FINANCE COMMISSION (Syllabus: GS Paper 2 – Polity)

News-CRUX-10     8th February 2024        

Context: The Karnataka government organized a protest in Delhi under the banner of "My Tax My Right" to voice opposition against what it deems as financial injustices aimed to highlight grievances regarding the allocation of funds and other financial matters affecting the state.

Finance Commission:

  • Article 280: It stipulates that the President of India shall constitute a Finance Commission at intervals of five years or earlier if deemed necessary. The Finance Commission's primary task is to determine the method and formula for the distribution of tax proceeds among the Centre and the states.

oComposition: The Finance Commission typically comprises a chairman and four other members appointed by the President.

oAbout 15th finance Commission:  N.K. Singh appointed as its chairman. Recommendations of the 15th Finance Commission cover a period of five years, from the fiscal year 2021-22 to 2025-26.

oCriteria for Allocation: Population (15%), Area (15%),Forest and Ecology (10%),Income Distance (45%), Demographic Performance (12.5%) and Tax Effort (2.5%).

Borrowing by States:

  • Borrowing Limit on State: The Net Borrowing Ceiling (NBC) is a financial restriction imposed by the central government on the borrowing capacity of states in India.
  • Limitation on Borrowings: The NBC sets a cap on the total amount of borrowing that states can undertake from all sources, including open market borrowings.
  • According to Article 293(3) of the Constitution, the State has to obtain the consent of the Centre to raise ‘any loan’, if ‘any part of the previous loan’ extended by the Centre is outstanding. The imposition of the NBC is done by invoking the powers of the Centre under Article 293(3).
  • Issues: Southern states like Karnataka is demanding more financial resources and autonomy in financial matters.