Topic 05 of 6 ยท Chapter 07 ยท Indian Economy
Finance Commission & Consolidated Fund
Finance Commission โ composition, functions, devolution of taxes. Consolidated Fund, Contingency Fund, Public Account.
๐ In This Article
1. Finance Commission
The Finance Commission is a constitutional body established under Article 280. It is set up every 5 years by the President to recommend the distribution of tax revenues between the Centre and States.
- Composition: Chairman + 4 members appointed by President
- Functions:
- Recommend distribution of net proceeds of taxes between Centre and States
- Recommend grants-in-aid to states
- Recommend measures to augment state finances
- Any other matter referred by President
- Current: 16th Finance Commission (2026-31)
โญ 15th Finance Commission (2021-26): Recommended 41% of divisible pool of taxes to states (reduced from 42% to accommodate newly created UTs of J&K and Ladakh). Chairman: N.K. Singh.
2. Three Government Funds
| Fund | Article | Description | Withdrawal |
|---|---|---|---|
| Consolidated Fund of India | Article 266 | All revenues received by government + all loans raised + all repayments received. Most important fund. | Only with Parliament’s approval |
| Contingency Fund of India | Article 267 | Emergency fund held by President. Used for unforeseen expenditure. Corpus: โน500 crore. | President can withdraw without Parliament approval (but must be replenished) |
| Public Account of India | Article 266 | Funds held by government as trustee โ provident funds, small savings, etc. Not government’s own money. | Executive authority (no Parliament approval needed) |
๐ก Salaries of constitutional functionaries (President, Judges, CAG, etc.) are charged on the Consolidated Fund of India โ they are NOT voted by Parliament. This ensures their independence.
3. Tax Devolution
The Finance Commission recommends what percentage of the divisible pool of central taxes should go to states:
- 14th Finance Commission (2015-20): 42% to states
- 15th Finance Commission (2021-26): 41% to states
- Taxes in divisible pool: Income tax, corporate tax, GST (Centre’s share), customs duty, excise duty
- Taxes NOT in divisible pool: Surcharges and cesses (e.g., Education Cess, Swachh Bharat Cess)
โ
Why Surcharges are Controversial: Surcharges and cesses are NOT shared with states. So when the Centre levies more surcharges (instead of regular taxes), states get less. This is a major grievance of states.
4. Key Points for Exam
๐ Must-Remember Facts
- Finance Commission = Constitutional body (Article 280)
- Finance Commission set up every 5 years by President
- 15th Finance Commission: 41% of divisible pool to states
- 16th Finance Commission covers: 2026-31
- Consolidated Fund = Article 266; withdrawal needs Parliament approval
- Contingency Fund = Article 267; corpus โน500 crore; President can withdraw
- Public Account = Article 266; government as trustee
- Surcharges and cesses are NOT shared with states
- Salaries of constitutional functionaries charged on Consolidated Fund
- Finance Commission transfers = statutory (mandatory)