Indian Fiscal Commission

The Indian Fiscal Commission was one of the earliest expert bodies established during the British colonial period to examine and recommend measures for the fair and efficient distribution of financial resources between the central and provincial governments in India. Formed in 1921, it played a pioneering role in shaping India’s fiscal federalism and the framework for financial relations between different levels of government — a concept that continues under the modern Finance Commission system established after independence.

Historical Background

Under British rule, the fiscal system of India was highly centralised, with most revenue powers concentrated in the hands of the Government of India (the Centre). The provinces (states) had limited autonomy and depended on grants or transfers from the central exchequer to meet their administrative and developmental needs.
This imbalance was particularly highlighted after the Montagu–Chelmsford Reforms and the introduction of Dyarchy through the Government of India Act of 1919, which transferred certain subjects like education, agriculture, and health to the provinces. These new responsibilities required corresponding financial resources, leading to the question of how revenue and expenditure should be shared between the centre and provinces.
To address this issue, the British Government appointed the Indian Fiscal Commission in 1921 to review and recommend a suitable scheme for financial relations between the two levels of government.

Composition of the Commission

The Indian Fiscal Commission (1921–1922) was chaired by Sir E. W. Edge, a member of the Indian Civil Service, and consisted of both British and Indian members representing administrative and financial expertise.
Key members included representatives from:

• The Finance Department of the Government of India.
• Provincial Governments (such as Bombay, Bengal, and Madras).
• Indian experts in commerce and economics.

The Commission conducted extensive studies, gathered evidence from provincial authorities, and analysed fiscal data before submitting its report in 1922.

Objectives of the Commission

The Indian Fiscal Commission was tasked with examining and recommending:

1. The principles governing the division of financial resources between the Centre and provinces.
2. The allocation of revenue-raising powers, such as taxation and duties.
3. The method of distributing proceeds of major taxes (like income tax, excise duties, and customs).
4. The criteria for financial assistance or grants to provinces.
5. Measures to ensure fiscal stability and administrative efficiency within the federal framework envisaged by the 1919 Act.

Essentially, the Commission sought to strike a balance between financial autonomy for provinces and the need for a unified national fiscal policy.

Recommendations of the Commission (1922 Report)

The Report of the Indian Fiscal Commission (1922) was a landmark in India’s fiscal history. Its major recommendations were as follows:

1. Separation of Revenue Heads: The Commission proposed the division of revenue sources into three categories:
   • Central Subjects: Customs duties, income tax, salt, and excise on mineral oils.
   • Provincial Subjects: Land revenue, irrigation, forest revenue, and excise on spirits.
   • Shared Subjects: Certain taxes, like stamp duties and income tax, to be shared between Centre and provinces.
2. Sharing of Income Tax: The Commission recommended that the income tax (excluding agricultural income) should be levied and collected by the Centre, but a portion of the net proceeds should be assigned to provinces on a fixed percentage basis.
3. Excise Duties: Excise duties on locally consumed goods, especially liquor, should be a provincial subject, while excise on items of inter-provincial or export importance (such as tobacco and mineral oils) should remain central.
4. Financial Grants: To assist provinces with weaker financial bases, the Commission recommended the introduction of statutory grants-in-aid to maintain administrative efficiency and balance disparities between richer and poorer regions.
5. Fiscal Accountability: The Commission emphasised the need for transparency and regular audits of financial transactions, advocating closer cooperation between provincial and central financial departments.
6. Periodic Review: It suggested that the fiscal arrangements should be periodically reviewed to adapt to changing administrative and economic conditions — an idea later institutionalised through the Finance Commission system in independent India.

Significance of the Commission

The Indian Fiscal Commission’s report laid the groundwork for a systematic approach to fiscal decentralisation in India. Its key contributions were:

• It defined the principles of revenue sharing between the Centre and provinces for the first time.
• It introduced the concept of shared taxes and grants-in-aid, ensuring financial support for economically weaker provinces.
• It influenced the Government of India Act of 1935, which provided for greater fiscal autonomy to provinces.
• It marked the beginning of fiscal federalism in India — the balancing of national control with regional financial responsibility.

Legacy and Impact

The Commission’s recommendations shaped subsequent fiscal developments in both colonial and post-colonial India:

• The Lee Commission (1924) and Indian Taxation Enquiry Committee (1925) built on its work.
• The Government of India Act (1935) further expanded provincial autonomy, incorporating many of the principles first outlined by the Fiscal Commission.
• After independence, the Constitution of India (1950) institutionalised periodic Finance Commissions (Article 280) to perform similar functions of resource distribution between the Union and States.

Thus, the Indian Fiscal Commission of 1921–22 can be regarded as the precursor to the modern Finance Commission system.

Evaluation and Limitations

While pioneering, the Commission faced several constraints:

• It operated within a colonial framework, prioritising imperial interests over genuine fiscal autonomy for provinces.
• The Central Government retained dominance, particularly in lucrative tax fields such as customs and income tax.
• Its recommendations were only partially implemented, limiting their practical effect.
• Provinces continued to face financial dependency and administrative control from the Centre.

Despite these limitations, the Commission’s attempt to rationalise fiscal relations marked a significant administrative advance in India’s financial governance.