Finance Commission

Why in news?

• The Fifteenth Finance Commission (FFC) will submit its report, containing recommendations on the sharing of tax revenues between the Centre and the States, for the period 2021-22 to 2025-26 to the President on October 31.

About Finance Commission:

• Finance Commission is a Constitutional body created in every five years to transfer financial resources from the centre to states.
• It is a quasi-judicial body.
• Origin of Finance Commission lies with Article 280 of the Constitution.

What is Article 280?

• The Article 280 prescribes that the President of India shall constitute a Finance Commission in every five years to give recommendations to him about the transfer of central revenues(tax) to the states and its allocation among them (states).

Composition:

• The Finance Commission consists of a chairman and four other members to be appointed by the president.
• They hold office for such period as specified by the president in his order.
• They are eligible for reappointment.

Qualifications:

• The Constitution authorizes the Parliament to determine the qualifications of members of the commission and the manner in which they should be selected.
• Accordingly, the Parliament has specified the qualifications of the chairman and Government Agencies.

Members of the commission.

• The chairman should be a person having experience in public affairs and the four other members should be selected from amongst the following:
  • A judge of high court or one qualified to be appointed as one
  • A person who has specialized knowledge of finance and accounts of the government.
  • A person who has wide experience in financial matters and in administration
  • A person who has special knowledge of economics.

Three core areas for FCs to make recommendations are:

• Resource transfer to the states and the criteria for the allocation of such resources among the states.
• Principle that should guide the allocation of grants in aid to the sates out of the center’s Consolidated Fund.
• Measures needed to augment the consolidated fund of a state to supplement the resources of the panchayats and the municipalities in the state on the basis of the recommendations made by the state finance commission.

Nature of recommendations:

• Recommendations made by the Finance Commission are only of advisory nature and hence, not binding on the government.

Terms of Reference of 15^th Finance Commission:

• The distribution between the Union and the States of the net proceeds of taxes and the allocation between the States of the respective shares.
• The principles which should govern the grants-in-aid to the States out of the Consolidated Fund of India.
• Measures needed to augment the Consolidated Fund of a State to supplement the resources of the Panchayats and Municipalities.
• Review the current status of the efforts of the Union and the States finance, deficit, debt levels, cash balances and fiscal discipline.
• Recommend a fiscal consolidation roadmap for sound fiscal management taking into account the responsibility of the Central Government and State Governments to adhere to appropriate levels of general and consolidated government debt and deficit levels.
• Examine whether revenue deficit grants be provided at all.
• Consider proposing measurable performance-based incentives for States, at the appropriate level of government.
• Use the population data of 2011 while making its recommendations.
• Review the present arrangements on financing Disaster Management initiatives and make appropriate recommendations.
• Indicate the basis on which it has arrived at its findings and make available the State wise estimates of receipts and expenditure.

PRELIMS QUESTION

Consider the following statements regarding finance commission:
1.Finance commissions are created annually and is appointed by the president.
2.Chairman of Finance commission is not eligible for any further appointments under the government of India.
Which of the statements given above is/are correct?
(a)1 only
(b)2 only
(c)Both 1 and 2
(d)Neither 1 nor 2

Answer to prelims question