Q.How is the Finance Commission of India constituted? What do you know about the terms of reference of the recently constituted Finance Commission? Discuss.

graph TD
    FC["Finance Commission of India"]
    QM["Qualifications of Members<br>- Public Affairs<br>- Finance<br>- Economics<br>- Administration"] --> FC
    AR["Advisory Role<br>- Tax Distribution<br>- Grants-in-Aid"] --> FC
    CP["Constitutional Provision<br>- Article 280"] --> FC
    AP["Appointment<br>- Every Five Years<br>- Earlier if Needed"] --> FC
    C["Composition<br>- Chairman<br>- Four Members"] --> FC

Body

1. Constitution of the Finance Commission

• Appointment and Composition: Under Article 280(1), the President of India is responsible for constituting the Finance Commission every five years, or sooner if deemed necessary. It comprises a Chairman and four other members, all of whom are presidential appointees.
• Qualifications and Expertise: As per the Finance Commission (Miscellaneous Provisions) Act of 1951, members must possess specialized expertise in public affairs, financial management, economics, or public administration. This ensures the body is equipped with the technical capability to address complex fiscal challenges.

2. Key Functions of the Finance Commission

• Allocation of Tax Revenues: The primary duty of the Commission is to recommend the distribution of net tax proceeds between the Centre and the States (vertical devolution) and among the States themselves (horizontal devolution).
• Grants-in-Aid: It formulates the principles that govern the allocation of grants-in-aid to states from the Consolidated Fund of India.
• Enhancing Local Body Resources: It suggests measures to augment the Consolidated Fund of a State to support the financial needs of local bodies like Panchayats and Municipalities.
• Additional Mandates: The President may refer any other financial matter to the Commission in the interest of sound public finance.

3. Finance Commission Act, 1951

• Legal Framework: This legislation provides the statutory foundation that complements the constitutional provisions, detailing the tenure, powers, and qualifications of the members.
• Key Provisions: The Chairman must have experience in public affairs, while other members must be experts in finance, economics, or administration. It also defines terms of service and removal procedures to ensure the body's independence.
• Scope of Work: The Act empowers the Commission to dynamically address evolving financial challenges, ensuring it has the authority to investigate all relevant center-state financial relations.

4. Terms of Reference of the 15th Finance Commission

• Horizontal and Vertical Devolution: The Commission was tasked with recommending the vertical share of states in the central tax pool (continuing the 42% benchmark of previous commissions) and designing a horizontal formula based on criteria like population, income distance, forest cover, and area.
• Impact of GST: With the introduction of GST transforming the indirect tax landscape, the Commission had to evaluate its impact on state and central revenues and recommend compensation and revenue-neutrality measures.
• Performance-Based Incentives: It was asked to recommend fiscal incentives for states demonstrating progress in tax collection, implementation of central schemes, and fiscal discipline.
• Strengthening Local Governance: It sought recommendations to enhance funding for local bodies to improve their service delivery and fiscal autonomy.
• Disaster Management: It was tasked with recommending financial allocations for disaster management, including setting up a national disaster fund.
• Fiscal Consolidation: The Commission reviewed the fiscal consolidation roadmap to ensure sustainability while balancing developmental spending needs.
• Special Considerations: It addressed the unique challenges of states with high population densities, international borders, or special category status.
• Population Data: A key task was deciding whether to use 1971 or 2011 Census data, balancing demographic performance with development needs.