Finance Commission Explained

Agency Name:Sixteenth Finance Commission of India
Nativename R:Vitta Āyoga
Type:Commission
Jurisdiction: Government of India
Headquarters:New Delhi
Chief1 Name:Arvind Panagariya
Chief1 Position:(Chairman)
Chief2 Name:Ajay Narayan Jha
Chief2 Position:(Member)
Chief3 Name:Annie George Mathew
Chief3 Position:(Member)
Chief4 Name:Dr.Manoj Panda
Chief4 Position:(Member)
Chief5 Name:Soumya Kanti Ghosh
Chief5 Position:(Part- Member)
Chief6 Name:Ritvik Ranjanam Pandey, IAS
Chief6 Position:(Secretary)

The Finance Commissions (IAST: Vitta Āyoga) are commissions periodically constituted by the President of India under Article 280 of the Indian Constitution to define the financial relations between the central government of India and the individual state governments. The First Commission was established in 1951 under The Finance Commission (Miscellaneous Provisions) Act, 1951. Fifteen Finance Commissions have been constituted since the promulgation of Indian Constitution in 1950. Individual commissions operate under the terms of reference which are different for every commission, and they define the terms of qualification, appointment and disqualification, the term, eligibility and powers of the Finance Commission.[1] As per the constitution, the commission is appointed every five years and consists of a chairman and four other members.

The most recent Finance Commission was constituted on 31st December 2023 and is chaired by Arvind Panagariya former Vice Chairman of NITI Aayog.[2]

History

As a federal nation, India suffers from both vertical and horizontal fiscal imbalances. Vertical imbalances between the central and state governments result from states incurring expenditures disproportionate to their sources of revenue, in the process of fulfilling their responsibilities. However, states are better able to gauge the needs and concerns of their inhabitants and therefore more efficient at addressing them. Horizontal imbalances among state governments result from differing historical backgrounds or resource endowments and can widen over time.

Several provisions to bridge the fiscal gap between the centre and the states were already enshrined in the Constitution of India, including Article 268, which facilitates the levy of duties by the centre but equips the States to collect and retain the same. Similarly, Articles 269, 270, 275, 282 and 293, among others, specify ways and means of sharing resources between the Union and States. In addition to the above provisions, the finance commission serves as an institutional framework to facilitate Centre-State Transfers.

Article 280 of the Indian Constitution defines the scope of the commission:

  1. The President will constitute a finance commission within two years from the commencement of the Constitution and thereafter at the end of every fifth year or earlier, as deemed necessary by him/her, which shall include a chairman and four other members.
  2. Parliament may by law determine the requisite qualifications for appointment as members of the commission and the procedure of selection.
  3. The commission is constituted to make recommendations to the president about the distribution of the net proceeds of taxes between the Union and States and also the allocation of the same among the States themselves. It is also under the ambit of the finance commission to define the financial relations between the Union and the States. They also deal with the devolution of unplanned revenue resources.

Functions

  1. Distribution of 'net proceeds' of taxes between Center and the States, to be divided as per their respective contributions to the taxes.
  2. Determine factors governing Grants-in-Aid to the states and the magnitude of the same.
  3. 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.
  4. Any other matter related to it by the president in the interest of sound finance.

The Finance Commission (Miscellaneous Provisions) Act, 1951

The Finance Commission (Miscellaneous Provisions) Act, 1951 was passed to give a structured format to the finance commission and to bring it to par with world standards, by laying down rules for the qualification and disqualification of members of the commission, and for their appointment, term, eligibility and powers.[3]

Qualifications of the members

The chairman of a finance commission is selected from people with experience of public affairs. The other four members are selected from people who:

  1. Are, or have been, or are qualified, as judges of a high court,
  2. Have knowledge of government finances or accounts, or
  3. Have had experience in administration and financial expertise; or
  4. Have special knowledge of economics

Disqualification from being a member of the commission

A member may be disqualified if:

  1. He is mentally unsound; and as follows-
  2. He is an undischarged insolvent;
  3. He has been convicted of an immoral offence;
  4. His financial and other interests are such that it hinders the smooth functioning of the commission.

Terms of office of members and eligibility for reappointment

Every member will be in office for the time period as specified in the order of the President, but is eligible for reappointment provided he has, by means of a letter addressed to the president, resigned his office.

Salaries and allowances of the members

The members of the commission shall provide full-time or part-time service to the commission, as the President specifies in his order. The members shall be paid salaries and allowances as per the provisions made by the Central Government.

List of Finance Commissions

So far 15 Finance Commissions have been appointed which are as follows:[4]

Finance CommissionYear of establishmentChairmanOperational duration
First1951K. C. Neogy1952–57
Second1956K. Santhanam1957–62
Third1960A. K. Chanda1962–66
Fourth1964P. V. Rajamannar1966–69
Fifth1968Mahavir Tyagi1969–74
Sixth1972K. Brahmananda Reddy1974–79
Seventh1977J. M. Shelat1979–84
Eighth1983Y. B. Chavan1984–89
Ninth1987N. K. P. Salve1989–95
Tenth1992K. C. Pant1995–00
Eleventh1998A. M. Khusro2000–05
Twelfth2002C. Rangarajan2005–10
Thirteenth2007Dr. Vijay L. Kelkar2010–15
Fourteenth[5] 2013Dr. Y. V Reddy2015–20
Fifteenth[6] 2017N. K. Singh2020-21; 2021-26
Sixteenth2023Arvind Panagariya2026 - 31

14th Finance Commission

See main article: Fourteenth Finance Commission of India. Major Recommendations of 14th Finance Commission headed by Prof. Y V Reddy

  1. The share of states in the net proceeds of the shareable Central taxes should be 42%. This is 10 percentage points higher than the recommendation of 13th Finance Commission.
  2. Revenue deficit to be progressively reduced and eliminated.
  3. Fiscal deficit to be reduced to 3% of the GDP by 2017–18.
  4. A target of 62% of GDP for the combined debt of centre and states.
  5. The Medium Term Fiscal Plan (MTFP) should be reformed and made the statement of commitment rather than a statement of intent.
  6. FRBM Act needs to be amended to mention the nature of stocks which shall require targets relaxation.
  7. Both centre and states should conclude 'Grand Bargain' to implement the model Goods and Services Act (GST).
  8. Initiatives to reduce the number of Central Sponsored Schemes (CSS) and to restore the predominance of formula-based plan grants.
  9. States need to address the problem of losses in the power sector in time bound manner.

15th Finance Commission

See main article: Fifteenth Finance Commission of India. The Fifteenth Finance Commission was constituted by the Government of India, after the approval from the President of India, through a notification in the Gazette of India in November 2017.[7] [8] Nand Kishore Singh was appointed as the commission's chairman, with its full-time members being Shaktikanta Das and Anoop Singh and its part-time members being Ramesh Chand and Ashok Lahiri.[9] [10] [11] [12] However Ajay Narayan Jha was appointed replacing Shaktikanta Das who resigned from the commission to serve as the governor of the Reserve Bank of India.

The commission was set up to give recommendations for five years commencing on 1 April 2020. The main tasks of the commission were to "strengthen cooperative federalism, improve the quality of public spending and help protect fiscal stability".[13] [14] Some newspapers like The Hindu and The Economic Times noted that commission's job was harder because of the rollout of goods and service tax (GST), as, it had taken certain powers related to taxation away from states and the Union and had given it to the GST Council.[15] [16]

Finance Commission allocation

First Finance Commission proposed, the percentage share of net proceeds of income-tax assigned to the states should be following manner:[17]

First Finance commission 1952
State% of share
Bombay17.5
U.P15.75
Madras15.25
West Bengal11.2
Bihar9.75
Madhya Pradesh5.25
Hyderabad4.5
Odisha3.5
Rajasthan3.5
Punjab3.25
Travancore2.5
Assam2.25
Madhya Bharat1.75
Saurashtra1
PEPSU0.75
!State!2nd FC % of share!3rd FC % of share!4th FC % of share!5th FC % of share
Uttar Pradesh16.3614.4214.616.01
Bombay15.9713.4114.2811.4
West Bengal10.0912.0910.919.11
Bihar9.949.739.039.99
Madras8.48.138.348.18
Andhra Pradesh8.127.717.348.01
Madhya Pradesh6.426.416.477.09
Mysore5.145.135.145.4
Gujarat4.785.295.13
Punjab4.244.494.362.55
Rajasthan4.093.973.974.34
Odisha3.733.443.43.75
Kerala3.643.353.593.83
Assam2.442.442.442.67
Jammu & Kashmir1.080.70.730.79
Haryana1.73
Union Territory132.52.6
Nagaland0.070.08
State 6th Fin. Com. % of share 7th Fin. com. % of share 8th Fin. Com. % of share 9th Fin. Com. % of share
Uttar Pradesh 15.23 15.42 17.907 16.786
Maharashtra 11.05 10.95 8.392 8.191
Bihar 9.61 9.53 12.08 12.418
West Bengal 8.89 8.015 7.8 7.976
Tamilnadu 7.94 8.05 7.565 7.931
Andhra Pradesh 7.76 8.021 8.187 8.208
Madhya Pradesh 7.3 7.35 8.378 8.185
Gujarat 5.55 5.96 4.049 4.55
Karnataka 5.33 5.44 4.979 4.928
Rajasthan 4.5 4.362 4.545 4.836
Kerala 3.92 3.95 3.76 3.729
Odisha 3.73 3.738 4.202 4.326
Punjab 2.75 2.73 1.744 1.706
Assam 2.54 2.52 2.879 2.631
Haryana 1.77 1.819 1.074 1.224
Jammu Kashmir 0.81 0.818 0.838 0.695
Himachal Pradesh 0.6 0.595 0.555 0.595
Tripura 0.27 0.26 0.269 0.303
Manipur 0.18 0.19 0.22 0.171
Meghalaya 0.180.18 0.184 0.208
Goa NA NA NA 0.11
Nagaland 0.09 0.085 0.088 0.096
Mizoram NA NA NA 0.073
Sikkim NA 0.035 0.035 0.03
!State!10th FC %!11th FC %!12th FC %!13th FC %!14th FC %!15th FC %
Andhra Pradesh8.4657.7017.366.9374.3054.047
Arunachala pradesh0.2440.3281.371.757
Assam2.7843.2853.243.6283.3113.128
Bihar12.86114.59711.0310.9179.66510.058
Chhattisgarh2.652.473.083.407
Goa0.180.2060.2660.3780.386
Gujarat4.4062.8213.573.0413.0843.478
Haryana1.2380.9441.081.0481.0841.093
Himachal Pradesh0.7040.6830.520.7810.7130.83
Jammu & Kashmir1.0971.291.5511.854
Jharkhand3.362.8023.1393.307
Karnataka5.3394.934.464.3284.7133.647
Kerala3.8393.0572.672.3412.51.925
Madhya Pradesh8.298.8386.717.127.5487.85
Maharashtra8.1264.63255.1995.5216.317
Manipur0.2820.3660.4510.6170.716
Meghalaya0.2830.3420.4080.6420.767
Mizoram0.1490.1980.2690.460.5
Nagaland0.1810.220.3140.4980.569
Odisha4.4955.0565.164.7794.6424.528
Punjab1.4611.1471.31.3891.5771.807
Rajasthan5.5515.4735.615.8535.4956.026
Sikkim0.1260.1840.2390.3670.388
Tamil Nadu6.6375.3855.314.9694.0234.079
Telangana2.4372.102
Tripura0.3780.4870.5110.6420.708
Uttar Pradesh17.81119.79819.2619.67717.95917.939
Uttarakhand1.121.0521.118
West Bengal7.4718.1167.067.2647.3247.523

See also

External links

Notes and References

  1. Web site: The Finance (Miscellaneous Provisions) Act, 1951. 24 November 2017.
  2. Web site: 2024-01-31 . Govt appoints four new members to 16th Finance Commission . 2024-04-02 . The Indian Express . en.
  3. The Finance Commission (Miscellaneous Provisions) Act . 33 . 1951 . 2017-07-22.
  4. Web site: Reports of the Finance Commissions of India . 2014-07-10.
  5. Web site: Terms of Reference of the Fourteenth Finance Commission . 2014-07-10.
  6. Web site: Terms of Reference of the Fifteenth Finance Commission . 2017-06-12.
  7. Web site: S.O. 3755(E).—The following order made by the President is to be published for general information:— ORDER. 27 November 2017. The Gazette of India. Department of Economic Affairs, Government of India. New Delhi. 20 January 2018.
  8. Web site: Constitution of Fifteenth Finance Commission Notified. 27 November 2018. Press Information Bureau of India. 20 January 2018.
  9. Web site: N.K. Singh heads 15th Finance Commission, Shaktikanta Das a member. 27 November 2017. Business Standard. New Delhi. 15 January 2018.
  10. Web site: NK Singh appointed Chairman of 15th Finance Commission. 27 November 2017. The Hindu Business Line. New Delhi. 15 January 2018.
  11. Web site: N.K. Singh appointed chairman of 15th Finance Commission. 27 November 2017. Livemint. HT Media Ltd. New Delhi. 15 January 2018.
  12. Web site: Former Planning Commission Member NK Singh Appointed 15th Finance Commission Chairman. 28 November 2017. NDTV. New Delhi. 15 January 2018.
  13. Web site: The tasks for the 15th Finance Commission. 6 December 2017. Livemint. HT Media Ltd. 20 January 2018.
  14. News: Agenda for 15th Finance Commission. Chandrasekhar. K. M.. 30 October 2017. Business Standard. 26 March 2018. 496280002. subscription .
  15. News: New India formula? – on the 15th Finance Commission. 6 December 2017. The Hindu. 26 March 2018. Editorial. 0971-751X. 13119119.
  16. News: The challenges before 15th Finance Commission are many. Srinivas. V.. 4 January 2018. The Economic Times. 26 March 2018. Indo-Asian News Service. 61311680. 27 March 2018. https://web.archive.org/web/20180327025101/https://economictimes.indiatimes.com/news/economy/policy/the-challenges-before-15th-finance-commission-are-many/articleshow/62366288.cms. dead.
  17. https://fincomindia.nic.in/commission-reports
  18. https://prsindia.org/files/policy/policy_committee_reports/Report%20Summary_15th%20FC_2021-26.pdf

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