Definition
Finance Commission
The Finance Commission is a constitutional body set up periodically to recommend how tax revenues should be shared between the Centre and the states.
Constituted roughly every five years under Article 280, the Finance Commission recommends the vertical split of taxes between the Centre and states and the horizontal distribution among states, along with grants-in-aid and other transfer principles. Its recommendations are usually accepted by the government.
Beyond tax sharing, it advises on measures to strengthen the finances of local bodies and on fiscal discipline. Each Commission's formula — the weights given to population, equity and performance — has major consequences for the resources available to different states.
Related terms
- Gross vs Net Tax RevenueGross tax revenue is the Centre's total tax collection, while net tax revenue is what remains after the states' share is devolved to them.
- Devolution to StatesDevolution is the constitutionally mandated transfer of a share of the Centre's divisible tax pool to the states, as recommended by the Finance Commission.
- Grants-in-AidGrants-in-aid are financial transfers from the Centre to states or local bodies, given over and above their share of central taxes, often for specific purposes or to bridge revenue gaps.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.