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Home Politics Finance Commission Under the President Assumes Responsibility for Disbursing State Funds, Not Central Government

Finance Commission Under the President Assumes Responsibility for Disbursing State Funds, Not Central Government

February 5, 2024445
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Finance Commission decides the allocation of funds to states
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Since the presentation of the Interim Budget by the Finance Minister of India on February 1, leaders from South Indian states have consistently accused the Central Government of inadequate fund distribution to their regions. Allegations abound that South Indian states contribute more through SGST but receive disproportionately fewer funds in return. These claims have escalated with accusations that the Modi government exhibits bias favouring North Indian states over their southern counterparts in fund allocation.

The discontent has found expression on social media, with figures like Priyank Kharge, VK Karthik, Vamsi Chandran, Darshini Reddy, DK Suresh, Veena Jain, Shrinivas Karkala, and Sabaraha sharing similar sentiments. 

A significant Twitter campaign, under the hashtag #SouthTaxMovement, is gaining momentum, fueling resentment among South Indians and potentially eroding the sense of national unity. This article aims to address the ongoing discourse surrounding fund distribution to counteract the prevailing narrative that poses a threat to the integrity of India.

Also Read: Pakistani Social Media Propagates Falsehood: Viral Video of Armed Confrontation Unrelated to Indian Army 

Fact Check 

To begin with, it is crucial to establish the authority responsible for allocating funds between the States and the Central Government. Article 280 of the Indian Constitution dictates that the Finance Commission plays a pivotal role in determining the distribution of funds. By the stipulations outlined in Article 280, the President of India holds the prerogative to form the Finance Commission, tasking it with making recommendations on the equitable apportionment of taxes among State Governments and the Union Government, as well as among the states themselves. Article 280 has been an integral part of the Indian Constitution since its inception. The inaugural Finance Commission, led by Shri K.C. Neogy, was instituted on April 6, 1952. Commission appointments by the President are for a fixed five-year term.

In detail, Article 280 says, “It shall be the duty of the Commission to make recommendations to the President as to–

(a) the distribution between the Union and the Stales of the net proceeds of taxes which are to be, or may be, divided between them under this Chapter and the allocation between the States of the respective shares of such proceeds;

(b) the principles which should govern the grants-in-aid of the revenues of the States out of the Consolidated Fund of India;

(bb) the measures needed to augment the Consolidated Fund of a State to supplement the resources of the Panchayats in the State on the basis of the recommendations made by the Finance Commission of the State;

(c) the measures needed to augment the Consolidated Fund of a State to supplement the resources of the Municipalities in the State on the basis of the recommendations made by the Finance Commission of the State;

(d) any other matter referred to the Commission by the President in the interests of sound finance.

Source- Indian Constitution

Therefore, as outlined by the Constitution of India, it is explicitly stated that the responsibility for the allocation of funds between states and the central government rests with the Finance Commission—a body operating under the guidance of the President of India. Regardless of the ruling party at the central level, the allocation of funds to states falls exclusively within the purview of the Finance Commission, with no direct involvement from the Central Government.

Now, let’s delve into the criteria used by the Finance Commission to determine the allocation of funds to the states.

According to the PRS website, “ Income Distance, Area, Population, Demographic Performance, Forest Cover, Forest and Ecology and Tax and Fiscal are the criteria for the devolution of taxes between the states.”

Source- PRS

The PRS further explains the above-mentioned terminology.

  • Income Distance:
    • Definition: Income distance represents how far a state’s income deviates from the state with the highest income. The state’s income is determined by the average per capita GSDP (Gross State Domestic Product) over the three years from 2016-17 to 2018-19.
    • Equity Principle: States with lower per capita income receive a higher share, ensuring fairness among states.
  • Demographic Performance:
    • Framework: The Commission, in line with its Terms of Reference, uses 2011 population data for recommendations. This criterion acknowledges states’ efforts in population control, with lower fertility ratios earning higher scores.
  • Forest and Ecology:
    • Methodology: The criterion evaluates each state’s contribution to the total dense forest area across all states. It is calculated by determining the share of each state’s dense forest in the overall dense forest cover.
  • Tax and Fiscal Efforts:
    • Purpose: This criterion aims to reward states demonstrating higher efficiency in tax collection. The measurement involves the ratio of average per capita own tax revenue to average per capita state GDP over the three years from 2016-17 to 2018-19. States with more effective tax collection efforts receive greater recognition.
Source- PRS


The Finance Commission employs various criteria to determine the allocation of funds to Indian states. Income Distance gauges how much a state’s income deviates from the highest income, using the average per capita GSDP over three years. Demographic Performance considers 2011 population data, rewarding states with lower fertility ratios. Forest and Ecology assesses each state’s contribution to total dense forest area. Tax and Fiscal Efforts aim to recognize states with superior tax collection efficiency by comparing per capita own tax revenue to state GDP over three years. These measures collectively ensure a fair and comprehensive approach to fund allocation, promoting equity among states.

Furthermore, we examined the 13th Finance Commission report spanning from 2010 to 2015, a document formulated during the tenure of Prime Minister Dr. Manmohan Singh. Despite the decade that has passed since its release, the story remains consistent. A stark contrast emerges when comparing fund allocations between Northern and Eastern states and those in South India. For instance, Karnataka received 4.16% of the total tax, Kerala 2.59%, and Andhra Pradesh 6.66%. In sharp contrast, Bihar received 13.14%, and Uttar Pradesh received 19.27% of the total tax allocation.

Source- 13th Finance Commission Report

Numerous factors play a pivotal role in determining the distribution of funds between states and the central government. While tax and fiscal efforts stand as one factor, others such as area, population, demographics, and forest cover also wield significant influence in shaping the allocation of funds to individual states.

In summary, it is imperative to note that the Finance Commission, not the central government, holds the authority to decide the allocation of funds to states. Furthermore, it is essential to recognize that the states’ fund allocation is contingent on a myriad of factors beyond just tax collection.

ClaimThe central government is not giving the required funds to the South Indian States
Claimed byCongress leaders
Fact Check Misleading

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