Article 280 of the Constitution of India provides for a Finance Commission as a quasi-judicial body. It is constituted by the President of India every fifth year or at such earlier time as he considers necessary.
The finance Commission consists of a Chairman and four other members to be appointed by the President.
They hold office for such period as specified by the President in his order. They are eligible for reappointment.
The Constitution authorizes the Parliament to determine the qualifications of members of the Commissions and the manner in which they should be selected.
Accordingly, the Parliament enacted the Finance Commission Act of 1951 specifying the qualifications of the Chairman and members of the Commission.
The chairman should be a person having experience in public affairs and the four other members should be selected from amongst the following.
A judge of the High Court or one qualified to be appointed as one.
A person who has specialized knowledge of finance and accounts of the government.
A person who has wide experience in financial matters and in administration.
A person who has special knowledge of Economics.
The Finance Commission is required to make recommendations to the President of India on the following matters (Article 280)
The distribution of the net proceeds of taxes to be shared between the Center and the States, and the allocation between the States, the respective shares of such proceeds.
The principal which should govern grants-in-aid to the States by the Center i.e., (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 in the State on the basis of recommendation made by the State Finance Commission. This function is added by the 73rd and 74th Constitutional Amendment Act of 1992, which have granted constitutional status on the panchayats and the municipalities respectively.
Any other matters referred to it by the President in the interest of sound finance.
Till 1960, the commission also suggested the grants given to the States of Assam, Bihar, Orissa and West Bengal in lieu of the assignment of any share of the net proceeds in each year of export duty on jute and jute products. These grants were to be given for a temporary period of ten years from the commencement of the Constitution (Article 273).
The Commission submits its report to the President. He lays it before both the Houses of Parliament along with an explanatory memorandum as to the action takes on its recommendations (Article 281).