Note: This article provides the readers with analytical points on the functioning of State Finance Commissions for UPSC CSE G.S. Mains Paper-2 Indian Polity & Governance.

State Finance Commissions are created every five years as per 73rd and 74th Constitutional Amendment Acts.

 Under Article 243-I of the Indian Constitution, the governor of a state ensures the laying of a State Finance Commission’s recommendations to the table of the state legislature. It also includes a memorandum of action taken by the government on the Commission’s report.

Recommendations of a State Finance Commission

A State Finance Commission reviews the financial position of the panchayats in a state and makes recommendations to the Governor about the principles that should govern the distribution of tax proceeds – taxes, duties, levies, toll fee collected by the state between the state and its Panchayati Raj Institutions at all three levels – village level, block level and district level.

It also recommends the following:

  • Taxes, levies and fees levied or appropriated by Panchayats themselves.
  • Grants-in-aid to Panchayati Raj Institutions from the consolidated fund of a state.
  • Ways to improve the financial position of the Panchayati Raj Institutions.
  • Measures for the overall improvement of Panchayat’s finances.

Problems – There are many problems with the working of this Constitution Body

  1. Poor Quality of Reports

  2. Difference is in approach of different State Finance Commissions

  3. Poor Synchronization with Union Finance Commission

Reforms to improve the functioning of State Finance Commissions

  1. Setup a National platform for interaction b/w various SFC’s

  2. Simplification of account format.

Recommendations of the 14th Finance Commission on the issue of State Finance Commissions

  • State government should strengthen State Finance Commissions through: -

     - timely constitution,

    - administrative support,

    - Adequate resources and

    - timely presentation of report in State Legislature


  • Recommendations of 14th Finance Commissions w.r.t Local Body Accounts

  1. Accounts serve two purposes –
    a)  They are the key to financial accountability
    b)  They help in realistically assessing the requirements of resources

  2. Entrusting technical guidance & supervision over local body audit to Comptroller & Auditor General was among the conditionalities for drawing performance grants under 13th Finance Commission recommendations. Presently, CAG is performing this role for 26 states.

  3. Continue technical guidance of CAG

  4. Simplification of accounts

  5. Comprehensive maintenance of accounts of local bodies

  • Problem with property tax
  1. Few states have not delegated it to Local bodies. In some states where it has been delegated rules have not been framed.

  2. Inadequacy of database on properties.

  3. Weak political will  as highlighted in Economic Survey 2018.

  4. Corruption in the lower bureaucracy

  5. Property tax rates not revised periodically

  6. Several exemptions 

  7. Several states levy property fax on ARV (Annual Rental Value) basis.

14th Finance Recommendations on Local bodies taxes:

  1. Fast track property tax reforms

  2. Regular revision of rates

  3. Minimal exemptions

  4. Plinth area in addition to other criteria should be the principle basis.

  5. Vacant Land Tax: It is hardly levied in India & it should be levied.

  6. Betterment Tax should be leived for betterment brought about in the area

  7. Some public improvements (Night way etc.) result in the appreciation of value of private assets. The owner gains but through no merit of its own.

  8. Advertisement Tax: It is relevant largely for urban areas but in most states conferred only on Tier I municipalities [Recommendation: It should be devolved to all 3 tiers.]

  9. Entertainment Tax: Comprehensive review to include new forms of entertainment such as cable TV, amusement parks, Cyber café’s