16TH FINANCE COMMISSION (Syllabus: GS Paper 2 – Polity)

Context: The government has appointed four members of the Sixteenth Finance Commission (SFC), which includes three full-time members.

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 advisory nature, not binding on the government.
• Fifteenth Finance Commission was constituted: On November 27, 2017.
• Power and Functions

oThe distribution of the net proceeds of taxes to be shared between the Centre and the states.

oThe principles that should govern the grants-in-aid to the states by the Centre (i.e., out of the consolidated fund of India).

oAny other matter referred to it by the president in the interests of sound finance.

Sixteenth Finance Commission (SFC)

• Task and Duration: The SFC's primary task is to determine the allocation of the Centre's tax revenue to states for the next five years, commencing from FY27.
• Efficient Financial Systems: The SFC is responsible for ensuring that states establish effective financial systems, following recommendations from state finance commissions, particularly in financing local bodies.
• Augmenting Funds for Local Bodies: Recommendations will be made by the SFC to enhance the consolidated funds of states for panchayats and municipalities.
• Flexibility in Recommendations: The government has deliberately kept the 'terms of reference' concise, granting the SFC flexibility in suggesting recommendations within constitutional limits for the sharing of tax revenue.