Article 243I of the Indian Constitution prescribes that 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 regarding the following:
A. Principles which should govern
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Distribution between the State and the Panchayats of the net proceeds of taxes,
duties, tolls and fees leviable by the State and allocation of their respective
shares among Panchayats at all levels.
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Determination of the taxes, duties, tolls and fees that may be assigned to,
or appropriated by, the Panchayats.
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Grants-in-aid to the Panchayats from the Consolidated Fund of the State.
B. Measures needed to improve the financial position of the Panchayats.
C. Any other matter referred to the Finance Commission by the Governor in the interests of sound finance of the Panchayats.
Article 243Y
Article 243Y of the Constitution further provides that the Finance Commission
constituted under Article 243I shall make similar recommendations with respect to Municipalities.
The Governor is required to place every recommendation made by the State Finance
Commission, together with an explanatory memorandum indicating the action taken,
before the Legislature of the State.