Third Finance Commission (1961)
The Third Finance Commission, constituted under Article 280 of the Indian Constitution, was tasked with recommending the principles governing the distribution of financial resources between the Union Government and the States. It was chaired by Ashok Kumar Chanda and submitted its report in 1961. Its recommendations covered the period from 1962-63 to 1965-66.
The Commission faced a challenging economic landscape. India was in the midst of its Third Five-Year Plan, and the need for resources at both the central and state levels was significant. Balancing the fiscal autonomy of the states with the overall financial stability of the nation was a key consideration.
The Third Finance Commission primarily focused on the sharing of income tax and union excise duties. With regard to income tax, the Commission recommended that 66 2/3% of the net proceeds be assigned to the States. This was a slight increase from the 62% recommended by the Second Finance Commission. The basis for distribution amongst the states remained largely unchanged, utilizing population as the main factor. While the Commission acknowledged the importance of other factors like needs and backwardness, they primarily used population as a proxy for these considerations.
Regarding the sharing of Union excise duties, the Commission significantly expanded the number of dutiable articles whose revenue was to be shared with the States. Previously, only a few specific commodities were included. The Third Finance Commission recommended sharing revenue from all excisable goods that generated at least ₹50 lakh in revenue annually. This broadened the revenue base available to the States and provided them with a more diversified source of income. The share of excise duties allocated to the States was set at 20%.
The Commission’s recommendations on grants-in-aid under Article 275 of the Constitution were relatively conservative. They recommended grants-in-aid to only a few states, primarily those considered to be fiscally weaker. The emphasis was on bridging the gap between the states’ expenditure and their own resources, ensuring that essential services were maintained.
One criticism leveled against the Third Finance Commission was its perceived timidity in exploring innovative approaches to fiscal federalism. Some felt that it relied too heavily on established patterns and did not adequately address the growing regional disparities. There were calls for greater weightage to be given to factors beyond population when determining the distribution of resources. Despite these criticisms, the Third Finance Commission played a crucial role in shaping the financial relationship between the Union and the States during a critical period in India’s economic development. Its recommendations provided a framework for revenue sharing that aimed to balance the needs of a developing economy with the principles of fiscal autonomy.
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