Finance Commission & Fiscal Devolution

The Finance Commission of India is a quasi-judicial constitutional body established under Article 280 of the Constitution by the President of India every five years, or earlier as necessary. Its primary constitutional function is to recommend the distribution of net tax proceeds of the Union between the Union and the States (vertical devolution) and the allocation among the States themselves (horizontal devolution). The Commission also recommends principles governing grants-in-aid to states under Article 275 and measures to augment Consolidated Funds of States for Panchayats and Municipalities. Landmark commissions, such as the 14th Finance Commission (which increased vertical devolution to 42%) and the 15th Finance Commission led by N.K. Singh (recommending 41% devolution), utilized multifaceted horizontal criteria including income distance, population, area, forest and ecology, and demographic performance.