Finance Commission Economics YouTube Lecture Handouts

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Finance Commission

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  • The Finance Commission (FC) is constituted by the President of India every five year under Article 280 of the Constitution. It consists of Chairman and 4 Members.
  • It is a constitutional body which determines the formula for distribution of taxes between centre and states, and between states.
  • It also determines the share of taxes and grants which is to be given to the local bodies in states. It is known as Finance commission grants.
  • The recommendations of the commission are laid in both the houses of parliament.
  • Chairman of 15th FC: N. K. Singh
  • Chairman of 14th FC: Y. V. Reddy
  • The 1st FC was set up in 1951 under the chairmanship of K. C. Neogy.
  • 12th FC: C. Rangarajan 2nd FC: K. Santhanam
  • 13th FC: Dr Vijay L. Kelkar 6TH FC: K. Brahmananda Reddy
  • Horizontal Devolution: Devolution of resources between different states. i.e.. , how much each state will get.
  • Vertical devolution: Distribution of net proceeds of taxes of the Union between Union and state government. 14th FC increased it to 42 % from 32 % . 15th FC reduced it to 41 % .


  • The net tax proceeds distribution between centre and states.
  • The principles which should govern the grants in aid of the revenues of the States out of the Consolidated Fund of India.
  • The measures needed to augment the Consolidated Fund of a State to supplement the resources of the Panchayats and Municipalities.
  • Impact of the enhanced devolution following 14th FC on the fiscal situation i.e.. 42 % .
  • โšนโšน The recommendations of the commission are advisory in nature and it is not binding on the Government to implement it.

Terms of Reference of 15th FC

  • The Commission shall review the current fiscal status of the Union and the States, and to recommend a fiscal consolidation roadmap.
  • The Commission may also examine whether revenue deficit grants be provided at all by the central government.
  • The impact of GST and the compensation for the losses owing to GST.
  • Creating a framework wherein performance based incentives can be given to states.
    • Expansion of tax base.
    • Implementation of flagship schemes.
    • Promoting digital economy, progress in ease of doing business, Population control
    • Progress in sustainable development.

Practice Question

Q 1. Which of the following article talks about the formation of the Finance Commission?

(A) Article 280

(B) Article 275

(C) Article 148

(D) Article 176

Answer: A

Q 2 Consider the following statements with regard to the Finance Commission.

1. The recommendations of the Finance Commission cover a period of five years.

2. The report is submitted to the Prime Minister.

Which of the statements given above is/are correct?

A) Only 1

B) Only 2

C) Both 1 and 2

D) Neither 1 nor 2

Answer: A


0: 00 Finance Commission

0: 14 Overview of Finance Commission

3: 59 Functions of Finance Commission

5: 30 Terms of Reference of 15th FC

7: 07 MCQ about Finance Commission

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โœ Manishika