Set up State Finance Commission or lose funds: How Centre’s ultimatum forced states to fall in line

Under Article 243 I of the Constitution, “the Governor shall, as soon as may be within one year from the commencement of the Constitution (73rd Amendment) Act, 1992, and thereafter at the expiration of every 5th year, constitute a Finance Commission to review the financial position of the panchayats, and to make recommendations to the Governor as to the principles which should govern the distribution between the State and the panchayats of the net proceeds of the taxes, duties, tolls and fees leviable by the State.”

The note by the Union Panchayati Raj Ministry, which was seen by The Indian Express, said, “As per the Constitutional provisions, setting up the 6th SFC became due in 2019-20 for all states. Available information shows that only nine states have constituted their 6th SFC.”

The 15th Finance Commission noted in its main report for 2021-26 which was submitted on November 9, 2020 that “only 15 States have set up the 5th or the 6th SFCs. Several States have still not moved beyond the 2nd or 3rd SFC.”

“We recommend that all States which have not done so, must constitute SFCs, act upon their recommendations and lay the explanatory memorandum as to the action taken thereon before the State legislature on or before March 2024. After March 2024, no grants should be released to a State that has not complied with the Constitutional provisions in respect of the SFC and these conditions,” it noted in its report.

“Article 243-I of the Constitution requires SFCs to be appointed at the ‘expiration of every fifth year’. The intention of this clause appears to be that all State Government transfers to local governments should be governed by the mandate of a current SFC. The mandate given to an SFC should thus be applicable only for a period of 5 years and should not be extended. In practice, this has not happened. Finance Commissions have not got the benefit of recommendations of SFCs, as most State Governments did not constitute them in time and did not give due importance to strengthening this critical constitutional mechanism,” it said.

The 15th Finance Commission tasked the Ministry of Panchayati Raj to certify the compliance of all constitutional provisions by a State in this respect before the release of their share of grants for 2024-25 and 2025-26.