Prelims: Economy – Constitutional Bodies
Mains: General Studies 3- Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment.
Why in News
16th Finance Commission held its first meeting recently.
Key Facts 🗝️
- Art 280 – Constitution of Finance Commission by the President
- Art 281– the President puts recommendations of the Finance Commission report before each House of Parliament along with an explanatory note and the action taken by the government on the Commission’s recommendations.
- The First Finance Commission was constituted under the chairmanship of Shri K.C. Neogy in 1952.
About
Finance Commission
- Constituted by the President under Article 280 of the Constitution.
Objective:
- To give its recommendations on distribution of tax revenues between the Union and the States and amongst the States themselves.
- Redressing the vertical imbalances between the taxation powers and expenditure responsibilities of the Centre and the States respectively;
- Equalization of all public services across the States.
Functions of the Finance Commission:
- The distribution between the Union and the States of the net proceeds of taxes which are to be, or may be, divided between them and the allocation between the States of the respective shares of such proceeds;
- The principles which should govern the grants-in-aid of the revenues of the States out of the Consolidated Fund of India;
- The measures 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 Finance Commission of the State;
- The measures needed to augment the Consolidated Fund of a State to supplement the resources of the Municipalities in the State on the basis of the recommendations made by the Finance Commission of the State;
- It is important to note that recommendations made by the Commission are not binding on the Government.
Terms of Reference for the 16th Finance Commission
- Distribution of net proceeds of taxes between the Union and the States.
- Allocation between the States of respective shares of such proceeds.
- Principles governing grants-in-aid of the revenues of the States from the Consolidated Fund of India.
- Sums are to be paid to the States as grants-in-aid for specified purposes under Article 275 of the Constitution.
- Measures to augment the Consolidated Fund of a State to supplement the resources of Panchayats and Municipalities.
Source: TH
UPSC CSE Question/PYQ’s
Prelims:
Q. Consider the following: (2023)
- Demographic performance
- Forest and ecology
- Governance reforms
- Stable government
- Tax and fiscal efforts
For the horizontal tax devolution, the Fifteenth Finance Commission used how many of the above as criteria other than population area and income distance?
(a) Only two
(b) Only three
(c) Only four
(d) All five
Ans: B. only three
Explaination :
Horizontal Devolution Criteria
- Population:
- The population of a State represents the needs of the State to undertake expenditure for providing services to its residents.
- Area:
- The larger the area, greater is the expenditure requirement for providing comparable services.
- Forest and Ecology:
- Share of dense forest of each state in the aggregate dense forest of all the states, the share on this criteria is determined.
- Income Distance:
- It is the distance of the Gross State Domestic Product (GSDP) of a particular state from the state with the highest GSDP.
- Demographic Performance:
- It rewards efforts made by states in controlling their population.
- This criterion has been computed by using the reciprocal of the total fertility ratio of each state, scaled by 1971 population data.
- States with a lower fertility ratio will be scored higher on this criterion.
- Tax Effort:
- This criterion has been used to reward states with higher tax collection efficiency.
- This criterion has been used to reward states with higher tax collection efficiency.
Mains:
Q. Discuss the recommendations of the 13th Finance Commission which have been a departure from the previous commissions for strengthening the local government finances. (2013)
