Cabinet Approves Terms of Reference for the Sixteenth Finance Commission

  • Approved by the Union Cabinet chaired by the Prime Minister.
  • Article 280(1) of the Constitution lays down the modalities for setting up a Finance Commission to make recommendations.

Terms of Reference for the Sixteenth Finance Commission:

The Finance Commission shall make recommendations as to the following matters, namely:

    1. The distribution between the Union and the States of the net proceeds of taxes which are to be, or maybe, divided between them under Chapter I, Part XII of the Constitution 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 for purposes other than those specified in the provisos to clause (1) of that article; and
    3. The measures needed to augment the Consolidated Fund of a State to supplement the resources of the Panchayats and Municipalities in the State are based on the recommendations made by the Finance Commission of the State.
  • The Commission may review the present arrangements for financing Disaster Management initiatives, constituted under the Disaster Management Act, 2005 (53 of 2005).
  • The Commission shall make its report available by the 31st day of October 2025 covering five years commencing on the 1st day of April 2026.

Background:

  • The Fifteenth Finance Commission (the 15th FC) was constituted on 27.11.2017 to make recommendations for five years (2020-21 to 2024-25).
  • The Finance Commission normally takes about two years to make their recommendations.
  • As per clause (1) of Article 280 of the Constitution, the Finance Commission is to be constituted every fifth year or earlier.
  • However, as the recommendations of the 15th FC cover the six years up to 31st March 2026, the 16th FC is proposed to be constituted now.
  • This will enable the Finance Commission to consider and appraise the finances of the Union and the States for the period immediately, preceding the period of its recommendations.
  • In this context, it is pertinent to mention that there are precedents where the Eleventh Finance Commission was constituted six years after the Tenth Finance Commission. Similarly, the Fourteenth Finance Commission was constituted five years and two months after the Thirteenth Finance Commission.
  • The Advance Cell of the 16th FC was formed in the Ministry of Finance on 21.11.2022, to oversee preliminary work, pending the formal constitution of the Commission.
  • Thereafter, a Working Group headed by the Finance Secretary and Secretary (Expenditure) and comprising of the Secretary (Economic Affairs), Secretary (Revenue), Secretary (Financial Services), Chief Economic Adviser, Adviser, NITI Aayog and Additional Secretary (Budget) was set up to assist in the formulation of the Terms of Reference (ToRs).
  • As part of the consultative process, views and suggestions were sought from the State Governments and the Union Territories (with legislature) on the ToRs and were duly deliberated by the Group.
Posted in Current Affairs.