Fifth Finance Commission

The Fifth Finance Commission was constituted under Article 280 of the Indian Constitution in 1968, with Mahavir Tyagi as its chairman. Its primary mandate was to make recommendations regarding the distribution of tax revenues between the Union Government and the State Governments for the period spanning from April 1, 1969, to March 31, 1974.

The Commission grappled with several complex economic and fiscal challenges prevalent at the time. These included increasing regional disparities, rising demands for resources from states, and the need to maintain fiscal stability at the national level. The Commission's recommendations aimed to address these issues while adhering to the principles of equity and efficiency.

Key Recommendations:

• Share of Taxes: The Commission recommended a slightly increased share of income tax to be distributed to the states, moving from 75% to 80%. This aimed to provide states with more resources to meet their developmental needs.
• Principles of Distribution: While population remained a significant factor in determining the share of each state, the Commission also gave weight to other factors like backwardness, assessed on the basis of per capita income. States with lower per capita income received a larger share of the divisible pool. This was a crucial step towards addressing regional imbalances and promoting equitable development.
• Excise Duties: The Commission recommended a share of 20% of the net proceeds of Union excise duties to be distributed among the states. Similar to income tax, population and backwardness were key determinants in the distribution formula.
• Grants-in-Aid: Apart from tax sharing, the Commission also recommended grants-in-aid to certain states under Article 275 of the Constitution. These grants were intended to help states meet specific needs and overcome budgetary deficits, especially those facing financial difficulties.
• Debt Relief: Recognizing the heavy debt burden faced by some states, the Commission suggested measures for debt relief, including rescheduling of repayment and relaxation of interest rates. This was an important step in easing the financial strain on these states and allowing them to allocate more resources towards development.
• Resource Mobilization: The Commission emphasized the need for states to improve their own resource mobilization efforts. It urged states to tap into new sources of revenue and enhance the efficiency of existing tax collection mechanisms.

The recommendations of the Fifth Finance Commission had a significant impact on the fiscal relations between the Union and the States. They provided states with more resources, particularly those that were economically backward. While the formula for distribution continued to evolve in subsequent Finance Commissions, the Fifth Commission's emphasis on backwardness as a criterion for resource allocation laid the foundation for a more equitable distribution of resources across the country. The Commission's focus on debt relief and improved resource mobilization also contributed to strengthening the financial position of the states and promoting fiscal responsibility.