Finance Commission is constituted to define financial relations between the centre and the states. Under the provision of Article 280 of the Constitution, the President appoints a Finance Commission for the specific purpose of devolution of non-plan revenue resources. The functions of the commission are to make recommendations to the President in respect of:
(i) The distribution of the divisible part of net proceeds of taxes between the states of such proceeds;
(ii) Principles governing grants-in-aid of the revenues of the states out of the Consolidated Fund of a state to supplement the resources of the panchayats and municipalities.
The commission is also mandated to review the state of finances of the Union and states and suggest a plan by which the Governments collectively and severally may bring about a restructuring of public finances, restoring budgetary balances, achieving macro-economic stability and debt restructuring along with equitable growth.
As of now, Eleven Finance Commissions have been appointed, which have further submitted their recommendations to the president. First finance commission was set up in 1951 under their chairmanship of K.C. Niyogi, which submitted its report in 1952, being under operation during 1952-97. Presently, recommendations of A.M. Khusro, chairman, eleventh finance commission, being operated for the period 2000-.2005.
However, the Twelfth Finance Commission has already been constituted with Dr. C. Rangrajan, as chairman, with three other members. The commission has been asked to submit its report by July 31, 2004 covering a period of five years commencing on April 1, 2005.