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Will states get 42% or more from central taxes? Watch out for the 15th Finance Commission report

The government will table the report of the 15th Finance Commission, headed by economist and top policymaker NK Singh, on February 1, 2020.

January 31, 2020 / 10:59 AM IST

Here's a lowdown on Finance Commission's mandate and role in India's macro-economic management:

What is the Finance Commission?

The Finance Commission is a body set up under Article 280 of the Constitution, primarily to recommend measures and methods on how revenues, which the government earns through various taxes, need to be distributed the Centre and states.

What are the functions of the Finance Commission?

Two distinctive features of the Commission's work involve redressing the imbalances between the taxation powers and expenditure responsibilities of the centre and the States respectively and equalisation of all public services across the states. The 13th finance commission headed by former Finance Secretary Vijay Kelkar had suggested 32 percent share for the states in the central revenues; the 14th Finance Commission headed by former Reserve Bank of India (RBI) governor YV Reddy raised the share of states to 42 percent.


All eyes will be on whether the 15th Finance Commission has maintained a status quo for now, by recommending that the devolution of the divisible tax pool to states be kept at the existing 42 percent for 2020-21.

For the states, how important is the role of the Commission for the management of their finances?

It is the duty of the Finance Commission to make recommendations to the government on distribution on the distribution of net tax revenues between the Centre and states and also the allocation the states of the respective shares of such proceeds. The Finance Commission is also mandated to recommend measures to govern the grants-in-aid of the revenues of the states out of the Consolidated Fund of India (CFI).

Besides, it recommends measures to needed to augment the Consolidated Fund of a State to supplement the resources of the Panchayats in the state on the basis of the recommendations made by the respective state finance commissions.

In addition, it is the mandate of the finance commission to recommend measures needed to boost the Consolidated Fund of a State to supplement the resources of the municipalities in the State.

Who appoints the Finance Commission and what are the qualifications for Members?

The Finance Commission, which is headed by a Chairman and has four other members, 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.

How are the four other members selected?

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;  have special knowledge of the finances and accounts of government; have had wide experience in financial matters and in administration; have special knowledge of economics

How are the recommendations of Finance Commission implemented?

The recommendations relation to distribution of central taxes and grants-in-aid are implemented by an order of the President. Other recommendations such as those relating to sharing of profit petroleum, debt relief and other central assistances are implemented by an executive order.

When was the first Commission appointed and how many Commissions have been appointed so far?

The First Finance Commission was constituted in 1951 headed by KC Neogy.  Fifteen Finance Commissions have been appointed so far at intervals of every five years.

Is the Finance Commission unique to India?

Most federal systems resolve the fiscal imbalances through mechanisms similar to the Finance Commission. For example, Australia and Canada, have systems similar to India's finance commmission.

What was the mandate of the 14th finance commission?

The 15th Finance Commission was constituted on November 27, 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), which has fundamentally redefined federal fiscal relations.

The Terms of Reference of the current commission have some distinctive features, including recommending monitorable performance criteria for important national flagship programmes and examining the possibility of setting up a permanent non-lapsable funding for India’s defence needs.

The reorganisation of the state of Jammu and Kashmir into two Union Territories – one of Jammu and Kashmir and one of Ladakh – presents a new dynamic. On the whole, the Finance Commission faces new challenges in the process of the evolution of our federal polity.

Has the Fifteenth Finance Commission submitted its report?

It has submitted its interim report for the financial year 2020-21 to President Ram Nath Kovind in December. The interim report will be tabled in Parliament on January 31 and made public.

In November, the Cabinet had extended Fifteenth Finance Commission's term by eleven months. The commission will submit a full report for fiscal years 2021-22 to 2025-26.

The extra time had been given for the new union territories of Jammu and Kashmir and Ladakh.
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first published: Jan 31, 2020 09:34 am
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