FINANCE COMMISSION (Syllabus GS Paper 2 – Polity)

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.