State Finance Commissions are constituted by the State Government under clause 1 of Article 243 (I) and (Y) of the Constitution of India alongside relevant sections of the Kerala Panchayat Raj Act and the Kerala Municipalities Act to review the financial position of panchayats and the urban local self-governments and make recommendations to the Governor.

The Constitution of India describes the functions of the State Finance Commission as follows:

1. The Finance Commission shall review the financial position of the Panchayats and Municipalities and to make recommendations as to –
2. The principles which should govern:

(i) The distribution between the State, the Panchayats and the Municipalities of the net proceeds of the taxes, duties, tolls and fees leviable by the State, which may be divided between them and the allocation between the Panchayats and the Municipalities at all levels of their respective shares of such proceeds;

(ii) The determination of the taxes, duties, tolls and fees which may be assigned to, or appropriated, by the Panchayats and the Municipalities;

(iii)The grants-in-aid to the Panchayats and the Municipalities from the Consolidated Fund of the State;

1. The measures needed to improve the financial position of the Panchayats and the Municipalities;
2. Any other matter referred to the Commission by the Governor in the interests of sound finance of the Panchayats and the Municipalities.

The relevant provisions in the Kerala Municipality Act and the Kerala Panchayat Raj Act are re-produced below. As per Section 206 of the Kerala Municipality Act 1994.

(1) The Finance Commission shall make recommendations to the Governor as to-

(a) The principles which should govern:-

(i) The distribution between the State and the Municipalities of the net proceeds of the taxes, duties, tolls and fees leviable by the State, which may be divided between them and the allocation between the Municipalities of their respective shares of such proceeds;

(ii) The determination of taxes, duties, tolls and fees which may be assigned to, or appropriated, by the Municipalities;

(iii) The grant-in-aid to the Municipalities from the Consolidated Fund of the State;

(b) The measures needed to improve the financial position of the Municipalities;

(c) Any other matter referred to the Finance Commission by the Governor in the interests of sound finance of the Municipalities.

(2) The Governor shall cause every recommendation made by the Commission under sub-section (1) together with an explanatory memorandum as to the action taken thereon to be laid before the Legislative Assembly.

Section 186 of the Kerala Panchayat Raj Act, 1994, has similar provisions in respect of Panchayats.

In accordance with the letter and spirit of these legal provisions, State Finance Commissions have been given detailed Terms of Reference (ToR) by the Government of Kerala.