The process of setting up the 16th Finance Commission will be started by the Central Government.
The Union Finance Ministry would normally notify the terms of reference of the Finance Commission and the Commission is normally provided with a time of about two years to consider the terms of reference, consult the states, and prepare its recommendations.
Important facts of the 16th Finance Commission
The 15th Finance Commission was set up in 2017 to make recommendations for a period of five years from 2020-21 and its mandate was extended by one year till 2025-26.
The last time a time limit of six years was given was for the 9th Finance Commission, which was set up in 1987.
A major new challenge for the 16th Finance Commission will be the co-existence of another permanent constitutional body, the GST Council.
According to experts, the GST Council’s decision on the change in tax rate may change the revenue calculation done by the Finance Commission for sharing of fiscal resources.
Finance Commission of India
- Indian Constitution under article 280 provides for a Finance Commission as a quasi-judicial body.
- The Commission is constituted by the president of India every fifth year or at such an earlier time as he considers necessary.
- The Commission consists of a chairman and four other members to be appointed by the president of India.
- The members hold office for such a period as specified by the president in his order.
- They are eligible for reappointment.
- Qualification of members: The Constitution authorizes the Parliament of India to determine the qualifications of members of the commission and the manner in which they should be selected.
- The Parliament has specified certain qualifications for the selection of the chairman and 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 a high court or one qualified to be appointed as one.
- A person who has specialised knowledge of finance and accounts of the government.
- A person who has wide experience in financial matters and administration.
- A person who has special knowledge of economics.
- The Commission is required to make recommendations to the Indian president on the following matters:
- The distribution of the net proceeds of taxes to be shared between the Centre and the states, and the allocation between the states of the respective shares of such proceeds.
- The principles that should govern the grants-in-aid to the states by the Centre.
- The measures needed to augment the consolidated fund of a state to supplement the resources of the panchayats and the municipalities in the state.
- Any other matter referred to it by the president in the interests of sound finance.
- The recommendations made by the Commission are only of advisory nature and are not binding on the government.
- It is up to the Union government to implement its recommendations on granting money to the states.
- The commission submits its report to the president of India.
- The President lays it before both Houses of Parliament along with an explanatory memorandum as to the action taken on its recommendations.
Finance Commission Member
The Finance Commission consists of a Chairman along with four other members who are appointed by the President of India.
The members of the Finance Commission hold office for a term specified by the President in his order.
The Constitution has empowered the Parliament to determine the procedure for the selection of the members of the Finance Commission and their qualifications accordingly.
Such a person is appointed as the chairman of the Finance Commission, who has sufficient experience in public affairs.
Prescribed qualifications for the members of the Finance Commission –
- Judge of a High Court or a person qualified for the post.
- A person who has special knowledge of finance and accounts matters of India.
- A person having wide knowledge and experience in administration as well as financial and economic matters.
- A person who has special knowledge of economics.
The President of India specifies the tenure of the members of the Finance Commission.
Normally the members are appointed for a term of 5 years, but the members can be re-appointed under certain conditions.
Functions of the Finance Commission
Article 280(3) deals with the functions of the Finance Commission, according to which it shall be the duty of the Finance Commission to make recommendations to the President on the following matters –
- Distribution of net taxable income between the Center and the States and its allocation among the States.
- Principles governing grants-in-aid to the States by the Central Government out of the Consolidated Fund of India.
- Necessary steps to expand the Consolidated Fund of the State to boost the resources of the Panchayats and Municipalities of the State based on the recommendations made by the State Finance Commission.
- Any matter referred to the Commission by the President in the interest of sound finance.