The Union Cabinet gave its nod to the ‘Terms of Reference’ or ToR for the 16th Finance Commission
Key Points Regarding the 16th Finance Commission
- Union Minister Anurag Thakur announced that the recommendations, spanning a five-year period from April 1, 2026
- The 15th Finance Commission, commissioned on November 27, 2017, previously made recommendations covering the six-year term from April 1, 2020.
- The new commission’s constitution is proposed in light of the 15th Finance Commission’s recommendations being valid until the financial year 2025-26.
- It may be noted that Article 280(1) of the Constitution outlines the procedures for establishing a Finance Commission.
Terms of Reference (ToR) for the 16th Finance Commission
- Recommending the distribution of taxes between the Union Government and the States under Chapter I, Part XII of the Constitution.
- Establishing the principles governing grants-in-aid to the States from the Consolidated Fund of India.
- This encompasses determining the amounts to be provided to the States as grants-in-aid, specifically under Article 275 of the Constitution, for purposes beyond those outlined in the provisos to clause (1) of that article.
- Identifying measures to enhance the Consolidated Fund of a State.
- This is aimed at supplementing the resources available to Panchayats and Municipalities within the State, based on recommendations made by the State’s own Finance Commission.
- The Commission may review the current financing structures related to Disaster Management initiatives.
- This involves examining the funds created under the Disaster Management Act, 2005, and presenting suitable recommendations for improvements or alterations.
Process of the Finance Commission’s Work
The process of transferring money to states involves the recommendations made by the Finance Commission.
- Finance Commission formation: The Finance Commission is constituted every fifth year or earlier, as per the constitutional provisions.
- Terms of Reference (ToR):The Cabinet approves the Terms of Reference for the Finance Commission. These ToR outline the specific areas that the commission should consider while making its recommendations.
- Consultative process: Before finalising its recommendations, the Finance Commission engages in a consultative process. Views and suggestions are sought from state governments and Union Territories with a legislature.
- Recommendations: The Finance Commission submits its report, which includes recommendations, to the President of India. These recommendations cover a specified period, usually five years.
- Implementation: The government, based on the recommendations of the Finance Commission, takes steps to implement the suggested fiscal measures.
- Transfer of funds: The actual transfer of funds to states occurs through various channels. This includes the devolution of a portion of the central taxes, grants-in-aid, and other financial assistance as recommended by the Finance Commission.
- Monitoring and review: The implementation of the Finance Commission’s recommendations is monitored over the specified period
About the Finance Commission
- Indian Constitution under article 280 provides for a Finance Commission as a quasi-judicial body.
- It is constituted by the president of India every fifth year or at such an earlier time as he considers necessary.
- The Commission consists of a chairman and four other members to be appointed by the president of India.
- The members hold office for such a period as specified by the president in his order.
- They are eligible for reappointment.
- The commission submits its report to the president of India.
- The President lays it before both Houses of Parliament along with an explanatory memorandum as to the action taken on its recommendations.
Qualifications of Finance Commission Members
- The Constitution authorizes the Parliament of India to determine the qualifications of members of the commission and the manner in which they should be selected.
- The Parliament has specified certain qualifications for the selection of the chairman and members of the commission.
- The chairman should be a person having experience in public affairs and the four other members should be selected from amongst the following:
- A judge of a high court or one qualified to be appointed as one.
- A person who has specialised knowledge of finance and accounts of the government.
- A person who has wide experience in financial matters and administration.
- A person who has special knowledge of economics.
Recommendation of the Finance Commission
- The Commission is required to make recommendations to the Indian president on the following matters:
- The distribution of the net proceeds of taxes to be shared between the Centre and the states, and the allocation between the states of the respective shares of such proceeds.
- The principles that should govern the grants-in-aid to the states by the Centre.
- The measures needed to augment the consolidated fund of a state to supplement the resources of the panchayats and the municipalities in the state.
- Any other matter referred to it by the president in the interests of sound finance.
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