Article 280

Article 280 of the Constitution of India provides for the establishment of a Finance Commission, a constitutional body responsible for recommending the distribution of financial resources between the Union and the States. This Article plays a pivotal role in maintaining fiscal federalism, ensuring that national revenues are allocated fairly to support balanced development and financial stability across all regions of the country.

Constitutional Provision and Purpose

The Finance Commission was envisaged by the framers of the Constitution to serve as an impartial and expert body that periodically evaluates the financial relations between the Union and the States. It aims to ensure that States have adequate resources to discharge their constitutional and administrative responsibilities while maintaining the overall fiscal stability of the nation.
The provision is contained in Part XII (Finance, Property, Contracts and Suits) of the Constitution, which outlines the financial framework of the Indian Union.

Composition of the Finance Commission

Under Article 280(1), the Finance Commission is constituted by the President of India at the end of every five years or earlier, if deemed necessary.
The Commission consists of:

• A Chairman, and
• Four other members,

all appointed by the President.
The qualifications and method of selection of the Chairman and members are prescribed by Parliament under the Finance Commission (Miscellaneous Provisions) Act, 1951. Typically:

• The Chairman is chosen from among persons with experience in public affairs or finance.
• The other members are drawn from fields such as economics, public administration, auditing, and government finance.

This ensures that the Commission functions as a technically competent and non-political advisory body.

Duties and Functions of the Finance Commission

The duties of the Finance Commission are laid out under Article 280(3). It is mandated to make recommendations to the President on the following key matters:

1. Distribution of Tax Revenues
   • The division of the net proceeds of taxes between the Union and the States under Chapter I of Part XII (commonly known as vertical devolution).
   • The allocation of shares among individual States (horizontal devolution) based on factors such as population, income distance, area, forest cover, and fiscal discipline.
2. Grants-in-Aid to States
   • The principles governing the grants-in-aid from the Consolidated Fund of India to States under Article 275.
   • These grants are particularly directed at States facing revenue deficits or those requiring special financial support for specific purposes, including the welfare of Scheduled Tribes and the development of Scheduled Areas.
3. Measures to Augment State Finances
   • Recommendations on measures to increase the financial resources of States to supplement the resources of Panchayats and Municipalities, based on the recommendations of the respective State Finance Commissions.
4. Other Matters Referred by the President
   • The President may refer to the Finance Commission any additional financial matter in the interest of sound fiscal management, such as debt management, disaster relief funding, or reforms in taxation.

These wide-ranging responsibilities enable the Finance Commission to serve as the principal instrument of fiscal coordination in India’s federal structure.

Significance and Objectives

The Finance Commission is an essential institution for promoting equity, efficiency, and stability in intergovernmental fiscal relations. Its recommendations aim to:

• Ensure equitable sharing of national resources.
• Correct vertical imbalances between the revenue powers of the Union and expenditure responsibilities of the States.
• Address horizontal imbalances among States with varying levels of economic development.
• Encourage fiscal responsibility and discipline at all levels of government.
• Strengthen local governance through financial empowerment of Panchayati Raj Institutions and Municipalities.

By doing so, it acts as a cornerstone of India’s fiscal federalism, maintaining harmony between the Union’s centralised revenue collection and the States’ expenditure needs.

Legal Framework and Supporting Legislation

The working of Article 280 is supplemented by the Finance Commission (Miscellaneous Provisions) Act, 1951, which lays down:

• The qualifications of the members,
• The procedure for their appointment and service conditions, and
• The powers and functions of the Commission.

The Act ensures institutional continuity and operational clarity in the functioning of successive Commissions.

Relation to Other Constitutional Provisions

Article 280 is closely interlinked with several other financial Articles in the Constitution:

• Article 275: Provides for grants-in-aid of revenues to States based on the Finance Commission’s recommendations.
• Article 281: Mandates that the President lay the Finance Commission’s recommendations before Parliament, along with an explanatory memorandum outlining the government’s actions on them.
• Article 282: Allows both the Union and the States to make discretionary grants for public purposes.

Together, these Articles create a comprehensive fiscal mechanism for the equitable sharing of national income and resources.

Judicial Interpretations and Case Law

The judiciary has, in several cases, clarified the role and authority of the Finance Commission:

• State of Karnataka v. Union of India (1977): The Supreme Court recognised the Finance Commission as a vital institution ensuring a just financial relationship between the Union and the States.
• Union of India v. State of Kerala (1979): The Court upheld the binding nature of the principles recommended by the Finance Commission regarding grants-in-aid, reinforcing its advisory but constitutionally significant status.
• S.R. Tewari v. District Board, Agra (1964): Although not directly about the Finance Commission, this case reiterated the constitutional principles governing equitable financial distribution.

These judgments affirm that while the Commission’s recommendations are advisory, they carry considerable constitutional weight and form the basis of financial policy decisions.

Role of Recent Finance Commissions

Since the adoption of the Constitution, numerous Finance Commissions have been constituted, each contributing uniquely to India’s evolving fiscal architecture.

• The Fourteenth Finance Commission (2015–2020) recommended a significant increase in the States’ share of the divisible pool of taxes from 32% to 42%, enhancing fiscal autonomy at the State level.
• The Fifteenth Finance Commission (2020–2026) continued this framework while factoring in the impact of the Goods and Services Tax (GST) and the need for fiscal stability during the COVID-19 pandemic.

These commissions have also emphasised transparency, performance-based grants, and prudent fiscal management.

Administrative and Economic Importance

The Finance Commission plays an ongoing role in:

• Assessing fiscal capacities and expenditure responsibilities of the Union and States.
• Formulating equitable revenue-sharing models to reduce regional disparities.
• Recommending fiscal rules and incentives for maintaining budgetary discipline.
• Strengthening decentralisation by supporting local government finances.

Through these functions, the Commission ensures that India’s federal system remains financially viable and responsive to changing socio-economic conditions.