Seventh Finance Commission

The Seventh Finance Commission, constituted in 1977 under the chairmanship of Justice Jaswant Singh, played a significant role in shaping the fiscal federalism of India. Its recommendations, covering the period from 1979 to 1984, aimed to address the resource imbalances between the Union and the States, and among the States themselves, fostering equitable development across the nation.

One of the key features of the Seventh Finance Commission's approach was its emphasis on a more progressive distribution of resources. Recognizing the needs of poorer states, the commission adopted a formula that gave greater weightage to factors like population, income distance, and area. 'Income distance' specifically referred to the gap between a state's per capita income and the highest per capita income among all states. By prioritizing income distance, the commission directed a larger share of central taxes towards states lagging in economic development, enabling them to bridge the gap.

Regarding the devolution of central taxes, the commission recommended that 85% of the net proceeds of income tax should be assigned to the states. Further, it suggested that 40% of the net proceeds of Union excise duties should also be distributed amongst the states. This represented a substantial increase in the share of excise duties compared to previous commissions, providing states with greater financial autonomy and resources to fund their developmental programs. The distribution criteria for excise duties were based on population (25%), income distance (25%), inverse of per capita income multiplied by population (25%), and a formula of revenue equalization (25%).

In addition to tax devolution, the Seventh Finance Commission addressed the issue of grants-in-aid under Article 275 of the Constitution. These grants were intended to assist states facing budgetary deficits or to support specific developmental projects. The commission recommended significant grants-in-aid to several states, particularly those in the northeastern region and other special category states, recognizing their unique challenges and development needs.

The commission also made recommendations regarding the financing of relief expenditure for natural calamities. It suggested that states should be responsible for a certain margin of expenditure from their own resources, and the central government should provide assistance beyond that margin. This approach aimed to encourage fiscal responsibility among states while ensuring adequate support during times of crisis.

The Seventh Finance Commission's recommendations were generally well-received, though some states expressed concerns about the weightage given to certain criteria. However, its emphasis on equitable distribution, its increased devolution of central taxes, and its focus on addressing the needs of poorer states contributed significantly to strengthening fiscal federalism in India and promoting more balanced regional development. The commission's report laid the groundwork for future Finance Commissions to continue refining the system of resource allocation and fostering a more just and equitable economic landscape for all states.