An instrument which the Constitution has evolved for the purpose of distributing financial resources between centre and states is the Finance Commission. According to Article 280 of the Constitution it is to be constituted by the President once every five years consisting of a chairman and four other members appointed by the President.

Within one year from 25th April 1993, i.e. the date on which the constitution 73rd Amendment came into force and afterwards every 5 years the State Government shall appoint a Finance Commission to review the financial position of the Panchayats and to make recommendations as to:

(i) The distribution between the State and the Panchayats of the net proceeds of taxes, duties, tolls and fees leviable by the State which may be divided between them and how allocation would be made among various levels of Panchayats

(ii) What taxes, duties, tolls and fees may be assigned to the Panchayats;


(iii) Grant-in-aid to the Panchayats

The report of the Commission, together with a memorandum of action taken on it, shall be laid before the State Legislature. These provisions are modeled on Article 280 which contains provisions, regarding appointment of a Finance Commission for distribution of finances between the Union and the States.