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What is Graded Water Tariff Policy? Centre accepts 15th Finance Commission recommendations on water

What is Graded Water Tariff Policy? Centre accepts 15th Finance Commission recommendations on water


  • GS 2 || Polity || Constitutional Body || Finance Commission

Why in the news?

Recently the government has accepted the recommendation of the 15th Finance Commission, which has suggested fixing a graded water tariff to reform the water sector.

Finance Commission:

  • Finance Commission is a constitutional body for the purpose of allocation of certain revenue resources between the Union and the State Governments.
  • Two distinctive features of the Commission’s work involve redressing the vertical imbalances between the taxation powers and expenditure responsibilities of the centre and the States respectively and equalisation of all public services across the States.
  • It is established under Article 280 of the Indian Constitution by the President of India.
  • The First Finance Commission was constituted vide Presidential Order under the chairmanship of Shri K.C. Neogy on 6th April, 1952.
  • Fifteenth Finance Commissions have been Constituted so far at intervals of every five years.

Constitutional Provisions:

  • Article 280 and Article 281 of the Indian Constitution deal with the Finance Commission.
  • According to Article 280, it shall be the duty of the Commission to make recommendations to the President in relation to the:
    • the distribution between the Union and the States of the net proceeds of taxes which are to be, or maybe, divided between them and the allocation between the States of the respective shares of such proceeds;
    • the principles which should govern the grants in aid of the revenues of the States out of the Consolidated Fund of India;
    • any other matter referred to the Commission by the President in the interests of sound finance
    • The Commission shall determine their procedure and shall have such powers in the performance of their functions as Parliament may by law confer on them
  • Article 281 is related to the recommendations of the Finance Commission:
    • It says that the President has to lay the recommendation made by the Finance Commission and its explanatory memorandum before each house of Parliament.

Composition of the Finance Commission:

  • The Commission is headed by a Chairman and four other members.
  • Chairman heads the Commission and presides over the activities. He should have had public affairs experience.
  • The Parliament determines legally the qualifications of the members of the Commission and their selection methods.

Eligibility for Chairman and Members:

As per the provisions of the Finance Commission [Miscellaneous Provisions] Act, 1951 and The Finance Commission (Salaries & Allowances) Rules, 1951, the Chairman of the Commission is selected from among persons who have had experience in public affairs, and the four other members are selected from among persons who-

  • are, or have been, or are qualified to be appointed as Judges of a High Court; or
  • have special knowledge of the finances and accounts of Government; or
  • have had wide experience in financial matters and in administration; or
  • have special knowledge of economics

Recommendations of the Commission:

The recommendations of the Finance Commission are implemented as under:-

  • Those to be implemented by an order of the President:The recommendations relating to distribution of Union Taxes and Duties and Grants-in-aid fall in this category.
  • Those to be implemented by executive orders: Other recommendations to be made by the Finance Commission, as per its Terms of Reference (ToR).

Are the recommendations of the Finance Commission binding?

  • The recommendations made by the Finance Commission are of an advisory nature only and therefore, not binding upon the government.
  • It is up to the Government to implement its recommendations on granting money to the states.

Functions of Finance Commission:

The Finance Commission makes recommendations to the president of India on the following issues:

  • The net tax proceeds distribution to be divided between the Centre and the states, and the allocation of the same between states.
  • The principles governing the grants-in-aid to the states by the Centre out of the consolidated fund of India.
  • The steps required to extend the consolidated fund of a state to boost the resources of the panchayats and the municipalities of the state on the basis of the recommendations made by the state Finance Commission.
  • Any other matter referred to it by the president in the interests of sound finance.
  • The Commission decides the basis for sharing the divisible taxes by the centre and the states and the principles that govern the grants-in-aid to the states every five years.
  • Any matter in the interest of sound finance may be referred to the Commission by the President.
  • The Commission’s recommendations along with an explanatory memorandum with regard to the actions done by the government on them are laid before the Houses of the Parliament.
  • The FC evaluates the rise in the Consolidated Fund of a state in order to affix the resources of the state Panchayats and Municipalities.
  • The FC has sufficient powers to exercise its functions within its activity domain.
  • As per the Code of Civil Procedure 1908, the FC has all the powers of a Civil Court. It can call witnesses, ask for the production of a public document or record from any office or court.

Comparison with other federal countries:

  • A constitutional body like the Finance Commission is not unique to India. Most federal systems resolve the vertical and horizontal imbalances through mechanisms similar to the Finance Commission. For example: Australia and Canada also do have similar bodies.
  • The Commonwealth Grants Commission (CGC) is the main institution in Australia that makes recommendations about the horizontal fiscal transfers.
  • Much like the Finance Commission in India, the CGC is also an advisory body that responds to its terms of reference. It also does not have powers to initiate and pursue inquiries on its own.
  • Unlike in India, where the Finance Commission looks at both the vertical and horizontal dimensions of transfers, the CGC does not look into the issue of vertical imbalance.
  • With the introduction of GST, the vertical transfers are determined by the amount of actual collections of the GST, supplemented by the Health Care Grants (HCG).

Model Mains Question:

  1. Critically examine the role of the finance commission in strengthening financial federalism in India. Is a body like the Finance Commission unique to India?