What is a Finance Commission? What functions can be assigned to a Finance Commission?

Most of the federal States have elaborate provisions of distribution of financial resources between the federal and provincial governments, as well as among the provinces. To this extent, Indian Constitution is no exception. Indian Constitution makes the distinction between the legislative power to levy a tax and the power to appropriate the proceeds of a tax so levied. There are taxes like sales tax and State excise duties, which are levied and collected by the States, while the sales tax on inter-State sale, called the central sales tax, is levied by the Central government but is assigned to the State concerned. Properties of the Union and States are exempted from mutual taxation under Article 285(1) and 289(1) of the Constitution. But there are taxes levied and collected by the Union, which are distributed between the Union and the States. These include income tax and union excise duties.

It is in relation to such taxes that Articles 270, 273, 275 and 280 of the Constitution provide for the constitution of a Finance Commission every five years, to recommend to the President of India certain measures regarding distribution of financial resources between the Union and the States. Article 280 provides that the Finance Commission shall recommend to the President the percentage of net proceeds of income tax, which should be assigned by the Union to the States, and the manner in which such a share of the States is to be distributed among them. The recommendations of the Finance Commission, when accepted, remain valid for a period of five years before which next Finance Commission is appointed.

The Chairman of the Commission, in view of the President, must be a person having experience in public affairs. In addition, four other members of the Commission with following qualifications/prerequisites are appointed:
(a) A High Court judge or anyone having qualification to be appointed as such. (b) A person having specific knowledge of finances and accounts of the government. (c) A person having vast experience of financial and administrative matters. (d)??A person having special knowledge of economics.

As per the Constitution, it is the duty of the Finance Commission to make recommendations to the President on the following:
(I) Distribution between the Union and the States, of net proceeds of taxes, which are to be distributed among them.
(II) Distribution of their share among the States.
(III) The principles governing grants-in-aid of the Union revenues to the States.
(IV) The measures to augment the resources of the States to supplement the resources of Panchayati Raj Institutions.
(V) The measures to augment the resources of the States to supplement the resources of municipalities in the States.
(VI) Any other matter referred to the Commission by the President of India.