GS Paper II

News Excerpt:

The Union Cabinet, chaired by the Prime Minister, has approved the terms of reference for the Sixteenth Finance Commission.

Finance Commission

The Finance Commission is a Constitutionally mandated body at the centre of fiscal federalism. 

• It is a quasi-judicial body set up under Article 280 of the Constitution.

Article 280 in The Constitution Of India 1949:

• Article 280 (1) The President shall, within two years from the commencement of this Constitution and thereafter at the expiration of every fifth year or at such earlier time as the President considers necessary, by order constitute a Finance Commission, which shall consist of a Chairman and four other members to be appointed by the President.
• Article 280(2) It shall be the duty of the Commission to make recommendations to the President as to
  • (a) 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;
  • (b) the principles which should govern the grants in aid of the revenues of the States out of the Consolidated Fund of India;
  • (c) any other matter referred to the Commission by the President in the interests of sound finance.

Background of 15th Finance Commission

The Fifteenth Finance Commission (the 15th FC) was constituted on 27.11.2017 to make recommendations for a five-year period of 2020-21 to 2024-25. 

• On 29.11.2019, the Term of Reference of the 15th FC was amended, requiring the Commission to submit two reports: a first report for the financial year 2020-21 and a final report for an extended period of 2021-22 to 2025-26. 
• As a result, the 15th FC made its recommendations for a six-year period from 2020-21 to 2025-26.
• As the recommendations of the 15th FC cover the six-year period up to 31st March 2026, the 16th FC is proposed to be constituted now. This will enable the Finance Commission to consider and appraise the finances of the Union and the States for the immediate period preceding the period of its recommendations.

16th Finance Commission:

The Advance Cell of the 16th FC was formed in the Ministry of Finance on 21.11.2022 to oversee preliminary work, pending the formal constitution of the Commission.

• A Working Group headed by the Finance Secretary and Secretary (Expenditure) and comprising of the Secretary (Economic Affairs), Secretary (Revenue), Secretary (Financial Services), Chief Economic Adviser, Adviser, NITI Aayog and Additional Secretary (Budget) was set up to assist in the formulation of the Terms of Reference (ToRs).
• The 16th Finance Commission’s recommendations, upon the acceptance by the government, would cover the period of five (5) years commencing April 1, 2026.
• The government has established an Advance Cell in the Finance Ministry to oversee the preliminary pending work before the formal constitution of the panel.

Recommendations made for the 16th Finance Commission:

• Apart from the key recommendation on the distribution of net proceeds of taxes between the Centre and States and allocation among States of the respective share of such proceeds, the panel will also prescribe measures needed to augment the Consolidated Fund of a State to supplement resources of the panchayats and local bodies based on recommendations made by the respective State Finance Commissions.
• The Commission may review the present arrangements on financing Disaster Management initiatives, with reference to the funds constituted under the Disaster Management Act, 2005 (53 of 2005), and make appropriate recommendations thereon.

The Constitution of India envisages the Finance Commission as the balancing wheel of fiscal federalism in India. 

Prelims PYQ

Q. With reference to the Finance Commission of India, which of the following statements is correct? (UPSC 2011)

(a) It encourages the inflow of foreign capital for infrastructure development

(b) It facilitates the proper distribution of finances among the Public Sector Undertakings

(c) It ensures transparency in financial administration

(d) None of the statements  (a), (b) and (c) given above is correct in this context.

Q. With Reference to the Fourteenth Finance Commission, which of the following statements is/are correct? (UPSC 2015)

1) It has increased the share of States in the central divisible pool from 32 percent to 42 percent. 

2) It has made recommendations concerning sector-specific grants. 

Select the correct answer using the codes given below.

(a) 1 only

(b) 2 only

(c) Both 1 and 2

(d) Neither 1 nor 2

Mains PYQ

Q. How have the recommendations of the 14th Finance Commission of India enabled the States to improve their fiscal position? (UPSC 2021)

Q. How is the Finance Commission of India constituted? What do you know about the terms of reference of the recently constituted Finance Commission? Discuss. (UPSC 2018)

Q. Discuss the recommendations of the 13th Finance Commission which have been a departure from the previous commissions for strengthening the local government finances.  (UPSC 2013)