FINANCE COMMISSION

FINANCE COMMISSION

CONTEXT: Arvind Panagariya, the former Chairman of 

NITI Aayog, has recently been named as the head of the 

16th Finance Commission.

Finance Commission in India:

€ The Finance Commission is a constitutional body that 

plays a crucial role in fiscal federalism. 

€ Constitutional Mandate: This quasi-judicial body 

is constituted under Article 280 of the Indian 

Constitution. It is formed every five years or at such 

intervals as deemed necessary by the President.

€ Objective: to address the distribution of financial 

resources between the Centre and the States.

 Functions:

 The Commission recommends the distribution of 

net proceeds of taxes between the Centre and the 

States.

 It suggests principles governing the grants-in-aid 

to be given to the States out of the Consolidated 

Fund of India.

 The Commission also evaluates the impact of the 

Centre’s debt on the fiscal autonomy of States.

 Composition:

 The Finance Commission comprises a Chairman 

and four other members.

 Members are appointed by the President, and 

they bring diverse expertise, including economics, 

finance, and public administration.

 Recommendations: It is required to make 

recommendations on the follow matters –

 Distribution of the taxes shared between the center 

and the states and allocation between the states

 The principles that governs the grants-in-aid to the 

states by the center

 The measure needed to argument the consolidated 

fund of the states to supplement the resources of 

the panchayat and the municipality in the states

What are the Major Terms of Reference for 

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.

PYQ (2023)

1. 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?

(a) Only two (b) Only three

(c) Only four (d) All five

Correct Option: (b)