Answer: 

Introduction:

The Finance Commission of India is a constitutional body established under Article 280 of the Indian Constitution, responsible for recommending the distribution of financial resources between the Union and State governments. The Commission ensures fiscal federalism and equitable distribution of resources, thereby promoting balanced economic development across the country.

Body:

Constitution of the Finance Commission:

• Composition: The Finance Commission consists of a Chairperson and four other members, appointed by the President of India.
• Qualifications: Members of the Commission are selected based on their expertise in public affairs, finance, and administration, ensuring that they have the necessary knowledge and experience to address fiscal matters.
• Tenure: The Finance Commission is appointed every five years or earlier, as deemed necessary by the President. The recommendations made by the Commission typically cover a five-year period.

Terms of Reference of the recently constituted Finance Commission:

The 15th Finance Commission, chaired by N. K. Singh, was constituted in November 2017. Its terms of reference include:

• Vertical devolution: Recommending the distribution of net proceeds of taxes between the Union and State governments, following the principles of equity, efficiency, and transparency.
• Horizontal devolution: Determining the criteria for allocating resources among the States, considering factors such as population, income, area, forest cover, and fiscal capacity.
• Grants-in-Aid: Recommending the principles governing the distribution of grants-in-aid to States, addressing revenue deficits and meeting the requirements of local bodies.
• Fiscal consolidation: Suggesting measures for fiscal consolidation at the central and state levels, promoting fiscal discipline and long-term macroeconomic stability.
• Performance-based incentives: Recommending performance-based incentives for States that demonstrate progress in areas such as ease of doing business, education, health, and sustainable development.
• Disaster management: Assessing the impact of the goods and services tax (GST) on the fiscal situation of the Union and States, and recommending measures for disaster management, particularly in light of the increasing frequency of natural disasters.

Conclusion:

By addressing the financial needs of both the Union and State governments, the Commission promotes balanced economic development and fosters cooperation between different levels of government. The terms of reference of the recently constituted Finance Commission reflect the evolving fiscal landscape and contemporary challenges, emphasizing the need for fiscal discipline, performance-based incentives, and effective disaster management.