{"id":121042,"date":"2024-07-19T19:58:30","date_gmt":"2024-07-19T14:28:30","guid":{"rendered":"https:\/\/pwonlyias.com\/stage\/?post_type=current-affairs&#038;p=121042"},"modified":"2025-02-13T15:59:03","modified_gmt":"2025-02-13T10:29:03","slug":"role-of-the-finance-commission","status":"publish","type":"current-affairs","link":"https:\/\/pwonlyias.com\/stage\/current-affairs\/role-of-the-finance-commission","title":{"rendered":"Role of the Finance Commission"},"content":{"rendered":"<p><span style=\"font-weight: 400;\">The <a href=\"https:\/\/pwonlyias.com\/stage\/current-affairs\/16th-finance-commission-of-india\/\"><strong>S<\/strong><\/a><\/span><b>ixteenth Finance Commission has begun its work <\/b><span style=\"font-weight: 400;\">by inviting suggestions from the public on the mandate set for it by the Centre.\u00a0<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The latest Finance Commission was<\/span><b> constituted in December last year <\/b><span style=\"font-weight: 400;\">and is expected to submit its recommendations by October, 2025 that will be valid for five years starting from April 1, 2026.<\/span><\/li>\n<\/ul>\n<p><strong><span style=\"font-size: 18pt;\">Role of the Finance Commission<\/span><\/strong><\/p>\n<p><span style=\"font-weight: 400;\">The <a href=\"https:\/\/pwonlyias.com\/stage\/upsc-notes\/finance-commission\/\">Finance Commission<\/a> is<\/span><b> a constitutional body <\/b><span style=\"font-weight: 400;\">and provided by <\/span><b>Article 280 of the <a href=\"https:\/\/pwonlyias.com\/stage\/upsc-notes\/historical-evolution-making-features-of-the-constitution\/\">Indian Constitution<\/a><\/b><span style=\"font-weight: 400;\"> as <\/span><b>a quasi-judicial body.<\/b><\/p>\n<p style=\"text-align: center;\"><span class=\"vc_button\"><a href=\"https:\/\/www.pw.live\/batches\/upsc?utm_source=seo+upsc+batch&#038;utm_medium=seo+upsc&#038;utm_campaign=seo&#038;utm_id=upsc\" target=\"_blank\" rel=\"noopener\">Enroll now for UPSC Online Course<\/a><\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Appointing Authority: <\/b><span style=\"font-weight: 400;\">The <\/span><b>President of India<\/b><span style=\"font-weight: 400;\"> constitutes a Finance Commission every fifth year or at such a time that is considered necessary.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Composition: <\/b><span style=\"font-weight: 400;\">The Finance commission composition consists of <\/span><b>a chairman and four other members<\/b><span style=\"font-weight: 400;\">.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Tenure: <\/b><span style=\"font-weight: 400;\">For the duration <\/span><b>specified in Presidential order.<\/b><span style=\"font-weight: 400;\"> The Commission is reconstituted <\/span><b>typically every five years<\/b><span style=\"font-weight: 400;\"> and usually takes a couple of years to make its recommendations.<\/span>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">Members are <\/span><b>eligible for reappointment.<\/b><\/li>\n<\/ul>\n<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Qualifications: <\/b><span style=\"font-weight: 400;\">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.<\/span>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><b>Specifications: <\/b><span style=\"font-weight: 400;\">Based on these powers, the <\/span><a href=\"https:\/\/pwonlyias.com\/stage\/upsc-notes\/parliament\/\"><b>Parliament<\/b><\/a><span style=\"font-weight: 400;\"> has given the following specifications for appointing the members.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">The <\/span><b>chairman must have experience in public affairs<\/b><span style=\"font-weight: 400;\"> while the<\/span><b> other four members<\/b><span style=\"font-weight: 400;\"> should be selected from amongst the following criteria:<\/span>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"3\"><span style=\"font-weight: 400;\">A <\/span><b>High Court judge or one qualified to become one<\/b><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"3\"><span style=\"font-weight: 400;\">An individual having <\/span><b>specialised knowledge of finance and accounts of the government<\/b><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"3\"><span style=\"font-weight: 400;\">A person who possesses <\/span><b>experience in financial matters and administration<\/b><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"3\"><span style=\"font-weight: 400;\">A person who has <\/span><b>special knowledge of economics<\/b><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Powers:<\/b><span style=\"font-weight: 400;\"> Based on the <\/span><b>Code of Civil Procedure 1908, <\/b><span style=\"font-weight: 400;\">the Finance Commission of India has all the <\/span><b>powers of a Civil Court.\u00a0<\/b>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><b>Evidence Demand: <\/b><span style=\"font-weight: 400;\">The commission has powers to call witnesses, and ask for the production of a public document or record from any office or court.<\/span><\/li>\n<\/ul>\n<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Mandates:<\/b><span style=\"font-weight: 400;\">\u00a0<\/span>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><b>Tax Distribution: <\/b><span style=\"font-weight: 400;\">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.<\/span>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"3\"><span style=\"font-weight: 400;\">The Centre, however, is not legally bound to implement the suggestions made by the Finance Commission.\u00a0<\/span><\/li>\n<\/ul>\n<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><b>Rules for Grants-in-Aid: <\/b><span style=\"font-weight: 400;\">The rules that govern grant-in-aid to the states by the Centre from Consolidated Fund of India.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><b>Tax Devolution at State Level:<\/b><span style=\"font-weight: 400;\"> Augmenting the consolidated fund of the state to supply resources to panchayats and municipalities based on recommendations of the State Finance Commission.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><b>Miscellaneous Matter: <\/b><span style=\"font-weight: 400;\">Any other matter referred by the President to the Commission in the <\/span><b>interests of sound finance.<\/b><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><b>Submit Report: <\/b><span style=\"font-weight: 400;\">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.<\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<h2><span style=\"font-size: 18pt;\"><strong>About the Distribution of Funds by the Finance Commission<\/strong><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">The Finance Commission decides what proportion of the Centre\u2019s net tax revenue goes to the States overall (vertical devolution) and how this share for the States is distributed among various States (horizontal devolution).\u00a0<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Horizontal Devolution:<\/b><span style=\"font-weight: 400;\"> This devolution of funds between States is usually decided based on a formula created by the Commission that takes into account a <\/span><b>State\u2019s population, fertility level, income level, geography, etc.\u00a0<\/b><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Vertical Devolution:<\/b><span style=\"font-weight: 400;\"> This devolution of funds however, is <\/span><b>not based on any such objective formula.\u00a0<\/b>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">Nevertheless, the <\/span><b>last few Finance Commissions have recommended greater vertical devolution <\/b><span style=\"font-weight: 400;\">of tax revenues to States.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">The <\/span><b>13th, 14th and 15th <\/b><span style=\"font-weight: 400;\">Finance Commissions recommended that the Centre share <\/span><b>32%, 42% and 41% of funds, <\/b><span style=\"font-weight: 400;\">respectively, with States.\u00a0<\/span><\/li>\n<\/ul>\n<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Additional Aid: <\/b><span style=\"font-weight: 400;\">The Centre may also aid States through additional grants <\/span><b>for certain schemes that are jointly funded by the Centre and the States.<\/b><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>For Local Bodies: <\/b><span style=\"font-weight: 400;\">The 16th Financial Commission is also expected to recommend ways to augment the revenues of local bodies such as panchayats and municipalities.<\/span>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><b>As of 2015, only about 3% of public spending in India happened at the local body level, <\/b><span style=\"font-weight: 400;\">as<\/span><b> compared to other countries such as China <\/b><span style=\"font-weight: 400;\">where over half of public spending happened at the level of the local bodies.<\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<p style=\"text-align: center;\"><span class=\"vc_button\"><a href=\"https:\/\/store.pw.live\/govt-entrance-exams\/upsc-books\/upsc-textbooks?utm_source=SEO&#038;utm_medium=PW+Live&#038;utm_campaign=UPSC+Textbooks\" target=\"_blank\" rel=\"noopener\"><span style=\"font-weight: 400;\">Check Out UPSC NCERT Textbooks From PW Store<\/span><\/a><\/span><\/p>\n<h2><span style=\"font-size: 18pt;\"><strong>Disagreements and Friction between the Centre and States<\/strong><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">The Centre and the States have been at loggerheads <\/span><b>over the issue of sharing tax revenues <\/b><span style=\"font-weight: 400;\">for a while now.\u00a0<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Inadequate Funds: <\/b><span style=\"font-weight: 400;\">The <\/span><b>Centre collects major taxes <\/b><span style=\"font-weight: 400;\">such as the income tax, the corporate tax, and the <a href=\"https:\/\/pwonlyias.com\/stage\/udaan\/goods-and-services-tax-gst\/\">goods and services tax (GST)<\/a> while the States primarily rely on taxes collected from the sale of goods such as liquor and fuels that are beyond the ambit of GST.\u00a0<\/span>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">The <\/span><b>States, however, are responsible for the delivery of many services<\/b><span style=\"font-weight: 400;\"> to citizens, including education, healthcare and the police.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><b>This has led to complaints <\/b><span style=\"font-weight: 400;\">that the Centre has reduced the power of the States to collect taxes and that it does not give enough funds to the States to match with the scale of their responsibilities.<\/span><\/li>\n<\/ul>\n<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>On Distribution Percentage: <\/b><span style=\"font-weight: 400;\">The States and Centre often disagree on what percentage of the total tax proceeds should go to the States and about the actual delivery of these funds.<\/span>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">States argue that they should receive more funds than what is recommended by the Finance Commission as they have greater responsibilities to fulfil than the Centre.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">They also point out that the Centre <\/span><b>does not even share the amount of funds recommended by the Finance Commissions,<\/b><span style=\"font-weight: 400;\"> which they believe is already too low.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><b>Example: <\/b><span style=\"font-weight: 400;\">The Centre has devolved an average of only 38% of funds from the divisible pool to the States under the current Fifteenth Finance Commission as against the Commission\u2019s actual recommendation of 41%.<\/span><\/li>\n<\/ul>\n<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>On Distribution Pool:<\/b><span style=\"font-weight: 400;\"> States have complaints about what portion of the Centre\u2019s overall tax revenues should be considered as part of the divisible pool out of which the States are funded.\u00a0<\/span>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">It is believed that<\/span><b> cesses and surcharges,<\/b><span style=\"font-weight: 400;\"> which do not come under the divisible pool and hence not shared with the States, can constitute as much as 28% of the Centre\u2019s overall tax revenues in some years, causing significant revenue loss for States.\u00a0<\/span><\/li>\n<\/ul>\n<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>On Governance by the States: <\/b><span style=\"font-weight: 400;\">It is argued that<\/span><b> more developed States with better governance are being penalised<\/b><span style=\"font-weight: 400;\"> by the Centre to help States with poor governance.\u00a0<\/span>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><b>States<\/b><span style=\"font-weight: 400;\"> such as Karnataka and Tamil Nadu have also complained that they<\/span><b> receive less money from the Centre than what they contribute as taxes.\u00a0<\/b><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><b>Example: <\/b><span style=\"font-weight: 400;\">Tamil Nadu received only 29 paise for each rupee that the State contributed to the Centre\u2019s exchequer while Bihar gets more than \u20b97 for each rupee it contributes.\u00a0<\/span><\/li>\n<\/ul>\n<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Political Influence: <\/b><span style=\"font-weight: 400;\">Some critics also believe that the Finance Commission, whose members are appointed by the Centre, may not be fully independent and immune from political influence.<\/span><\/li>\n<\/ul>\n<p style=\"text-align: center;\"><span class=\"vc_button\"><a href=\"https:\/\/www.pw.live\/batches\/upsc\/pw-only-ias?utm_source=seo+upsc+batch&#038;utm_medium=seo+upsc&#038;utm_campaign=seo&#038;utm_id=upsc\" target=\"_blank\" rel=\"noopener\">Enroll now for UPSC Online Classes<\/a><\/span><\/p>\n<table style=\"width: 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137.921%; text-align: center; border-style: solid; border-color: #000000;\" colspan=\"2\"><a href=\"https:\/\/store.pw.live\/govt-entrance-exams\/upsc-books?utm_source=SEO&#038;utm_medium=PW+Live&#038;utm_campaign=UPSC+CSE+Books\" target=\"_blank\" rel=\"noopener\"><span style=\"font-weight: 400;\">Check Out UPSC CSE Books From PW Store<\/span><\/a><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>\u00a0<\/p>\n","protected":false},"excerpt":{"rendered":"<p>The sixteenth Finance Commission has begun its work by inviting suggestions from the public on the mandate set for it by the Centre. <\/p>\n","protected":false},"author":11,"featured_media":0,"menu_order":0,"comment_status":"open","ping_status":"open","template":"","format":"standard","meta":{"rank_math_lock_modified_date":false,"footnotes":""},"tags":[],"paper-wise":[2089],"subject":[2100],"acf":[],"_links":{"self":[{"href":"https:\/\/pwonlyias.com\/stage\/wp-json\/wp\/v2\/current-affairs\/121042"}],"collection":[{"href":"https:\/\/pwonlyias.com\/stage\/wp-json\/wp\/v2\/current-affairs"}],"about":[{"href":"https:\/\/pwonlyias.com\/stage\/wp-json\/wp\/v2\/types\/current-affairs"}],"author":[{"embeddable":true,"href":"https:\/\/pwonlyias.com\/stage\/wp-json\/wp\/v2\/users\/11"}],"replies":[{"embeddable":true,"href":"https:\/\/pwonlyias.com\/stage\/wp-json\/wp\/v2\/comments?post=121042"}],"version-history":[{"count":4,"href":"https:\/\/pwonlyias.com\/stage\/wp-json\/wp\/v2\/current-affairs\/121042\/revisions"}],"predecessor-version":[{"id":121230,"href":"https:\/\/pwonlyias.com\/stage\/wp-json\/wp\/v2\/current-affairs\/121042\/revisions\/121230"}],"wp:attachment":[{"href":"https:\/\/pwonlyias.com\/stage\/wp-json\/wp\/v2\/media?parent=121042"}],"wp:term":[{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/pwonlyias.com\/stage\/wp-json\/wp\/v2\/tags?post=121042"},{"taxonomy":"paper-wise","embeddable":true,"href":"https:\/\/pwonlyias.com\/stage\/wp-json\/wp\/v2\/paper-wise?post=121042"},{"taxonomy":"subject","embeddable":true,"href":"https:\/\/pwonlyias.com\/stage\/wp-json\/wp\/v2\/subject?post=121042"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}