- The terms of reference (ToR) for the Sixteenth Finance Commission were adopted by the Union Cabinet.
- For the term beginning April 1, 2026, the Commission will develop a mechanism for income distribution between the Centre and the States.
About
- The Finance Commission (FC) of India was constituted by the President of India in 1951 under Article 280 of the Indian Constitution.
- Its principal function is to define and regulate the financial relationships between the federal government and the several state governments.
- The Finance Commission (Miscellaneous Provisions) Act, 1951, defines the Finance Commission’s qualifications, appointment, disqualification, term, eligibility, and powers.
- The FC is made up of a chairman and four additional members who are appointed every five years.
- Changes in India’s macroeconomic situation have greatly altered the Commission’s recommendations since the First FC.
Provisions of the Constitution
- Article 268: Allows the Centre to impose duties, with the States collecting and retaining them.
- Article 280: Describes the FC’s composition, membership criteria, and terms of reference. It directs the FC to make recommendations on the distribution of net tax receipts between the Union and the states, as well as the allocation among states. It also tackles the Union’s and States’ financial ties, as well as the devolution of unanticipated revenue resources.
The Finance Commission’s Essential Functions
- Tax Devolution: Recommends how net tax proceeds should be divided between the federal government and the states.
- Grants-in-Aid: Establishes the principles that govern these state grants.
- Augmenting State Funds: Based on State Finance Commission recommendations, advises on strategies to strengthen the States’ Consolidated Funds to help local bodies and panchayats.
- Other financial functions include: Any additional financial concerns presented by the President are addressed.
Finance Commission Commissioners
- Standards and Structure: The Finance Commission (Miscellaneous Provisions) Act of 1951 establishes a systematic format for the FC as well as worldwide norms.
- Qualifications and abilities: Specifies the qualifications, disqualification, appointment, tenure, eligibility, and powers of members.
- The Chairman is chosen based on their experience in public affairs. The other members are chosen for their judicial experience, government finance knowledge, administrative and financial competence, or particular economic understanding.
Challenges for the 16th Finance Commission
- Overlap with GST Council: Living beside the GST Council, a permanent constitutional entity, poses a new issue.
- Conflict of Interest: GST Council decisions on tax rates may have an influence on the FC’s revenue-sharing estimates.
- Recommendations’ Feasibility: While the Centre frequently follows the FC’s ideas on tax devolution and fiscal objectives, other recommendations may be neglected.
Outstanding Major Recommendations
- The formation of a Fiscal Council was advocated by the 15th FC for collaborative macro-fiscal management, but the administration has showed hesitation.
- Non-Lapsable Fund for Internal Security: Though the Centre agreed ‘in principle’ to establish this fund, the details of its implementation are still being worked out.
Source: https://www.thehindu.com/news/national/cabinet-approves-terms-of-reference-for-16th-finance-commission/article67586753.ece#:~:text=The%20Union%20Cabinet%20on%20Wednesday,beginning%20on%20April%201%2C%202026.