Article 281

Article 281 of the Constitution of India plays a vital role in maintaining fiscal balance between the Union and the States. It ensures that the recommendations made by the Finance Commission are formally presented before Parliament, thus upholding transparency, accountability, and cooperative federalism in India’s financial governance.

Constitutional Background

Article 281 is part of Part XII of the Indian Constitution, which deals with finance, property, contracts, and suits. The provision requires that the recommendations of the Finance Commission, constituted under Article 280, must be laid before both Houses of Parliament by the President of India. Along with these recommendations, an explanatory memorandum must also be submitted, outlining the actions taken or proposed by the government based on the Commission’s advice. This constitutional mechanism ensures that the process of fiscal devolution between the Union and the States is conducted in an open and accountable manner.

The Finance Commission: Establishment and Composition

The Finance Commission is established under Article 280 of the Constitution. It is constituted every five years, or earlier if the President considers it necessary. The Commission comprises a Chairman and four other members, all appointed by the President of India. The qualifications and terms of service of the members are prescribed by Parliament through the Finance Commission (Miscellaneous Provisions) Act, 1951.
The primary duty of the Finance Commission is to evaluate the financial relations between the Centre and the States. It operates as an independent constitutional body that safeguards the principles of fiscal federalism and equitable distribution of resources across the country.

Functions and Objectives

The Finance Commission performs several essential functions aimed at maintaining fiscal discipline and ensuring balanced economic growth across the States. Its principal responsibilities include:

• Recommending the distribution of the net proceeds of taxes between the Union and the States.
• Determining the allocation between the States of their respective shares of such proceeds.
• Assessing the financial position of the States to ensure they have adequate resources for development.
• Suggesting measures to augment the Consolidated Fund of a State to support the finances of local bodies.
• Advising the President on any other financial matter referred to the Commission in the interests of sound fiscal management.

These functions ensure a fair and rational distribution of resources, supporting both the national interest and regional development.

Parliamentary Procedure under Article 281

Once the Finance Commission submits its report, the President of India is constitutionally mandated to lay it before both Houses of Parliament. The report must be accompanied by an explanatory memorandum, which details the action taken or proposed by the government on the recommendations. This process guarantees parliamentary oversight and reinforces transparency in the management of intergovernmental fiscal relations.
Although the recommendations of the Finance Commission are advisory in nature, the Union Government is expected to provide valid reasons if it decides to deviate from them. This practice strengthens accountability and maintains trust between the Union and the States.

Judicial Interpretations and Case Law

The judiciary has, on several occasions, elaborated on the constitutional significance of Article 281 and the role of the Finance Commission in India’s federal structure.

• State of Karnataka v. Union of India (1977): The Supreme Court highlighted that the Finance Commission plays an indispensable role in maintaining the federal balance by recommending equitable financial adjustments between the Centre and the States.
• Union of India v. R. C. Gupta (1990): The Court reaffirmed the importance of the Finance Commission’s recommendations as essential instruments of fiscal federalism.
• S.R. Tewari v. District Board, Agra (1964): This case underscored the importance of adhering to the Finance Commission’s recommendations to ensure uniformity and fairness in financial transfers.

Through these judicial pronouncements, the Court has consistently upheld the Commission’s advisory authority and its integral role in fiscal governance.

Significance and Implications

Article 281 serves as a bridge between the recommendations of the Finance Commission and parliamentary scrutiny. It ensures that fiscal transfers are conducted in a constitutionally transparent manner and that both Houses of Parliament remain informed of the fiscal policies impacting the Union–State relationship.
The provision enhances cooperative federalism by addressing the vertical and horizontal imbalances in financial resources. Vertical imbalances refer to disparities between the revenue-raising powers of the Centre and the expenditure responsibilities of the States, while horizontal imbalances exist among the States themselves due to varying levels of economic development. The Finance Commission’s recommendations, when presented under Article 281, aim to correct these imbalances and promote inclusive growth.

Recent Developments: The Fifteenth Finance Commission

The 15th Finance Commission (2020–2025), chaired by N. K. Singh, presented its report in the backdrop of the COVID-19 pandemic, which significantly strained both central and state finances. It focused on:

• The need for fiscal consolidation and responsible budgeting.
• Strengthening state-level fiscal frameworks.
• Enhancing the financial autonomy of local bodies.
• Recommending measures for debt management and revenue augmentation.

The Commission also recommended the distribution of tax revenues in a ratio of 41% to the States and 59% to the Centre, adjusting for the reorganisation of Jammu and Kashmir. Its report, when tabled under Article 281, reflected the continued evolution of fiscal policy in India to address contemporary challenges.

Implementation and Challenges

While the government is not legally bound to accept every recommendation made by the Finance Commission, it must provide a reasoned justification for any deviation. This requirement enhances transparency and preserves the spirit of constitutional propriety.
However, practical challenges often arise, including:

• Disparities in state revenues and expenditure patterns.
• Political considerations influencing the acceptance of recommendations.
• Delays in the implementation of recommendations, leading to temporary fiscal imbalances.
• Differences in priorities between the Centre and States regarding fiscal devolution.

Despite these challenges, Article 281 ensures that the mechanism of fiscal consultation remains an integral part of India’s democratic and federal framework.

Related Constitutional Provisions

• Article 280: Provides for the establishment and composition of the Finance Commission.
• Article 282: Grants the Union and the States the authority to make grants for public purposes, even beyond their respective legislative jurisdictions.