POLITY

Finance Commission

Breaking Down the Basics

The Finance Commission (FC) was established by Dr. B R Ambedkar in 1951, in order to address fiscal imbalances.
It is a constitutionally mandated body that is at the centre of fiscal federalism.
It determines the method and formula for distributing the tax proceeds between the centre and states, and among the states as per the constitutional arrangement and present requirements.
FC makes recommendations to contribute towards improved quality of fiscal spending and fiscal stability.

POI –

Since the first FC in 1951 there have been 15 FCs so far, with the 15th Finance Commission being set up on 27 November 2017.
Shri N K Singh is the Chairman of the 15th Finance Commission of India.
The Finance Commission is constituted by the President under Article 280 of the Constitution, to give its recommendations on distribution of tax revenues between the Union and the States and amongst the States.
It is an autonomous body which is governed by the Government of India.

Functions

Distribution of ‘net proceeds’ of taxes between Centre and the States, to be divided as per their respective contributions to the taxes.
Determining factors governing Grants-in-Aid to the states and the magnitude of the same.
To make recommendations to the president as to the measures needed to augment the Fund of a State to supplement the resources of the panchayats and municipalities in the state on the basis of the recommendations made by the finance commission of the state.
Review the current status of the finance, deficit, debt levels, cash balances and fiscal discipline efforts of the Union and the States, and recommend a fiscal consolidation roadmap for sound fiscal management.

Important – The recommendations of the Finance Commission are only advisory in nature and not binding on the government.

Scope of the Commission

15th Finance Commission – Cade Study on the current FC

Constituted on 27 November 2017 against the backdrop of the abolition of Planning Commission (as also of the distinction between Plan and non-Plan expenditure) and the introduction of the goods and services tax (GST).
Chairman – Nand Kishore Singh
Full time members – Anoop Singh, Ajay Narayan Das
Part time members – Ramesh Chand Ashok Lahiri

Current Affairs POI – Shaktikanta Das, Governor of Reserve Bank of India (RBI), resigned as permanent member of the 15th FC to serve as Governor; replaced by Ajay Narayan Das.

Set up to give recommendations for 5 years commencing on 1 April 2020.
Critics comment that rollout of GST has taken certain powers related to taxation away from states and the Union and had given it to the GST Council.
Mandate:
The Commission shall review the current status of finance deficit, debt levels, cash balances and fiscal discipline efforts of the Union and the States;
Recommend a fiscal consolidation roadmap for sound fiscal management, taking into account the responsibility of the Central Government and State Governments to adhere to appropriate levels of general and consolidated government debt and deficit levels;
Foster higher inclusive growth in the country guided by the principles of equity, efficiency and transparency;
The Commission may also examine whether revenue deficit grants ought to be provided at all.
Term of Reference:
Recommending monitorable performance criteria for important national flagship programmes.
Examining the possibility of setting up a permanent non lapsable funding for India’s defence needs.
Proposing measurable performance-based incentives for states, at the appropriate level of government, in areas like deepening of tax net under GST, efforts and progress made in moving towards replacement rate of population growth.

Challenges

Promoting equity and efficiency will be the key challenge taking into account regional imbalances, the relative resource base, cost disabilities due to geography, historical circumstances, and remoteness in the case of some special category states in the North East.
Another major challenge is to work out incentives for achieving efficiency. As the previous commissions pointed out, the major constraint in designing forward-looking incentives is the unavailability of real-time data to judge performances of states.
Protest from Southern States
Southern States are against using 2011 census population figures instead of 1971 for the purpose of tax devolution.
Why? As “population-based formula” for tax-sharing between the Centre and states would “hurt” South Indian states because they have shown better adoption of family planning and resultant reduction in population in comparison to northern states.
Argue that they pay higher taxes, but get less.
Demands –
they should be incentivized, instead of being penalized, for controlling population
allocation of resources to better reflect their consistent effort in improving infrastructure, governance, and industrial growth.
Bring new thinking to the table & give incentives to tax mobilization effort, growth engines like Bengaluru, Hyderabad, Coimbatore, Kochi etc., and education & empowerment of women.