Why in the News?

• The Union Cabinet has approved the Terms of Reference (ToR) for the 16^th Finance Commission.
• The government has set a deadline of October 31, 2025, for the panel to submit its recommendations.

What’s in Today’s Article?

• About Finance Commission (Objectives, Functions, Composition, Reports, etc.)
• News Summary

About Finance Commission:

• The Finance Commission is constituted by the President under Article 280 of the Constitution.
• Objective: To give its recommendations on distribution of tax revenues between the Union and the States and amongst the States themselves.
• Two distinctive features of the Commission’s work involve:
  • Redressing the vertical imbalances between the taxation powers and expenditure responsibilities of the Centre and the States respectively;
  • Equalization of all public services across the States.

Functions of the Finance Commission:

• The distribution between the Union and the States of the net proceeds of taxes which are to be, or may be, 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.

Who Appoints the Finance Commission and what are the Qualifications for Members?

• As mentioned earlier, the Finance Commission is appointed by the President under Article 280 of the Constitution.
• The chairman and members of the commission are selected as per the provisions contained in the Finance Commission [Miscellaneous Provisions] Act, 1951 and the Finance Commission (Salaries & Allowances) Rules, 1951.
• The chairman of the commission is selected from among persons who have had experience in public affairs.
• Four other members are selected from among persons who:
  • are, or have been, or are qualified to be appointed as Judges of a High Court; or
  • have special knowledge of the finances and accounts of Government; or
  • have had wide experience in financial matters and in administration; or
  • have special knowledge of economics

Reports of Finance Commission:

• Under Article 281 of the Constitution, the President is required to cause laying of the Finance Commission report before each House of Parliament along with an explanatory note and the action taken by the government on the Commission’s recommendations.
• It is important to note that recommendations made by the Commission are not binding on the Government.

How are the Recommendations of the Commission Implemented?

• The recommendations of the Finance Commission are implemented as under:
  • Those to be implemented by an order of the President:
    • The recommendations relating to distribution of Union Taxes and Duties and Grants-in-aid fall in this category.
  • Those to be implemented by executive orders:
    • Other recommendations to be made by the Finance Commission, as per its Terms of Reference.

When was the First Commission Constituted?

• The First Finance Commission was constituted under the chairmanship of Shri K.C. Neogy on 6th April, 1952.
• Fifteen Finance Commissions have been constituted so far at intervals of every five years.

Is the Finance Commission unique to India?

• Most federal systems resolve the vertical and horizontal imbalances through mechanisms similar to the Finance Commission. For example, Australia and Canada.

 What is the Tenure of the 15^th Finance Commission?

• The Finance Commission was required to give its report by 30th October, 2019.
• Its recommendations made by the commission will cover the five-year period commencing from 1st April, 2020.
• However, the Fifteenth Finance Commission, which was headed by Shri N.K. Singh, had been given an extended mandate to make recommendations for six years up, till 2025-26.

News Summary:

• The Union Cabinet has approved the Terms of Reference (ToR) for the 16^th Finance Commission.
• The ToR include:
  • Disaster management financing
  • Determining revenue to states
  • Increasing the consolidated fund of states
  • Increasing the income of Gram Panchayats
  • Augmenting the Consolidated Fund of a State
  • Supplementing the resources of the Panchayats and Municipalities