Financial Relations & the Finance Commission
Key facts on tax devolution, grants-in-aid, the Finance Commission and the GST Council under Part XII of the Constitution.
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Questions Covered in This Set
10 cards to master
Which Articles of the Constitution deal with Centre–State financial relations?
Part XII, Articles 264–293.
Why is taxation power treated differently from ordinary legislative power?
A tax must be expressly listed in the Seventh Schedule — it cannot be inferred from a general legislative entry.
How many tax entries are in the Concurrent List, and why?
None. Concurrent taxation was deliberately avoided to prevent double taxation.
What is 'vertical fiscal imbalance'?
The Union holds the elastic, fast-growing tax bases while States bear heavy spending duties; it is corrected by transferring money downward via devolution and grants.
Who constitutes the Finance Commission, how often, and under which Article?
The President, every five years (or earlier), under Article 280 — a chairperson plus four members.
Name the main terms of reference of the Finance Commission.
Distribution of net proceeds of shareable taxes (vertical and horizontal devolution), principles for grants-in-aid under Article 275, measures to augment State funds for Panchayats/Municipalities, and any matter referred by the President.
What share of the divisible pool did the 15th Finance Commission recommend for States (2021–26)?
41% (down from 42% after Jammu & Kashmir and Ladakh became Union Territories); chaired by N.K. Singh.
What is the biggest weight in the 15th FC's horizontal devolution formula?
Income distance at 45% — poorer States receive more; other weights: area 15%, population (2011) 15%, demographic performance 12.5%, forest & ecology 10%, tax effort 2.5%.
Are Finance Commission recommendations binding?
No — they are advisory, though tax devolution recommendations have always been accepted in practice.
Why do States say their real share is below 41%?
Because the divisible pool excludes cesses and surcharges (Article 271), which the Union keeps entirely, and these have grown steadily.
