Finance Commission

Article 280 of the Constitution provides for a Finance Commission. It states that the
President of India shall at the expiration of every fifth year, or earlier, constitute a
Finance Commission which shall consist of a Chairman and four other members
to be appointed by the President.

Function: The Commission shall make recommendations to the President with

respect to:

1. The distribution between the Union and the States of the net proceeds of
taxes and the allocation between the States of the respective shares of such
proceeds.

2. The principles which should govern the grants-in-aid of the revenues of the
States out of the Consolidated Fund of India and the sums to be paid to the
States by way of grants-in-aid of their revenues under Article 275 of the
Constitution.

3. 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.

4. The Commission shall 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.

5. Recommendations of Finance Commission together with an explanatory

memorandum as to the action taken thereon shall be laid before each House
of Parliament by the President

However, the role the recommendations of the Finance Commission are only
advisory in nature and not binding on the government.

15th Finance Commission

The Government of India, with the approval of the President of India, has constituted
15th Finance Commission as per Article 280(1) of the Constitution. This Commission
will be headed by Shri. N.K. Singh. The 15th FC shall recommend devolution of
taxes among states for period of five years commencing 1st April, 2020. The
Commission shall use the population data of 2011 while making its
recommendations.

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 be

provided at all.

Terms of Reference of 15 th FC: The Commission may consider 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, implementation of
flagship schemes of GOI etc.

Southern States Issues

Southern states have expressed their reservation to one particular mandate of the
present Fifteenth Finance Commission i.e. to use 2011 census population figures
instead of 1971 for the purpose of tax devolution. They have argued that a
“population-based formula” for tax-sharing between the Centre and states would
“hurt” South Indian states because Southern States have shown better adoption of
family planning and resultant reduction in population in comparison to northern
states.

The southern states demand that they should be incentivized, instead of being
penalized, for controlling population. They also argue that they pay higher taxes but
get less. This is not an encouraging trend for them. Hence , they want the allocation
of resources to better reflect their consistent effort in improving infrastructure,
governance, and industrial growth.They are demanding that the 15th Finance
Commission must 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 (a proxy for population control)

Challenges in front of 15th FC

 Promoting equity and efficiency will be the key challenge. The commission
has to take 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. In
the past, fiscal discipline and tax collection effort were also considered. But 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