What is the Finance Commission and Its Purpose?
Article 280 of the Constitution states that the President of India shall constitute a Finance Commission which should consist of a chairman and 4 other members (Total – 05) at the expiration of every fifth year or at such earlier time as the President considers necessary.
According to article 280 of the Indian Constitution the Finance Commission is a quasi-judicial body i.e. its recommendations are only of advisory nature and hence, not binding on the government.
Main purpose of FC is to make recommendations to the president of India in following matters:
- The distribution of net proceeds of the taxes which needs to be shared between the Centre and states and the allocation among the states.
- The principles which should govern the grants-in-aid to the states by the Centre (i.e., 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 and the municipalities in the state on the basis of the recommendations made by the State Finance Commission.
- Any other matter referred to it by the President in the interests of sound finance.
Members of 15th Finance Commission.
NOTE: As Mr. Shaktikanta Das, IAS became New RBI governor hence Mr. Ajay Narayan Jha, IAS have replaced himin the members of Finance Commission.
Why in News?
Recently, the Fifteenth Finance Commission submitted its report with recommendations for the financial year 2020-21.
15th Finance Commission needs to submit two reports:
- The 1st report, consisting of recommendations for the financial year 2020-21, was presented in parliament on 1st Feb 2020.
- The final report will be tabled by October 30, 2020 which will be considering the recommendations for 2021-26 period.
15th FC was to submit its report for period 2020-2025. However, its term was extended last year in November 2019. Due to some following reasons committee didn’t got satisfactory result:
- Political disturbance in Maharashtra.
- Major fiscal/budgetary reforms were introduced by the Union Government like closure of the Planning Commission and its replacement by NITI Aayog.
- Removal of distinction between Plan and Non-Plan expenditure.
- Introduction of GST and New FRBM architecture with debt and fiscal deficit path the
Apart from present interim report, FC will be submitting its second report for 2021-22 to 2025-26 in October
However, the commission have increased the disaster relief as well as revenue deficit grant to states and brought back the performance-based incentives for states undertaking agriculture reforms and reduction in pollution. The Constitution anticipates the Finance Commission as the balancing wheel of fiscal federalism in India.
The commission highlighted some challenges with the implementation of the Goods and Services Tax (GST):
- Heavy shortfall in the collection of tax as compared to the original forecast.
- High volatility in collections
- Accumulation of large integrated GST credit
- Glitches in invoice and input tax matching
- Delay in refunds
Formula that decides a state-wise share:
Key Recommendations of the 15th FC Report (2020-2021):
Following the recommendations, the Finance Minister Ms Nirmala Sitharaman said in her budget speech that states formulating and implementing plans for ensuring cleaner air in cities with a population of more than one million would be encouraged.
- Devolution of taxes to states: Reduction in the share of states in the divisible pool of central taxes from 42% to 41% during the 2015-20 period. The proposed change in coverage of the period will help medium-term resource planning for the state governments and the central government.
- The 1% decrease in taxes is to provide for newly formed Union Territories of Jammu and Kashmir and Ladakh from the resources of the central government.
- Reintroducing the performance-based incentives for states on 2 parameters:
- Demographic performance (based on Total Fertility Rate)
- Taxation efforts.
- Rationalization of centrally sponsored schemes and Centre and states should fully reveal their off-budget borrowings. Both the Centre and state governments should make full disclosure of extra-budgetary borrowings.
- An overarching fiscal framework for Centre & states, on lines of FRBM (Fiscal Reform Budget Management) Act (to lay down accounting, budgeting and auditing standards) needs to be followed at all levels of government.
- Enhanced devolution to local bodies compared to 14thFC.
- To form an expert group or committee to draft legislation to provide a statutory framework for the sound public financial management system.