FINANCE COMMISSION (Syllabus: GS Paper 2 – Polity)

Context: The Union Cabinet chaired by the Prime Minister of India has approved the Terms of Reference for the Sixteenth Finance Commission.

Finance Commission

• About: Article 280 of the Constitution of India provides for a Finance Commission as a quasi-judicial body. 
• Constituted by: President of India every fifth year or at such earlier time as he considers necessary.
• Composition: Chairman and four other members to be appointed by the president.
• Tenure: They hold office for such period as specified by the president in his order.
• Recommendation of Commission: The recommendations made by the Finance Commission are only of an advisory nature, not binding on the government.
• Fifteenth Finance Commission was constituted: On November 27, 2017 and was headed by N.K. Singh.

Power and Functions of Commission

• The distribution of the net proceeds of taxes is to be shared between the Centre and the states.
• The principles that should govern the grants-in-aid to the states by the Centre (i.e., out of the consolidated fund of India).
• Any other matter referred to it by the president in the interests of sound finance.

Terms of Reference for the Sixteenth Finance Commission

• The division of net tax proceeds between the Union and States, as outlined in Chapter I, Part XII of the Constitution, and the allocation of shares among the States.
• Principles governing grants-in-aid from the Consolidated Fund of India under Article 275 of the Constitution, excluding specified purposes in the provisos to clause (1) of that article.
• The measures needed to augment the Consolidated Fund of a State to supplement the resources of the Panchayats and Municipalities in the State on the basis of the recommendations made by the Finance Commission of the State.