The Indian Finance Commission is a unique constitutional body, which has survived sixty years. We do not find similar Constitutional institutions even in older federations like the USA, Canada and Australia.
In any federation, the distributions of governmental functions, which involve expenditure obligations, and sources of revenue, which ensure the capacity to raise revenues, are distributed on the basis of different set of principles.
This leads to two types of imbalances between the expenditure requirements of the national and state governments and the capacity to raise revenue to meet these requirements.
One imbalance is called vertical federal fiscal imbalance, which indicates the deficit faced by the States vis-a-vis the surplus experienced by the national government, and another is horizontal federal fiscal imbalance, which indicates the relative financial imbalance between their own revenues and expenditures among the states themselves.
Work of finance commission
The most important part of the Finance Commissions’ work in the methodology of the Commission is
(1) To determine the quantum of divisible pool of the taxes,
(2) The quantum of grants and
(3) Other financial reliefs.
The terms of reference are broadly indicated under Article 280 itself. Even then, under provision (d) ‘any other matter’, the Central Government stipulates a number of guidelines and even conditions in order to specify the scope of the Finance Commission’s work which has led to the Commission confining its recommendations to the non-plan revenue account of the state government finances.
In fact, there is no consistency in the scope of the Finance Commission, though there is some continuity in regard to the terms of the references of the Commission.