Recently, the Union Cabinet has approved the terms of reference (ToR) for the Sixteenth Finance Commission. This commission has a substantial responsibility: it must propose the formula for distribution of revenue between the Central and State governments for the crucial five-year period starting from April 1, 2026.
Major Terms of Reference for 16th Finance Commission
Among the significant ToRs for this commission are:
1. Division of Tax Proceeds: The commission will strategize about how taxes should be distributed between the Union Government and the States. The allocation of tax shares among different states will also be under its purview.
2. Principles for Grants-in-Aid: This involves the commission establishing guidelines for grants-in-aid given to the States from the Consolidated Fund of India. The commission will decide the amounts to be allocated as grants-in-aid, especially those outlined in Article 275 of the Indian Constitution.
3. Enhancing State Funds for Local Bodies: The commission’s role includes identifying measures to increase the Consolidated Fund of a State to supplement resources available to Panchayats and Municipalities within the State.
4. Evaluation of Disaster Management Financing: The commission may evaluate current financial structures related to Disaster Management initiatives and suggest improvements or alterations.
The Finance Commission: A Brief Overview
The Finance Commission in India is a critical constitutional body established under Article 280 of the Indian Constitution. It advises on the distribution of financial resources between the central government and the individual state governments. The Fifteenth Finance Commission was constituted on November 27, 2017, and its recommendations reign until the financial year 2025-26.
Criteria for Devolution of Funds Between Central and State Governments
Various criteria determine the devolution of funds between the center and the states. Comparing data from the 14th and 15th Finance Commissions reveals shifts in weightage given to different factors, such as Income Distance, Area, and Population. Remarkably, ‘Tax and fiscal efforts’ were introduced as a new parameter during the 15th Finance Commission.
Key Recommendations by the 15th Finance Commission
Several essential suggestions were proposed by the 15th Finance Commission, including:
1. Share of States in Central Taxes: The commission suggested maintaining the states’ share in central taxes at 41% for the 2021-26 period, slightly lower than the 42% allocated during the 14th Finance Commission (2015-20 period).
2. Fiscal Deficit and Debt Levels: The Commission counseled that the Centre aims for a fiscal deficit limit of 4% of GDP by 2025-26. It also recommended individual fiscal deficit limits as a percentage of Gross State Domestic Product (GSDP) for different years within the 2021-26 period.
3. Defense and Internal Security Funding: The report recommended creating a non-lapsable Modernisation Fund for Defence and Internal Security (MFDIS), mainly funded through the Consolidated Fund of India and other sources.
4. Centrally Sponsored Schemes (CSS): The commission advised setting thresholds for annual CSS allocations, implementing third-party evaluations, establishing transparent funding patterns, and steadily allocating funds to phase out obsolete schemes.
With the ToRs approved, the Sixteenth Finance Commission is ready to embark on its mandate, shaping the financial architecture of India’s federal structure decisively.
Last Modified: November 27, 2024