FINANCE COMMISSION (Syllabus GS Paper 2 – Polity)

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Context: The sixteenth Finance Commission headed by former Niti Aayog Vice-Chairman Arvind Panagariya has begun its work by inviting suggestions from the public on the mandate set for it by the Centre.

Finance Commission

About: It is a constitutional body that recommends how tax revenues collected by the Central government should be distributed among the Centre and various States in the country.
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
Function:

oGrants-in-aid: The principles which should govern the grants-in-aid of the revenues of the States out of the Consolidated Fund of India.

oConsolidated Fund of a State: 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.

oPresident reference: Any other matter referred to the Commission by the President in the interests of sound finance.

How does the Commission decide?

Vertical Devolution: The Finance Commission decides what proportion of the Centre’s net tax revenue goes to the States overall.
Horizontal Devolution: The Commission determines how the States' share of the overall tax revenue is distributed among various States.
Recent Recommendations on Vertical Devolution: The last few Finance Commissions have recommended increasing vertical devolution of tax revenues to States.
Specific Recommendations by Past Commissions

o13th Finance Commission: Recommended 32% of funds to States.

o14th Finance Commission: Recommended 42% of funds to States.

o15th Finance Commission: Recommended 41% of funds to States.

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