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15th Finance Commission interacts with Chairmen of previous Finance Commissions.

Focus:  GS 3;Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment. 

Why in News?

Towards the end of their deliberations, the Chairman Shri N.K Singh and Members of the 15th Finance Commission today held a virtual meeting with the Chairmen of previous Finance Commissions, Dr C. Rangarajan, Chairman 12th Finance Commission and Dr. Vijay Kelkar, Chairman 13th Finance Commission.

About Finance Commission (FC);-

  • The Finance Commission (FC) is constituted by the President of India every fifth year under Article 280 of the Constitution.
  • The Fifteenth Finance Commission (XV-FC) was constituted in November 2017 to give recommendations for vertical and horizontal devolution of taxes for five fiscal years, commencing 1 April 2020.
  • Finance Commission is a constitutional body, that determines the method and formula for distributing the tax proceeds between the Centre and states, and among the states.
  • Two distinctive features of the Commission’s work involve redressing the vertical imbalances between the taxation powers and expenditure responsibilities of the centre and the States respectively and equalization of all public services across the States.
Term of 15TH Finance Commission extended by one year
  • The Finance Commission also decides the share of taxes and grants to be given to the local bodies in states. This part of tax proceeds is called Finance Commission Grants, which is a part of the Union Budget.
  • The Finance Commission has a chairman and four members appointed by the President of India.
  • They hold office for such period as specified by the president in his order. They are eligible for reappointment.
  • The 15th Finance Commission was constituted by the President of India in November 2017, under the chairmanship of NK Singh. Its recommendations will cover a period of five years from April 2020 to March 2025.
  • The share of states in the center’s taxes is recommended to be decreased from 42% during the 2015-20 period to 41% for 2020-21.  The 1% decrease is to provide for the newly formed Union Territories of Jammu and Kashmir, and Ladakh from the resources of the central government.
  •  Criteria for Devolution (2020-21);-
Criteria 
Income Distance 
Population (1971 ) 
Population (2011 ) 
Forest Cover 
Forest and Ecology 
Demographic Performance 
Tax Effort 
Total 
14th FC 
2015-20 
50.0 
17.5 
10.0 
15.0 
7.5 
100 
5th Finance Commission; PE_ 
2020-21 
45.0 
100 
12.5 
2.5 
100

Functions of the Finance Commission;-

It is the duty of the Commission to make recommendations to the President as to:-

The distribution between the Union and the States of the net proceeds of taxes which are to be, or may be, divided between them and the allocation between the States of the respective shares of such proceeds.

The principles which should govern the grants-in-aid of the revenues of the States out of the Consolidated Fund of India.

The measures needed to augment the Consolidated 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.

Any other matter referred to the Commission by the President in the interests of sound finance.

          The Commission determines its procedure and have such powers in the performance of their functions as Parliament may by law confer on them.

Finance Commission and Qualifications of its Members;-

The Finance Commission is appointed by the President under Article 280 of the Constitution.   

As per the provisions contained in the Finance Commission [Miscellaneous Provisions] Act, 1951 and The Finance Commission (Salaries & Allowances) Rules, 1951, the Chairman of the Commission is selected from among persons who have had experience in public affairs, and the four other members are selected from among persons who:-

  • Are, or have been, or are qualified to be appointed as Judges of a High Court or
  • Have special knowledge of the finances and accounts of Government or
  • Have had wide experience in financial matters and in administration or
  • Have special knowledge of economics

The recommendations of the Finance Commission are implemented as under:-

Those to be implemented by an order of the President

  • The recommendations relating to distribution of Union Taxes and Duties and Grants-in-aid fall in this category.
  • Those to be implemented by executive orders.
  • Other recommendations to be made by the Finance Commission, as per its Terms of Reference

Need for a Finance Commission;-

  • The Indian federal system allows for the division of power and responsibilities between the centre and states.  Correspondingly, the taxation powers are also broadly divided between the centre and states. 
  • State legislatures may devolve some of their taxation powers to local bodies
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