and medical aid, and to undertake long-term measures like building water conservation structures.

Example 3:

Scenario: Augmenting Resources of Panchayats

Context: The Finance Commission recommends measures to augment the Consolidated Fund of a State to supplement the resources of Panchayats.

Example: The Finance Commission recommends that 5% of the State's share of Union taxes should be earmarked for Panchayats. This means if a State receives ₹1,000 crore from the Union taxes, ₹50 crore should be allocated to Panchayats.

Impact: This ensures that local self-governments at the village level have sufficient funds to carry out development activities such as building roads, schools, and sanitation facilities.

Example 4:

Scenario: Augmenting Resources of Municipalities

Context: The Finance Commission also recommends measures to augment the Consolidated Fund of a State to supplement the resources of Municipalities.

Example: The Finance Commission recommends that 10% of the State's share of Union taxes should be allocated to Municipalities. This means if a State receives ₹1,000 crore from the Union taxes, ₹100 crore should be allocated to Municipalities.

Impact: This ensures that urban local bodies have adequate funds to manage urban infrastructure and services such as waste management, water supply, and public transportation.

Example 5:

Scenario: Special Recommendations by the President

Context: The President refers a special matter to the Finance Commission in the interest of sound finance.

Example: The President asks the Finance Commission to study and recommend measures to improve the financial health of States that are heavily indebted. The Finance Commission recommends a debt relief package and fiscal discipline measures for these States.

Impact: This helps the indebted States to manage their finances better, reduce their debt burden, and improve their creditworthiness, thereby ensuring long-term financial stability.