State Finance Commission (SFC)

Definition

The constitutional body that the Governor of each State sets up every five years to review the financial position of Panchayats and Municipalities and recommend how State revenues are shared with them.

Key points

• Created by the 73rd and 74th Constitutional Amendment Acts, 1992, under Articles 243-I (Panchayats) and 243-Y (Municipalities).
• Constituted by the Governor every fifth year to recommend the distribution of taxes, duties, tolls and fees between the State and its local bodies, and grants-in-aid to them.
• Its recommendations are laid before the State Legislature along with an explanatory memorandum of action taken.
• The (Union) Finance Commission under Article 280 is also required to suggest measures to augment the consolidated fund of a State to supplement the resources of local bodies, on the basis of the State Finance Commission's recommendations.
• It is the local-government analogue of the national fiscal-devolution mechanism.

Why it matters for CAPF

Articles 243-I and 243-Y, the five-year cycle and the link between the State Finance Commission and the Union Finance Commission are standard fiscal-federalism and local-government facts.

Common confusion

The State Finance Commission (Art 243-I and 243-Y) deals with State-to-local-body devolution, whereas the Union Finance Commission (Art 280) deals with Centre-to-State devolution; both are constitutional and both run on five-year cycles.

Parent note

local government