16th Finance Commission

Context:

Government of India constituted the 16^th Finance Commission recently.

16^th Finance Commission:

• Constituted with the approval of the President of India under Article 280 (1) of the Constitution.
• Chairman – Arvind Panagariya (former vice-chairman of NITI Aayog)
• Tenure – 5 years commencing April 1, 2026
• Commission’s work involves –
  • Redressing the vertical imbalances between the taxation powers and expenditure responsibilities of the Centre and the States respectively
  • Equalization of all public services across the States.
• Commission shall make recommendations on the following –
  • Distribution between the Union and States of the net proceeds of taxes and allocation between the States of such proceeds.
  • Principles for governing the grants-in-aid and revenues of the state under Article 275 of the Constitution.
  • Measures needed to augment the Consolidated Fund of a State to supplement the resources of the Panchayats and Municipalities based on state finance commission recommendation.
  • The commission may review present arrangements for financing Disaster Management initiatives, concerning the funds constituted under Disaster Management Act, 2005.

15^th Finance Commission:

• Set up in 2017
• Chaired by – NK Singh
• Tenure – 5 years from the year 2021-22 to 2025-26
• Major Recommendations include –
  • For vertical devolution, the share of states in central taxes is to be 41%.
  • Criteria for horizontal devolution (Allocation Between the States) include: Income distance, area, population (2011), demographic performance, forest and ecology, and tax and fiscal efforts.
  • Suggested to reduce fiscal deficit to 4% of GDP by 2025-26.
  • Performance Based Incentives and Grants to States around 4 main themes: Social sector, Rural economy, Governance and administrative reforms, Performance-based incentive system for the power sector
  • Centre’s debt to GDP ratio is 58.7% and Fiscal Deficit to GDP ratio 9.2% There is a need to reduce States debt-GDP target to 20%.
  • To re-examine the 2018 amendment to Fiscal Responsibility and Budget Management Act (FRBM).

Facts about Finance Commission:

• A Constitutional body under Article 280 of the Constitution of India
• Constituted by – President of India (every 5^th year or at such earlier time as he considers necessary)
• A quasi-judicial body.
• Recommendations made are only advisory (not binding).
• Composition – Chairman + 4 members
• Qualifications – 4 members should be or have been qualified as High Court judges, or be knowledgeable in finance or experienced in financial matters and are in administration, or possess knowledge in economics.

Source: PIB

---

Previous Year Question

Consider the following:
1. Demographic performance
2. Forest and ecology
3. Governance reforms
4. Stable government
5. Tax and fiscal efforts
For the horizontal tax devolution, the Fifteenth Finance Commission used how many of the above as criteria other than population area and income distance?

[UPSC Civil Services Exam – 2023 Prelims]

(a) Only two
(b) Only three
(c) Only four
(d) All five

Answer: (b)
Explanation:
Criteria for horizontal devolution (Allocation Between the States) include: Income distance, area, population (2011), demographic performance, forest and ecology, and tax and fiscal efforts.

---