Finance Commission

10 Nov 2023 Finance Commission

This article covers “Daily Current Affairs” and the topic details “Finance Commission”. This topic has relevance in the “Polity and Governance” section of the UPSC CSE exam.

For Prelims:
What is Finance Commission?
Appointment, Eligibility Criteria?

For Mains:
GS2:  Polity and Governance
Appointment to various Constitutional posts, powers, functions and responsibilities of various Constitutional Bodies.

Why in the news?

The government has begun the constitution process for the Sixteenth Finance Commission. This commission, crucial for determining the tax-sharing formula between the Centre and states, is expected to be formed by the end of this year.

Finance Commission

• The Finance Commission, established as a constitutional body, provides recommendations on distributing tax revenues among the Union and the States and the States themselves. 
• It is constituted by the President under Article 280 of the Constitution, occurring at the end of every fifth year or earlier if deemed necessary.

Composition

• The Commission comprises a chairman and four members appointed by the President.
• They serve for a period specified by the president in his order and are eligible for reappointment.
• The Constitution authorises Parliament to determine commission members’ qualifications and selection process.
• The Parliament, under the Finance Commission (Miscellaneous Provisions) Act, 1951, has specified the qualifications for the chairman and members:
  • Chairman: Must have experience in public affairs.
  • Members: Can be selected from among individuals with the following qualifications:
    • A high court judge or someone qualified to be appointed as one.
    • A person with specialised knowledge of government finance and accounts.
    • Someone with extensive experience in financial matters and administration.
    • An individual with exceptional knowledge of economics.

Functions:

The Commission is tasked with making recommendations to the President on:

• The distribution of net tax proceeds between the Centre and states and the allocation among states.
• Principles governing grants-in-aid to states from the Consolidated Fund of India.
• Based on state finance commission recommendations, measures to augment a state’s consolidated fund to support resources for panchayats and municipalities.
• Any other matter referred by the President in the interests of sound finance.

Nature of FC’s Recommendations:

• The Constitution does not mandate that the Commission’s recommendations be binding or confer a legal right on beneficiary states to receive the recommended funds.
• The Union government can decide whether to implement the Commission’s suggestions regarding financial allocations to states.

Achievements:

• The Finance Commission of India has significantly reduced vertical and horizontal fiscal imbalances, accomplishing its core objectives.
• It has played a pivotal role in promoting cooperative federalism by serving as a platform for dialogue and negotiation between the central and state governments.

The Finance Commission is a valuable institution that plays a vital role in Indian fiscal federalism. However, it can be improved by making its formula for distributing tax revenues more transparent and giving more weight to the needs of special category states and new fiscal challenges.

Sources: Govt begins process of constituting Sixteenth Finance Commission | Business News – The Indian Express 

Download Yojna daily current affairs eng med 10th November 2023

Q1. With reference to the Finance Commission, consider the following statements: 

1. It is established as a constitutional body. 
2. It provides recommendations on distributing tax revenues among the Union and the States and the Local Bodies. 

Which of the statements given above is/are correct?

(a) 1 only

(b) 2 only

(c) Both 1 and 2 

(d) None 

Answer: (a) 

Q2. Consider the following statements regarding the Finance Commission: 

1. The Constitution has specified the qualifications for the chairman and members.
2. The Commission’s recommendations are advisory and not binding on the government.
3. The Commission plays a vital role in Indian fiscal federalism.

How many of the abovementioned statements are correct?

(a) Only one 

(b) Only two 

(c) All three 

(d) None

Answer: (b)

Q3. The Finance Commission is regarded as a balancing wheel of fiscal federalism in India. Discuss. 

Gaurav N