The Finance Commission of India is a constitutional body established by the President under Article 280 of the Constitution of India. It was first constituted in 1951 under The Finance Commission (Miscellaneous Provisions) Act, 1951, to address the structural imbalance in India's federal design where the Union government collects the majority of taxes but the State governments bear the bulk of expenditure responsibilities. This mechanism is the central instrument of fiscal federalism in India.
The President is mandated to constitute the Commission every five years, or earlier if deemed necessary. Its primary function is to make recommendations to the President regarding the distribution of the net proceeds of taxes between the Union and the States (vertical devolution) and the allocation of the States' share among themselves (horizontal devolution). It also recommends the principles governing grants-in-aid to the states out of the Consolidated Fund of India under Article 275. Furthermore, it suggests measures to augment a state's Consolidated Fund to supplement the resources of Panchayats and Municipalities, based on the recommendations of the State Finance Commission (mandated by Article 243-I and Article 243-Y).
The most recent body, the 16th Finance Commission, was constituted on December 31, 2023, and is chaired by Dr. Arvind Panagariya. It has retained the States' share in the divisible pool at 41%, but has significantly restructured transfers by introducing a 10% weight for contribution to GDP in the horizontal devolution formula and discontinuing Post-Devolution Revenue Deficit Grants.