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Article 243I of the Indian Constitution: Constitution of Finance Commission to review financial position

Part: IX
Shorthand Notes: 243I - I for Income -> State Finance Commission for Panchayats

Part IX of the Indian Constitution, introduced by the Constitution (73rd Amendment) Act, 1992, institutionalized the Panchayati Raj system, giving it constitutional status. A crucial aspect of empowering these local self-governments is ensuring their financial viability. Recognizing this need, Article 243I mandates the establishment of a State Finance Commission specifically for Panchayats, mirroring the role of the Union Finance Commission under Article 280 for the Union and States.

This article is fundamental to fiscal federalism at the grassroots level, providing a mechanism for the periodic review of the financial health of Panchayats and recommending measures to improve their financial resources, thereby enabling them to function effectively as institutions of local self-government.

Original Text

As per the Constitution of India:

(1) The Governor of a State shall, as soon as may be within one year from the commencement of the Constitution (Seventy-third Amendment) Act, 1992, and thereafter at the expiration of every fifth year, constitute a Finance Commission to review the financial position of the Panchayats and to make recommendations to the Governor as to-

(a) the distribution between the State and the Panchayats of the net proceeds of the taxes, duties, tolls and fees leviable by the State, which may be divided between them and the allocation between the Panchayats at all levels of their respective shares of such proceeds;

(b) the determination of the taxes, duties, tolls and fees which may be assigned to, or appropriated by, the Panchayats;

(c) the grants-in-aid to the Panchayats from the Consolidated Fund of the State;

(d) the measures needed to improve the financial position of the Panchayats;

(e) any other matter referred to the Finance Commission by the Governor in the interests of sound finance of the Panchayats.

(2) The Legislature of a State may, by law, make provision with respect to the composition of the Commission, the qualifications which shall be requisite for appointment as members thereof and the manner in which they shall be selected.

(3) The Commission shall determine their procedure and shall have such powers in the performance of their functions as the Legislature of the State may, by law, confer on them.

(4) The Governor shall cause every recommendation made by the Commission together with an explanatory memorandum as to the action taken thereon to be laid before the Legislature of the State.

Detailed Explanation

Article 243I mandates the creation of a State Finance Commission (SFC) in every State to specifically address the financial aspects related to Panchayats. This provision aims to ensure that the financial resources available to Panchayats are reviewed periodically and adequate measures are recommended for their fiscal health.

  1. Mandatory Constitution: Clause (1) makes it obligatory for the Governor of a State to constitute a Finance Commission. The first such commission was required to be constituted within one year from the commencement of the 73rd Amendment Act, 1992 (which came into force on 24th April 1993). Subsequently, a new commission must be constituted at the expiration of every fifth year. This ensures a regular, periodic review of the financial position of Panchayats.
  2. Terms of Reference/Scope of Recommendations: The primary function of the SFC is to review the financial position of the Panchayats. Based on this review, the commission is required to make recommendations to the Governor on several key matters:
    • (a) Distribution of Net Proceeds: Recommendations on how the net proceeds of State-levied taxes, duties, tolls, and fees (which are divisible between the State and local bodies) should be distributed between the State and the Panchayats. It also requires recommendations on the allocation of these shares among Panchayats at different levels (Village, Intermediate, and District, where applicable).
    • (b) Assignment/Appropriation of Taxes: Recommendations on which specific taxes, duties, tolls, and fees may be assigned exclusively to Panchayats or appropriated by them. This gives Panchayats independent sources of revenue.
    • (c) Grants-in-Aid: Recommendations regarding grants-in-aid to be given to Panchayats from the Consolidated Fund of the State. These grants are crucial for bridging the gap between the resources raised by Panchayats and their expenditure requirements.
    • (d) Measures for Improvement: Recommendations on general measures needed to improve the overall financial position of the Panchayats. This could include suggestions on revenue mobilization, expenditure management, financial administration reforms, etc.
    • (e) Other Matters: The Governor may refer any other matter to the SFC related to the sound finance of the Panchayats. This provides flexibility to the Governor to seek expert advice on specific financial issues concerning Panchayats.
  3. Composition and Qualifications: Clause (2) provides flexibility to the State Legislature to determine, by law, the composition of the SFC, the qualifications required for appointment as members, and the procedure for their selection. This allows States to tailor the SFC to their specific needs and circumstances while ensuring that qualified persons are appointed.
  4. Procedure and Powers: Clause (3) states that the SFC shall determine its own procedure for carrying out its functions. Furthermore, the State Legislature may, by law, confer such powers on the SFC as are necessary for it to perform its duties effectively. This enables the SFC to collect information, summon persons, and carry out investigations as needed.
  5. Tabling of Recommendations: Clause (4) mandates that the Governor shall cause every recommendation made by the SFC, along with an explanatory memorandum detailing the action taken or proposed to be taken by the State Government on these recommendations, to be laid before the State Legislature. This ensures accountability and transparency, allowing the Legislature to discuss and scrutinize the SFC’s recommendations and the government’s response.

Detailed Notes

  • Article 243I is part of Part IX of the Indian Constitution (Panchayats), introduced by the 73rd Amendment Act, 1992.
  • It mandates the constitution of a State Finance Commission (SFC) in each State.
  • The SFC is constituted by the Governor of the State.
  • The first SFC was required within one year of the 73rd Amendment’s commencement (by April 1994).
  • Thereafter, an SFC must be constituted at the expiration of every fifth year.
  • The primary role is to review the financial position of the Panchayats.
  • Recommendations are made to the Governor regarding:
    • Distribution of divisible State taxes between the State and Panchayats.
    • Allocation of Panchayat’s share among different levels of Panchayats.
    • Determination of taxes, duties, tolls, fees assignable to Panchayats.
    • Grants-in-aid to Panchayats from the State’s Consolidated Fund.
    • Measures to improve the financial position of Panchayats.
    • Any other matter referred by the Governor for sound finance of Panchayats.
  • State Legislature, by law, determines the composition, member qualifications, and selection process of the SFC.
  • The SFC determines its own procedure.
  • State Legislature may confer necessary powers on the SFC by law.
  • The Governor must present the SFC’s recommendations and the action taken report before the State Legislature.
  • This article establishes a constitutional mechanism for the fiscal devolution to Panchayats.

Additional Comments

  • Article 243I is similar in purpose and periodicity (five years) to Article 280, which deals with the Union Finance Commission reviewing the finances of the Union and States and recommending the distribution of central taxes.
  • The State Finance Commission recommendations are not necessarily binding on the State Government, although governments generally consider them seriously. The ‘action taken report’ laid before the legislature provides a formal response.
  • The recommendations of the SFC provide the basis for the State Government’s policies regarding financial support and resource sharing with Panchayats.
  • The SFC’s work is crucial for strengthening the financial autonomy and capacity of Panchayats, enabling them to undertake development activities effectively.
  • Article 243Y, also introduced by the 73rd Amendment, mandates the same State Finance Commission constituted under Article 243I to also review the financial position of Municipalities.

Summary

The Governor of each State is mandated by Article 243I to constitute a State Finance Commission every five years. This commission’s role is to review the financial status of Panchayats and make recommendations to the Governor concerning the division of state taxes, assignment of specific revenues, provision of grants-in-aid from the state’s consolidated fund, and measures to enhance the financial health of the Panchayati Raj institutions. The State Legislature determines the commission’s composition and member qualifications. The commission’s recommendations, along with an action report from the government, are required to be laid before the State Legislature. This article establishes a critical mechanism for fiscal devolution and financial strengthening of local self-governments in rural areas.
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