The Hindu Editorial Analysis- 12th March 2024 | Current Affairs & Hindu Analysis: Daily, Weekly & Monthly - UPSC PDF Download

Central transfers and the issue of shares of some States

There are many issues; that the Sixteenth Finance Commission will have to deal with. In this article, we focus on an issue that has been raised by many States, particularly those in the south of India. The issue (or complaint) is that these States have been facing an in their Share out Of the transfer from the Centre to the States, from Finance Commission to Finance Commission.

• Arvind Panagariya, former Vice Chairman of NITI Aayog appointed as Chairman of the 16th Finance Commission.
• The 16th Finance Commission is tasked to submit its Report by October 31, 2025.
• Covers a period of five years from April 1, 2026.

Qualification:

Qualifications for appointment as, and the manner of selection of, members of the commission

The Chairman of the Commission shall be selected from among persons who have had experience in public affairs, and the four other members shall be selected from among persons who–

(a) are, or have been, or are qualified to be appointed as Judges of a High Court

(b) have special knowledge of the finances and accounts of the Government

(c) have had wide experience in financial matters and in administration

(d) have special knowledge of economics.

Major Terms of Reference for 16th Finance Commission:

1. Division of Tax Proceeds:
   • Recommend the allocation of taxes between the Union Government and the States according to Chapter I, Part XII of the Constitution.
   • Determine the distribution of shares among States from these tax proceeds.
2. Principles for Grants-in-Aid:
   • Establish principles governing grants-in-aid to States from the Consolidated Fund of India.
   • Determine the amounts to be provided to States as grants-in-aid under Article 275 of the Constitution.
3. Enhancing State Funds for Local Bodies:
   • Identify measures to boost the Consolidated Fund of a State to supplement resources available to Panchayats and Municipalities.
   • Based on recommendations from the State’s Finance Commission.
4. Evaluation of Disaster Management Financing:
   • Review current financing structures related to Disaster Management initiatives.
   • Examine funds created under the Disaster Management Act, 2005, and provide recommendations for improvements or alterations.

Key Recommendations of 15th Finance Commission:

1. Maintaining States' Share in Central Taxes:
   • Maintained states’ share in central taxes at 41% for the 2021-26 period, down slightly from the 42% allocated during 2015-20 by the 14th Finance Commission.
   • Adjustment made to accommodate the newly formed union territories of Jammu and Kashmir and Ladakh.
2. Fiscal Deficit Advisory:
   • Advised the Centre to limit its fiscal deficit to 4% of GDP by 2025-26.
3. Modernisation Fund for Defence and Internal Security:
   • Proposed the establishment of a Modernisation Fund for Defence and Internal Security.
4. Recommendations for Centrally Sponsored Schemes (CSS):
   • Recommendations include setting a threshold for annual CSS allocations.

What is the Finance Commission?

• The Finance Commission is a constitutional body established under Article 280 of the Indian Constitution.
• Its primary function is to recommend the distribution of financial resources between the central government and the state governments.
• The Fifteenth Finance Commission, made recommendations covering the period of six years commencing on April 1, 2020.
• Criteria include factors like income distance, area, population, demographic performance, forest cover, and tax and fiscal efforts.

Constitutional Provisions

• Article 268: Facilitates the levy of duties by the Centre, with collection and retention by the States.
• Article 280: Outlines the FC’s composition, qualifications for members, and its terms of reference. It mandates the FC to recommend the distribution of net tax proceeds between the Union and States and the allocation among States. It also addresses the financial relations between the Union and States and the devolution of unplanned revenue resources.

Key Functions of the Finance Commission

• Tax Devolution: Recommends the distribution of net tax proceeds between the Center and States.
• Grants-in-Aid: Determines the principles governing grants to States.
• Augmenting State Funds: Advises on measures to enhance States’ Consolidated Funds to support local bodies and panchayats, based on recommendations from State Finance Commissions.
• Other Financial Functions: Addresses any other financial matters referred by the President.

Members of the Finance Commission

• Structure and Standards: The Finance Commission (Miscellaneous Provisions) Act, 1951, establishes a structured format and aligns with global standards for the functioning of the Finance Commission.
• Qualifications and Powers: Specifies rules regarding the qualifications, disqualification, appointment, term, eligibility, and powers of the members.
• Composition: The Chairman is chosen for their extensive experience in public affairs. Other members are selected based on various criteria such as judicial experience, knowledge of government finances, administrative and financial expertise, or special economic knowledge.

Challenges for the 16th Finance Commission

• Overlap with GST Council: The coexistence with the GST Council, a permanent constitutional body, presents a new challenge.
• Conflict of Interest: Decisions by the GST Council on tax rates could impact the FC’s revenue-sharing calculations.
• Feasibility of Recommendations: While the Centre often adopts the FC’s suggestions on tax devolution and fiscal targets, other recommendations may be overlooked.

Major Outstanding Recommendations

• Fiscal Council Creation: The 15th FC proposed a Fiscal Council for collective macro-fiscal management, but the government has shown reluctance.
• Non-Lapsable Fund for Internal Security: Though the Centre agreed ‘in principle’ to establish this fund, its implementation details are pending.