2018 · GS Paper 2 · Q14 · 15 marks
How is the Finance Commission of India constituted? What do you know about the terms of reference of the recently constituted Finance Commission? Discuss.
In short
The President constitutes the Finance Commission under Article 280 with a chairman and four members qualified under the 1951 Act, while the 15th FC's terms of reference added Census 2011 data, a review of devolution and performance incentives. It finally recommended 41% devolution with a 12.5% demographic performance weight.
Model answer
Ghissu Editorial · Verified 4 Oct 2026 · 293 words
Periodic body
The President constitutes it every fifth year or earlier, and its report reaches Parliament with an explanatory memorandum.
Qualifications by law
The Finance Commission (Miscellaneous Provisions) Act, 1951 requires a chairman experienced in public affairs and members drawn from the judiciary, public finance, administration and economics.
Mandate
It divides shareable taxes vertically and horizontally, sets grant principles under Article 275, and, since the 73rd and 74th Amendments, supports local bodies.
Census 2011 base
Replacing the 1971 population worried southern states that had controlled population growth.
Review of devolution
It weighed the 14th FC's 42% share against the Centre's needs for defence, security and infrastructure.
Incentives and prudence
It could reward GST deepening, DBT, ease of doing business and population stabilisation, and reviewed FRBM paths and revenue deficit grants.
Outcome
It set 41% devolution with a 12.5% demographic performance weight.
Consultative ToR
Discussing ToR in the Inter-State Council and sharing cesses would protect the divisible pool.
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Question from the official UPSC Civil Services (Main) Examination 2018 paper. Answer written by Ghissu's engine and checked against our editorial standards. Found an error? Tell us and we correct it within 48 hours.