The Finance Commission in India is constituted, usually, once in five years. It is a constitutional body created to address issues of vertical and horizontal imbalances of federal finances in India. The constitutional mandate of the Finance Commission is (a) to decide on the proportion of tax revenue to be shared with the States and (b) the principles which should govern the grants-in-aid to States. In addition to the core mandate, the Finance Commission is also entrusted with the responsibility to make recommendations on various policy issues, as and when they arise. The Finance Commission also tender advice to the President on any other matter referred to it in the interest of sound public finance. The Finance Commission is also required to recommend on the measures needed to augment the Consolidated Fund of a State to supplement the resources of the Panchayats and Municipalities in the State on the basis of the recommendations made by the Finance Commission of the State. The recommendations made by the Finance Commission are advisory in nature and, hence, not binding on the Government. So far, 14 Finance Commissions have been constituted and the last one submitted its report to the Government in December 2014. Their recommendations are to cover a period from 2015-20.
The scope of the Finance Commission broadened over time as they were assigned several other issues on government finances, particularly those relating to augmentation of State Consolidation Funds to supplementing the resources of local bodies
Vertical imbalances refer to the mismatch between the revenue raising capacity and expenditure needs of the centre and the states. Horizontal imbalances exist because of the inability of some States to provide comparable services due to inadequate capacity to raise funds.
Individual States in India also set up State Finance Commissions.