The Finance Commission of India is a constitutional body that is constituted every five years. It is responsible for recommending the distribution of financial resources between the central government and the state governments of India. The commission also advises on matters related to fiscal management, tax reforms, and grants-in-aid.

The Finance Commission is composed of a chairman and four other members appointed by the President of India. Usually, a retired judge of the Supreme Court is appointed as the chairman. The members are selected based on their expertise in economics, public finance, or administration.

The terms of reference of the recently constituted Finance Commission (also known as the 15th Finance Commission) are as follows:

1. To recommend the distribution of the net proceeds of taxes between the center and the states.
2. To recommend the principles that should govern the grants-in-aid to the states based on the need for revenue deficit, infrastructure gap, and other special circumstances.
3. To examine the impact of the Goods and Services Tax (GST) on the finances of the center and the states and suggest measures to maintain a balance between them.
4. To review the performance of the state governments in implementing centrally-sponsored schemes and recommend incentives or disincentives based on the same.
5. To recommend measures to strengthen the financial position of the local governments and reinforce their functioning.

These terms of reference highlight the crucial role of the Finance Commission in coordinating fiscal matters between the central and state governments. The commission's recommendations play a significant role in shaping the distribution of resources and ensuring a balanced fiscal system in India.

Composition and Terms of Reference of the Finance Commission of India

The Finance Commission of India is a constitutionally mandated body tasked with recommending the distribution of taxes collected by the central government between the Union and the States.

Constitution:

• The Finance Commission is constituted by the President of India under Article 280 of the Constitution.
• It consists of a Chairman, who is usually a former judge of the Supreme Court or a High Court, and four other members, who are chosen for their expertise in public finance, economics, or administration.
• The members are appointed for a period of five years and are not eligible for reappointment.

Terms of Reference of the 15th Finance Commission (2021-26):

The 15th Finance Commission, headed by N.K. Singh, was constituted in November 2019 and submitted its report in February 2021. Its key terms of reference included:

• Devolution of Taxes: Recommending the horizontal and vertical distribution of taxes between the Union and the States. Horizontal distribution refers to the sharing of taxes among states, while vertical distribution deals with the division between the center and the states.
• Fiscal Consolidation: Assessing the fiscal situation of the Union and the States, and recommending measures for fiscal consolidation. This involves recommending strategies to reduce the fiscal deficit and manage debt.
• State Finances: Examining the financial position of the States and recommending measures for improving their fiscal health. This includes suggesting ways to enhance revenue collection and efficient expenditure management.
• Grants-in-Aid: Determining the quantum of grants-in-aid to be provided by the Union to the States to meet their developmental needs.
• Special Provisions: Making recommendations for the provision of special grants or assistance to any State facing specific challenges, such as natural calamities or revenue shortfalls.
• Disaster Management: Evaluating the effectiveness of existing mechanisms for disaster management and recommending measures for strengthening them.
• Social Sector: Assessing the progress made in social sector development and recommending steps for improvement.
• Local Government Finance: Examining the financial condition of local governments and recommending measures for strengthening their financial autonomy.

Key Features of the 15th Finance Commission's Recommendations:

• Increased Share for States: The Commission recommended a higher share of divisible tax revenue for the states, increasing it from 41% to 42%.
• Focus on Population: The commission emphasized the population of 2011 for allocating the divisible pool of taxes among states, leading to a decrease in the share for states with higher population growth rates after 2011.
• Performance-Based Grants: The commission introduced performance-based grants to incentivize states in areas such as healthcare, education, and social welfare.
• Disaster Relief: It recommended disaster risk mitigation and preparedness measures and proposed a new National Disaster Response Fund.
• Local Governments: The commission stressed the importance of strengthening local governments financially and advocated for the devolution of powers and responsibilities to them.

Significance of the Finance Commission:

The Finance Commission plays a crucial role in India's federal system. It ensures a balanced distribution of resources between the Union and the States, promotes fiscal discipline, and contributes to the economic and social development of the country.

Conclusion:

The Finance Commission plays a vital role in India's federal system, ensuring equitable resource distribution and promoting fiscal responsibility. The 15th Finance Commission's recommendations reflected a focus on population-based allocation, performance-based grants, disaster management, and strengthening local governments, aiming to promote a more equitable and sustainable development path for the nation.

The Finance Commission of India is a constitutional body established by the Government of India under Article 280 of the Indian Constitution. The Commission is constituted every five years to make recommendations to the President of India on the distribution of taxes and duties between the Union Government and the States, as well as the allocation of resources between the Centre and the States.

Constitution of the Finance Commission:

The Finance Commission consists of a Chairman and four other members, appointed by the President of India. The Chairman is usually a person with a background in finance, economics, or public administration, while the other members are experts in various fields, including economics, finance, and law. The Commission is usually headed by a former Secretary to the Government of India or a prominent economist.

Terms of Reference of the 15th Finance Commission:

The 15th Finance Commission was constituted on November 27, 2017, with N.K. Singh, a former Secretary to the Government of India, as its Chairman. The Terms of Reference of the 15th Finance Commission are as follows:

1. Horizontal Devolution: To recommend the distribution of the net proceeds of taxes between the Union and the States, including the principles governing the distribution.
2. Vertical Devolution: To recommend the allocation of resources between the Centre and the States, including the sharing of taxes, duties, and other receipts.
3. Measuring Fiscal Capacity: To recommend the norms for determining the fiscal capacity of States, which will help in allocating funds to them.
4. Local Bodies: To recommend the principles and norms for devolving funds to local bodies, such as panchayats and municipalities.
5. Disaster Management: To suggest ways to manage and mitigate the impact of natural disasters on the economy and suggest funding mechanisms for disaster response and mitigation.
6. Health and Education: To recommend ways to increase investment in health and education, including the role of the Centre and States in funding these sectors.
7. Performance-Based Incentives: To suggest performance-based incentives for States to promote fiscal responsibility, sustainability, and efficiency in expenditure.
8. GST Compensation: To recommend the framework for compensating States for any revenue losses due to the introduction of the Goods and Services Tax (GST).
9. Other Issues: To examine and recommend on other issues related to fiscal federalism, such as the need for a roadmap for fiscal consolidation, and the role of the Centre and States in promoting economic growth and development.

The 15th Finance Commission submitted its report in three volumes to the President of India on February 1, 2020. The report's recommendations are expected to shape the fiscal landscape of India and influence the country's economic growth and development over the next five years.