The Finance Commission and the GST Council: fiscal-federal bodies in outline

Detail

What "fiscal federalism" means here

• Fiscal federalism is how money is split between the Union and the states. It covers who collects which tax and how the money is shared out.
• The Union collects the biggest taxes, but the states spend on most public services. This gap is called vertical imbalance. Some states are also poorer than others, which is horizontal imbalance.
• The Constitution sets up two bodies to manage these gaps:
• Finance Commission (Art. 280): decides how tax money is shared.
• GST Council (Art. 279A): decides how one common tax is designed.

Finance Commission: how it is set up (Art. 280)

• Who sets it up: the President, every five years, or earlier if needed.
• Members: a chairman and four other members.
• Qualifications: the Constitution leaves these to Parliament. Parliament set them in the Finance Commission (Miscellaneous Provisions) Act, 1951.
• Chairman: a person with experience in public affairs.
• Members are chosen from people who:
  • are qualified to be High Court judges;
  • have special knowledge of government finance and accounts;
  • have wide experience of financial administration; or
  • have special knowledge of economics.

Finance Commission: what it recommends (Art. 280(3))

Clause	Task	Plain meaning
280(3)(a)	Share of net tax proceeds	Vertical: how much of the Union's shareable taxes goes to all states together. Horizontal: how that total is split among the states.
280(3)(b)	Principles for grants-in-aid under Art. 275	Rules for extra money the Union gives to states that need help, paid from the Consolidated Fund of India
280(3)(bb)	Help for panchayats, added by the 73rd Amendment (1992)	Ways to add to a state's funds so it can pay its panchayats
280(3)(c)	Help for municipalities, added by the 74th Amendment (1992)	The same, for municipalities
280(3)(d)	Any other matter	Anything the President refers to it for sound finance

• Divisible pool: the central taxes that are shared with the states under Art. 270. Cesses and surcharges are not part of it.
• The 280(3)(bb) and (c) tasks use the reports of State Finance Commissions, which are covered in panchayati-raj.

Report, Art. 281, and why it is "advisory"

• Steps under Art. 281:
• The Commission gives its report to the President.
• The President has it laid before each House of Parliament.

• An explanatory memorandum goes with it. This memorandum says what action the government has taken on each recommendation.

• Example: with the 16th FC report, the Union laid an "Explanatory Memorandum as to the Action Taken" (2026) [9].

• Legal status: the report is advisory. The Constitution does not make it binding.
• Convention: a convention is an unwritten practice that is usually followed. By convention, the Union accepts the devolution award (the tax-sharing share) in full.
• Example: the government accepted the 16th FC's advice to keep the states' share at 41% [3].

Chain of Finance Commissions (outline only)

Commission	Chair	Award period	States' share of the divisible pool
1st FC	K.C. Neogy	1952-57	—
14th FC	—	2015-20	42% [4]
15th FC	N.K. Singh	2020-21 and 2021-26	41% [4]
16th FC	Arvind Panagariya	2026-27 to 2030-31	41% [2]

• Why the share fell from 42% to 41% (15th FC):
• In 2019, Jammu and Kashmir was split into two Union Territories: J&K and Ladakh.
• Union Territories are funded by the Union, not through tax sharing.

• So 1 percentage point was kept with the Union to fund them [4].

• 16th FC report: tabled in Parliament on 1 February 2026 [2].

• New horizontal criteria (16th FC):
• income distance (per capita GSDP distance): 42.5%
• population (2011): 17.5%
• demographic performance: 10%
• area: 10%
• forest: 10%

• contribution to GDP: 10% [2]

• "Contribution to GDP" replaces the 15th FC's "tax and fiscal effort" criterion [2].

• 16th FC grants:
• Grants to local bodies total ₹7.91 lakh crore: ₹4.35 lakh crore for rural bodies and ₹3.56 lakh crore for urban bodies [2].

• The 16th FC ended revenue-deficit grants, sector-specific grants and state-specific grants [2].

• The detailed formula, the weights and the grant design are covered in the economy subject (fiscal federalism).

GST Council: how it is set up (Art. 279A)

• GST (Goods and Services Tax): one tax on the supply of goods and services. It replaced many separate Union and state indirect taxes.
• Legal base: the 101st Constitutional Amendment Act, 2016. It added:
• Art. 246A: Parliament and the state legislatures can both make GST laws.
• Art. 269A: GST on supplies between states (IGST) is collected by the Union and then split between the Union and the states.

• Art. 279A: the GST Council.

• Time limit: under Art. 279A(1), the President had to set up the Council within 60 days of the 101st Amendment coming into force [7].

• Dates:
• Art. 279A came into force on 12 September 2016.
• The Union Cabinet approved the Council and its Secretariat the same day.

• The first meeting was held on 22-23 September 2016 in New Delhi [6][8].

• Members:

• the Union Finance Minister, who is the Chairperson;
• the Union Minister of State in charge of Revenue or Finance;

• each state's Finance or Taxation Minister, or another minister the state nominates [6].

• Vice-Chairperson: chosen by the state members from among themselves (Art. 279A(3)) [7].

• Quorum: half of all members (Art. 279A(7)). Quorum is the minimum number of members who must be present for a meeting to act [7].

GST Council: voting (Art. 279A(9))

• Weighted vote: the votes do not all count the same.
• The Union holds one-third of the total weight.

• All states together hold two-thirds of the total weight [7].

• Majority needed: at least three-fourths of the weighted votes of members present and voting [7].

• Why neither side can act alone:
• The Union has 33.3%, which is well short of 75%. So it needs the support of most of the states.
• All the states together have 66.7%, which is also short of 75%. So they need the Union's vote.
• This means the Union has a practical veto, and the states, if enough of them act together, have one too.

GST Council: what it recommends (Art. 279A(4))

• Which taxes, cesses and surcharges of the Union, the states and local bodies GST replaces (subsumed taxes) [7]
• Which goods and services are taxed under GST and which are exempt
• GST rates, including floor rates with bands (a minimum rate with a range around it) [7]
• The threshold turnover below which a business does not pay GST
• Special provisions for the north-eastern and hill states
• Guiding aim (Art. 279A(6)): a harmonised GST structure and a harmonised national market [7]
• Compensation to states, rate changes and the 2025 rate rationalisation are covered in fiscal federalism. The GST Appellate Tribunal is covered in justice-delivery-tribunals.

Union of India v. Mohit Minerals (19 May 2022)

• Issue: are the GST Council's recommendations binding on Parliament and the state legislatures?
• Holding: they are persuasive, not binding.
• Reason 1: Art. 246A gives Parliament and the state legislatures power to make GST laws at the same time (simultaneous power). Neither one is placed above the other.
• Reason 2: "Neither can Article 279A override Article 246A nor can Article 246A be made subject to Article 279A" [5].
• Two-step process: first, the Union and the states negotiate in the Council (cooperative federalism, Art. 279A(6)). Second, each legislature uses its own power to make the law [5].

• The Union and the states follow the Council's recommendations because they choose to, not because the law forces them [5].

• Meaning: the Council is a forum of cooperative and also contestational federalism. In contestational federalism, states can openly bargain and disagree with the Union.

• Dispute mechanism (Art. 279A(11)): the Council "shall establish a mechanism" to settle disputes between the Union and states, or among states, about its recommendations [7]. This mechanism has not been set up.

Why both bodies are in the Constitution

• Both take Union–state money bargaining out of the hands of the Union executive alone.
• The Finance Commission is an expert body that is set up again every five years.
• The GST Council is a joint body where the Union and the states vote together.

• Because the Constitution creates them, the Union cannot simply abolish them by an executive order.

• The contrast:

Body	How it was created	Status
Finance Commission	Art. 280	Constitutional, advisory
GST Council	Art. 279A (101st Amendment, 2016)	Constitutional, recommendatory
Planning Commission (1950-2014)	Executive (Cabinet) resolution	Non-constitutional, non-statutory
NITI Aayog (2015)	Executive (Cabinet) resolution	Non-constitutional, non-statutory

• See statutory-regulatory-bodies for the Planning Commission and NITI Aayog.

Prelims Hooks

• Art. 280 sets up the Finance Commission. Art. 281 has its report laid before Parliament with an explanatory memorandum. Art. 275 covers grants-in-aid to states.
• The qualifications of FC members are set by the Finance Commission (Miscellaneous Provisions) Act, 1951, not by the Constitution.
• 280(3)(bb) (panchayats) was added by the 73rd Amendment. 280(3)(c) (municipalities) was added by the 74th Amendment.
• States' share of the divisible pool: 14th FC 42%; 15th FC 41% (1 point kept for the J&K and Ladakh UTs); 16th FC (Panagariya, 2026-31) 41%.
• The 16th FC added "contribution to GDP" (10%) as a horizontal criterion and ended revenue-deficit grants.
• Art. 279A (GST Council) was added by the 101st Amendment, 2016. It came into force on 12 September 2016, and the Council's first meeting was on 22-23 September 2016.
• GST Council voting: the Union has 1/3 of the weight and the states 2/3. Decisions need 3/4 of the weighted votes of members present and voting. Quorum is half the members.
• The Vice-Chairperson of the GST Council is chosen by the states. The Chairperson is the Union Finance Minister.
• Mohit Minerals (2022): GST Council recommendations are not binding, because of the simultaneous power under Art. 246A.
• Trap: NITI Aayog and the old Planning Commission were executive bodies. They were not constitutional and not statutory.

Mains Points

• Advisory but respected. The Finance Commission's report is advisory, but its devolution award is accepted by convention. Critics point to:
• the Union's growing use of cesses and surcharges, which are kept out of the divisible pool;
• Union-set terms of reference that limit what the Commission can examine.

Both reduce what the states actually receive, even when the share stays at 41%.

• GST Council: pooled sovereignty. The states gave up some of their separate taxing power for one national market. But the Union's practical veto, and the fact that the Art. 279A(11) dispute mechanism was never set up, weaken trust. Reform ideas include:
• setting up the dispute body;
• an independent Council secretariat;

• recording the reasons for dissent.

• Cooperative vs contestational federalism. Mohit Minerals (2022) let states keep their legislative voice under Art. 246A. This makes the Council a forum for agreement, not a body that gives orders. It protects federalism but carries a risk: different laws in different states could break up the single GST market.

• Why it matters that both are constitutional. Unlike the Planning Commission or NITI Aayog, neither body can be dissolved by an executive order. This protects the states' claim to a fair share of revenue from changes in Union policy.