The Terms of Reference of the Commission as given in the notification are extracted below:-

The Finance Commission shall review the financial position of the Panchayats and Municipalities and make recommendations as to

The principles which should govern,
  • The distribution between the State, Panchayats and Municipalities 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 Municipalities of their respective share of such proceeds.
  • The determination of the taxes, duties, tolls and fees which may be assigned to or appropriated by the Panchayats and the Municipalities.
  • The grants-in-aid to the Panchayats and the Municipalities from the Consolidated Fund of the State.
The measures needed to strengthen the financial position of Panchayats and Municipalities with special reference to
  • The potential for Local Governments to raise funds from financial institutions and the market and to suggest a framework for realizing the 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 measures needed for the proper institutionalization of the decentralization initiatives in the State".
The Commission is also entrusted to revisit the recommendations of first four Commissions and suggestions are invited on the recommendations of earlier commissions, which had been accepted by Government but have not been operationalized