The Finance Commission of India, a constitutional body, plays a pivotal role in the fiscal federalism of the country by recommending the distribution of financial resources between the Union and the States. Constituted every five years, its composition and terms of reference are crucial aspects that shape the economic landscape of the nation. The Commission comprises a Chairman and four other members, each possessing a deep understanding of finance, economics, or public administration. The President of India appoints the members, and their tenure is generally aligned with the planning cycle. The constitutional mandate directs the Commission to assess the revenue position of both the Union and the States, consider factors affecting the distribution of resources, and recommend principles for sharing taxes and grants-in-aid.
Tag: Appointment to various Constitutional posts, powers, functions, and responsibilities of various Constitutional Bodies.
Decoding the Question:
- In the Introduction, try to briefly write about the Finance Commission (FC) and how it is constituted.
- In Body,
- Briefly write about the 15th Finance Commission and discuss its terms of reference.
- In Conclusion, try to write about the overall importance of the Finance Commission.
Answer:
The Finance Commission is a Constitutionally mandated quasi-judicial body that is at the center of fiscal federalism. Article 280 of the Constitution of India provides for a Finance Commission (FC) consisting of a chairperson and four other members. They are appointed by the President, every 5th year or at such an earlier time as he considers necessary.
Composition of Finance Commission:
- The Finance Commission consists of a chairman and four other members to be appointed by the President.
- They are eligible for reappointment and hold office for such a period as specified by the President in his order.
- The Constitution authorizes the Parliament to determine the qualifications of members of the commission and the manner of selection.
- The Parliament has specified the qualifications of the chairman and members of the commission. Its chairman should be a person having experience in public affairs, and the other members should be selected from amongst the following:
- A judge of the High court or one qualified to be appointed as one.
- A person who has specialized knowledge of finance and accounts of the government.
- A person who has wide experience in financial matters and in administration.
- A person who has special knowledge of economics.
Fifteenth Finance Commission: The Fifteenth Finance Commission was constituted in 2017 under the chairmanship of N. K. Singh, against the backdrop of the abolition of the Planning Commission and the introduction of the goods and services tax (GST), which has fundamentally redefined federal fiscal relations. Its recommendations are applicable for five years from the year 2021-22 to 2025-26.
Terms of Reference of 15th FC:
- Use of Census 2011 for distribution of tax revenue between centre and states: Previously FCs were using 1971 Census, but using 2011 Census might lead to smaller share of revenue for some states, mainly Southern States, which have stabilized their population over the period.
- Progress made in promoting ease of doing business: This has raised concerns as this does not consider geographical limitations of a state.
- Control over expenditure on populist measures by states: This appears to challenge the decision-making ability of state government. What may appear to be a populist measure, can also be a necessity in a particular state.
- Examine whether revenue deficit grants should be provided at all
- Though in line with the Fiscal Responsibility and Budget Management Act, 2003, which recommends zero revenue deficit, it is important for states with persistent deficits.
- The Commission shall use the population data of 2011 while making its recommendations.
- Progress made by states in sanitation, solid waste management and bringing in behavioral change to end open defecation.
- Achievements of states in the implementation of flagship schemes of Government of India, disaster resilient infrastructure, sustainable development goals, and quality of expenditure.
As per the Constitution, the Finance Commission is a balancing wheel of fiscal federalism in India. It is one of the most important organs for unitary administration in India, working towards enhanced cooperative, competitive, and fiscal federalism. However, there are various concerns, such as decrease in the share of devolutions of the southern states from the central government, etc. which are required to be addressed for redressing the vertical imbalances between the taxation powers.
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