Finance Commission

In News

• The government will soon start the process of setting up the Sixteenth Finance Commission, with the Finance Ministry likely to notify the terms of references for the constitutional body.

About 

• The terms of reference for the Sixteenth FC will be worked out after internal government deliberations steered by the Finance Ministry
• the first step towards constituting the Commission will be the appointment of an Officer on Special Duty to drive the process. 
  • This officer typically becomes the member-secretary of the Commission, once it is constituted. 
• A key new challenge for the 16th FC would be the co-existence of another permanent constitutional body, the GST Council.
  • as the Council’s decisions on tax rate changes could alter the revenue calculations made by the Commission for sharing fiscal resources. 

About Finance Commission

• It is a Constitutionally mandated body that is at the center of fiscal federalism.
• It is constituted by the President under Article 280 of the Constitution.
• The First Finance Commission was constituted vide Presidential Order under the chairmanship of Shri K.C. Neogy on 6th April 1952.
• the Constitution requires a Finance Commission (FC) to be set up every five years, the 15th FC’s mandate was extended by a year till 2025-26, breaking the cycle. 
  • The last time an FC was granted a six-year time frame was for the 9th Finance Commission, formed in June 1987. 
• Core Responsibilities:   It is the duty of the Commission to make recommendations to the President as to—  
  • the distribution between the Union and the States of the net proceeds of taxes which are to be, or maybe, divided between them and the allocation between the States of the respective shares of such proceeds; 
  • the principles which 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 in the State on the basis of the recommendations made by the Finance Commission of the State;
  • any other matter referred to the Commission by the President in the interests of sound finance.
  • The Commission determines its procedure and has such powers in the performance of its functions as Parliament may by law confer on them.

• Importance: Its working is characterised by extensive and intensive consultations with all levels of government, thus strengthening the principle of cooperative federalism.
  • Its recommendations are also geared towards improving the quality of public spending and promoting fiscal stability. 
• Current Commission: The Fifteenth Finance Commission was constituted on 27 November 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.
  • Features: The Terms of Reference of the current Commission have some distinctive features, including recommending monitorable performance criteria for important national flagship programmes and examining the possibility of setting up permanent non-lapsable funding for India’s defence needs. 
    • The reorganisation of the State of Jammu and Kashmir into two Union Territories – one of Jammu and Kashmir and one of Ladakh – presents a new dynamic. 

Source: TH