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Center State relation and State Finance Commission

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State Finance commission (SFC)

State Finance Commission is the Constitutional body appointed by each state government at regular intervals of five years under the article 243(I) of the Constitution to review and revise the financial position of Panchayati Raj Institutions (PRIs) and Urban Local Bodies (ULBs). They recommend principles and methodology as regards to the devolution of funds to PRIs and ULBs.

The recommendations

1. The distribution between the State and the local bodies of the net proceeds of the taxes, duties, tolls and fees leviable by the State.

2. Determination of the taxes, duties, tolls and fees levied or appropriated by the local bodies

3. Measures needed to improve the financial position of the local bodies.

4. Any other matter referred to the Finance Commission by the Governor in the interests of sound finance of the local bodies

Issues relating to SFC

1. SFCs are not appointed on time and that the period covered by the SFCs does not synchronize with the period covered by the Central Finance Commission. There is absence of uniform standards and formats in various SFC reports.

2. State governments cherry pick from the SFC’s recommendations and don’t accept the inconvenient ones.

3. There is undue delay on the part of the states in placing the Action Taken Reports (ATR) on the recommendations of SFCs in state legislatures

4. Equally worrisome is the practice of states appointing people not well versed in the affairs of local bodies or their finances as members of the SFCs. The quality of SFC’s reports continues to remain poor.

5. While estimating the resource gap, SFCs normally just make forecasts based on historical trends.

6. SFCs have also not identified the issues requiring action by the Central Finance commision (CFC) to augment the consolidated fund of the state. The lack of quality of SFC reports has been ascribed to lack of data and limited capacity of the commissions

Recommendations to improve SFCs

1. SFCs should be constituted at least 2 years before the required date of submission of their recommendations, and the deadline should be so decided as to allow the State Government at least 6 months time for tabling the ATR. SFC reports should be readily available to the CFC.

2. The healthy precedent established by the Union Government in generally accepting the devolution proposals made by the CFC should also be followed by the State Government.

3. The SFCs follow the procedures and guidelines adopted by the CFC.

4. SFCs should follow a normative approach in estimating resource gaps. They should link the devolution of funds to the level of civic amenities that the citizens could expect consistent with some uniform standards of service delivery

5. SFCs should have people of eminence and competence. They should follow the requirements as for the CFC. Serving bureaucrats should not be appointed.

6. There should be a permanent SFC cell in the finance department

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