Finance Commission: What is It, Its Power, and Functions

PWOnlyIAS February 16, 2024 03:25 2876 0

Recently, the Sixteenth Finance Commission (SFC) held its first meeting on to discuss the terms of reference and other matters.

Finance Commission: What is It, Its Power, and Functions

Context: Recently, the Sixteenth Finance Commission (SFC) held its first meeting to discuss the terms of reference and other matters.

About Sixteenth Finance Commission (SFC)

Chairman: Arvind Panagariya.
Full Time Members: A.N. Jha (Former expenditure secretary and member of the 15th Finance Commission)
- Annie George Mathew (Former special secretary of the department of expenditure).
- Niranjan Rajadhyaksha (executive director of Artha Global Niranjan Rajadhyaksha).
Part-Time Member: Soumya Kanti Ghosh (State Bank of India’s group chief economic adviser).
Duration: It is tasked with defining the distribution of the Centre’s tax revenue to states for five years starting FY27.
- It will make its recommendations available by 31 October 2025, covering an award period of five years beginning 1 April 2026.

Enroll now for UPSC Online Course

Also Read: Terms Of Reference For 16th Finance Commission

About Finance Commission

Constitutional Mandate: It is provided by Article 280 of the constitution as a quasi-judicial body.
Appointing Authority: The President of India constitutes a Finance Commission every fifth year or at such a time that is considered necessary.
Composition: It consists of a chairman and four other members, all appointed by the president.
Tenure: The members of the commission are appointed for the duration specified in presidential order.
- Members are eligible for reappointment.
Qualifications: The Parliament has been authorized by the constitution to determine the qualifications of the members and the manner in which they are to be appointed.
- Based on these powers, the Parliament has given the following specifications for appointing the members.
- The chairman must have experience in public affairs while the other four members should be selected from amongst the following criteria:
  - A High Court judge or one qualified to become one;
  - An individual having specialized knowledge of finance and accounts of the government;
  - A person who possesses experience in financial matters and administration;
  - A person who has special knowledge of economics.
Removal: Members can be removed in the following cases:
- If they are found to be of unsound mind;
- If they are involved in a vile act;
- If there is a conflict of interest.

Enroll now for UPSC Online Classes

Finance Commission

Powers of the Finance Commission

Powers of Civil Court: Based on the Code of Civil Procedure 1908, the Finance Commission has all the powers of a Civil Court.
Evidence Demand: The commission has powers to call witnesses, and ask for the production of a public document or record from any office or court.

Functions of the Finance Commission:

Existing Functions: It is tasked with making recommendations to the President on the following matters:
- Tax Distribution: Distributing shares of net proceeds of tax between the Union and the States and the allocation between the States of the respective shares of such proceeds;
- Rules for grants-in-aid: The rules that govern grant-in-aid to the states by the centre from Consolidated Fund of India;
- Tax Devolution at State Level: Augmenting the consolidated fund of the state to supply resources to panchayats and municipalities based on recommendations of the state finance commission;
- Miscellaneous Matter: Any other matter referred by the President to the Commission in the interests of sound finance.
- Submit Report: A report is submitted to the President, who lays it before both houses of the Parliament. The report is followed by an explanatory memorandum on the actions taken on its recommendations.
Previous Functions:
- Grants for Specific States: Previously the Finance Commission used to suggest grants to the states of Assam, Bihar, Odisha, and West Bengal regarding the sharing of net proceeds of export duties imposed on jute products. This was valid for only 10 years.

Enroll now for UPSC Online Coaching

Criticism of Finance Commission

Advisory Nature: The recommendations are only advisory in nature and not binding on the government.
- However, the government must have compelling reasons for turning down the recommendations of the commission.
Discretion of the Union Government: The union government has discretionary powers to implement its recommendations on granting money to states.

Recommendation of the 15th Finance Commission

Share of State in Central Tax (Vertical Devolution): The share of states in the central taxes for the 2021-26 period is recommended as 41%, which earlier was 42%. This is due to the creation of UT of Jammu and Kashmir, and Ladakh.
Distribution between States (Horizontal Devolution): For distribution, the commission has suggested 12.5% weightage to demographic performance, 45% to income, 15% each to population and area, 10% to forest and ecology, and 2.5% to tax and fiscal efforts.
Grants to States: The commission has recommended revenue deficit grants amounting to about Rs. 3 trillion over the five-year period ending FY26.
- It also suggested grants for local bodies such as municipalities and panchayats, which include performance-based grants for the incubation of new cities and health grants to local governments.
Performance-based Incentives: These cover four areas:
- The first is the social sector, which covers health and education.
- Second is the rural economy, which covers agriculture and the maintenance of rural roads.
- Third is based on governance and administrative reforms which include grants for judiciary, statistics, and aspirational districts and blocks.
- Fourth covers the power sector, which is not linked to grants but provides an important, additional borrowing window for States.

Enroll now for UPSC Online Course

Finance Commission

State Finance Commission

Constitutional Position: It is a constitutional body set up after the 73rd Constitutional Amendment Act of 1992 under Article 280.
Appointment: The governors of the respective states appoint it under Article 243-I of the Constitution of India, every five years.
Functions: It performs all the functions of the Finance Commission at the state level. It includes distributing state funds to the Panchayati Raj and municipalities.

DOWNLOAD PDF

Frequently Asked Questions

It is a quasi-judicial body provided by Article 280 of the constitution.

The President of India constitutes the Finance Commission by appointing members every fifth year or at such a time that is considered necessary.

The members of the commission are appointed for the duration as specified in presidential order. Members are eligible for reappointment.

The main function of the commission is to distribute the shares of net proceeds of tax between the Union and the States and the allocation between the States of the respective shares of such proceeds.

Arvind Panagariya is the chairman of the 16th Finance Commission.

For distribution, the commission has suggested 12.5% weightage to demographic performance, 45% to income, 15% each to population and area, 10% to forest and ecology, and 2.5% to tax and fiscal efforts.

Recommended For You

May 17, 2024

Latest Comments

Live Blog

Live Now

May 16, 2024

Mon	Tue	Wed	Thu	Fri	Sat	Sun
		1	2	3	4	5
6	7	8	9	10	11	12
13	14	15	16	17	18	19
20	21	22	23	24	25	26
27	28	29	30	31

Finance Commission: What is It, Its Power, and Functions

About Sixteenth Finance Commission (SFC)

About Finance Commission

Powers of the Finance Commission

Functions of the Finance Commission:

Criticism of Finance Commission

Recommendation of the 15th Finance Commission

State Finance Commission

Frequently Asked Questions

What is the Finance Commission?

Who appoints the Finance Commission?

What is the Tenure of the Finance Commission?

What is the main Function of the Finance Commission?

Who is the Chairman of the 16th Finance Commission?

What are the Horizontal Devolution Criteria Suggested by the 15th Finance Commission?

Recommended For You

Latest Comments

Live Blog

Recent posts

Archive Calendar

by month

Follow Us

THE MOST LEARNING PLATFORM

Our Courses

Our Initiatives

Beginner’s Roadmap

Quick Links

Contact Details

Download Our App

THE MOST LEARNING PLATFORM

Our Courses

Our Courses

Our Initiatives

Our Initiatives

Biginner's Roadmap

Beginner’s Roadmap

Quick Links

Quick Links

Follow Us:

Contact Details

Download Our App

THE MOST
LEARNING PLATFORM

THE MOST
LEARNING PLATFORM