State Finance Commission is constituted under clause (1) of Article 243-I of the Constitution of India and section 186 of the Kerala Panchayat Raj Act, 1994(13 of 1994), read with clause (1) of Article 243-Y of the Constitution of India and section 205 of the Kerala Muncipality Act, 1994 (20 of 1994). The Commission has the mandate review the financial position of the Panchayats and Muncipalities and make recommendations as to-

The Principles which should govern:
  • The distribution between the State, Panchayats and Muncipalities of the net proceeds of the taxes, duties, tolls and fees leviable by the State, which may be divided between them under Part IX and Part IX-A of the Constitution and the allocation between the Panchayats at all levels and the Muncipalities of their respective shares of such proceeds.
  • The determination of the taxes, duties, tolls and fees which may be assigned to or appropriated by the Panchayats and the Muncipalities.
  • The grants-in-aid to the panchayats and the Muncipalities from the Consolidated Fund of the State.

The Commission shall also suggest measures needed to strengthen the financial position of Panchayats and Muncipalities with special reference to-

  • The potential for Local Governments to raise funds from financial institutions and the market, and to suggest a framework for realising this potential.
  • Improving the quality of upkeep of assets owned by Local Governments as well as those transferred to Local Governments.
  • Rationalizing of taxes and revenues now collected by Local Governments.
  • Achieving economy and efficiency in expenditure by Local Governments.
  • Providing incentives for higher own resource mobilization by the Local Governments.
  • Maintaining a proper fiscal data base relating to Local Governments.
  • Putting in place measures required for improving the capacity of financial management by Local Governments.
  • Improving monitoring of the fiscal performance of the Local Governments.

The SFC Cell is entrusted with the following functions and duties:
  • Placing of Report of the State Finance Commission before the Council of Ministers, preparation of Action Taken Report thereon and placing the Report and Action Taken Report before the State Legislature.
  • Prepare details about assessed tax, collection made and arrears, in respect of each tax and non-tax revenue, for each level of LGs.
  • Analyse Data collected for identifying broad trends among LGs and for identifying champions and innovations. Compile such good practices.
  • Undertake a campaign to overcome the large slack in revenue collection.
  • Prepare a compendium of the relevant legal provisions and executive orders in respect of the administration of taxes by LGs, incentivisation programmes, innovations, recommendations of the SFC etc.
  • Assist the SFC to lead policy work for
    • exploring appropriate tax and non-tax revenue assignments,
    • ways and means of administering and enforcing them including manpower & training
    • achieving a greater linkage between revenue collection and spending decisions at the local level.
  • Rationalise the number and type of Taxes, and assign atleast a few important taxes to each level of LGs.
  • Re-examine the current rates of taxation and consider an upward revision, remove maximum limits fixed on tax as also the conditionalities that hamper or restrict taxation powers of LGs.
  • Incentivise tax efforts of LGs by reworking the formulae for devolution of funds.
  • Act as the nodal section for monitoring the fiances of the Local Governments.
  • Create the data bank on finances of Local Governments for the use of State and Central Finance Commissions.
  • Up keep and maintenance of the on line software developed for the IV SFC.
  • Collection and comparative studies of State Finance Commission Reports of other States.
  • Organize training programmes for the staff of LSGIs.
  • Transfer of funds to Local Bodies, monitoring expenditure and utilisation of funds.

Government will examine recommendations of the State Finance Commission and place an Action Taken Report thereon before the State Legislature. Once it is laid before the State Legislature the Report of the Commission becomes a public document.

The State Government devolves funds from its Consolidated Fund among the Local Governments based on recommendations of the State Finance Commission. Currently, three types of funds are devolved among Local Governments as detailed below.

i. Development Fund
ii. Maintenance Fund
iii. General Purpose Fund