The Finance Commission is a constitutional body in India that is periodically constituted by the President of India under Article 280 of the Indian Constitution to define the financial relations between the central government of India and the individual state governments.
The Commission is responsible for making recommendations to the President concerning the distribution of certain revenue resources between the Union and the State Governments.
The Commission is appointed every five years and consists of a chairman and four other members.
The Finance Commission in India has the following key functions:
Tax Revenue Distribution: Recommends how the net proceeds of taxes should be shared between the central and state governments.
Grants-in-Aid: Suggests principles for providing grants from the central government to the states.
Revenue Deficit Grants: Recommends measures to address the assessed revenue deficits of states.
Fiscal Consolidation: Offers suggestions for improving the financial positions of states and local bodies.
Review and Reports: Regularly reviews the financial positions of the central and state governments and submits reports with recommendations to the President of India.
Consultation: Consult with states, experts, and other stakeholders while formulating its recommendations.
These functions are aimed at promoting fiscal equity, transparency, and stability in the financial relations between the central and state governments.
The Union cabinet has recommended setting up the 16th Finance Commission to decide on the sharing of taxes between the Centre and the states, setting off speculation on the chairman and members of the Constitutionally mandated panel, whose award would be effective for five years, starting April 2026.
The 15th Finance Commission, commissioned on November 27, 2017, previously made recommendations covering the six-year term from April 1, 2020. The new commission's constitution is proposed in light of the 15th Finance Commission's recommendations being valid until the financial year 2025-26.
The Cabinet approved certain Terms of Reference for the 16th Finance Commission:
Division of Tax Proceeds: Recommending the distribution of taxes between the Union Government and the States under Chapter I, Part XII of the Constitution. This includes the allocation of shares among the States from these tax proceeds.
Principles for Grants-in-Aid: Establishing the principles governing grants-in-aid to the States from the Consolidated Fund of India. This encompasses determining the amounts to be provided to the States as grants-in-aid, specifically under Article 275 of the Constitution, for purposes beyond those outlined in the provisos to clause (1) of that article.
Enhancing State Funds for Local Bodies: Identifying measures to enhance the Consolidated Fund of a State. This is aimed at supplementing the resources available to Panchayats and Municipalities within the State, based on recommendations made by the State's own Finance Commission.
Evaluation of Disaster Management Financing: The Commission may review the current financing structures related to Disaster Management initiatives. This involves examining the funds created under the Disaster Management Act, 2005, and presenting suitable recommendations for improvements or alterations.
Overall, the idea behind the Finance Commission is to maintain fiscal federalism and ensure the financial autonomy of both the central and state governments.
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