The government is expected to constitute the 16th Finance Commission by the end of November this year. Terms of Reference (ToR) for the commission is being finalised.
What is the Finance Commission?
• The Finance Commission is constituted by the President under Article 280 of the Constitution, mainly to give its recommendations on distribution of tax revenues between the Union and the states and among the states themselves.
• The Fifteenth Finance Commission was constituted on November 27, 2017 against the backdrop of the abolition of the Planning Commission (as also of the distinction between Plan and non-Plan expenditure) and the introduction of the Goods and Services Tax (GST), which has fundamentally redefined federal fiscal relations.
• In November 2020, the Fifteenth Finance Commission, led by chairman N.K. Singh, submitted its report for the period 2021-22 to 2025-26 to the then President Ram Nath Kovind.
What are the functions of Finance Commission?
Two distinctive features of the commission’s work involve redressing the vertical imbalances between the taxation powers and expenditure responsibilities of the Centre and the states respectively and equalisation of all public services across the states.
It makes recommendations on:
• The distribution between the Union and the states of the net proceeds of taxes that are to be, or may be, divided between them and the allocation between the states of the respective shares of such proceeds.
• The principles that should govern the grants-in-aid of the revenues of the states out of the Consolidated Fund of India.
• The measures needed to augment the consolidated fund of a state to supplement the resources of the panchayats in the state on the basis of the recommendations made by the Finance Commission of the state.
• The measures needed to augment the consolidated fund of a state to supplement the resources of the municipalities on the basis of the recommendations made by the Finance Commission of the state.
What are the qualifications required for its members?
As per the provisions contained in the Finance Commission (Miscellaneous Provisions) Act, 1951, and The Finance Commission (Salaries & Allowances) Rules, 1951, the chairman of the commission is selected from among persons who have had experience in public affairs, and the four other members are selected from among persons who:
(a) are, or have been, or are qualified to be appointed as judges of a High Court or
(b) have special knowledge of the finances and accounts of government or
(c) have had wide experience in financial matters and in administration or
(d) have special knowledge of economics.
When was the first commission constituted?
The First Finance Commission was constituted by a presidential order under the chairmanship of K.C. Neogy on April 6, 1952.
Do other countries have such commissions?
Most federal systems resolve the vertical and horizontal imbalances through mechanisms similar to the Finance Commission. For example, Australia and Canada.
Constitutional provisions under which Finance Commission acts:
• Article 268 - Duties levied by the Union but collected and appropriated by the states.
• Article 269 - Taxes levied and collected by the Union but assigned to the states.
• Article 270 - Taxes levied and collected by the Union and distributed between the Union and the states.
• Article 271 - Surcharge on certain duties and taxes for purposes of the Union.
• Article 274 - Prior recommendation of President required to Bills affecting taxation in which States are interested.
• Article 275 - Grants from the Union to certain states.
• Article 280 - Constituting of the Finance Commission.
• Article 281 - Recommendations of the Finance Commission.
• Article 282 - Expenditure defrayable by the Union or a state out of its revenues.
Some recommendations of the 15th Finance Commission:
• The 15th Finance Commission submitted its report on November 9, 2020, for the five fiscals — 2021-22 to 2025-26 — to the President.
• The 15th Finance Commission had kept the tax devolution ratio at 42 per cent — at the same level suggested by the 14th Commission.
• The central government accepted the report of the 15th Finance Commission, and accordingly, the states are being given 42 per cent of the divisible tax pool of the Centre during the period 2021-22 to 2025-26.
• The 15th Finance Commission’s recommendations include the fiscal deficit, debt path for the Union and states, and additional borrowing room to states based on performance in power sector reforms.
• As per the glide path for fiscal consolidation, the government aims to bring down the fiscal deficit to 4.5 per cent of gross domestic product (GDP) by the 2025-26 fiscal.
