Terms of Reference for the Sixteenth Finance Commission

 

Why in News?

Recently, The Union Cabinet has approved the Terms of Reference (ToR) for the Sixteenth Finance Commission (FC).

About Finance Commission

1. The Constitution establishes the FC as a constitutional body, established by the President every fifth year or earlier, under Article 280.
2. The Commission aims to address vertical imbalances between the central and state taxation powers and expenditure responsibilities, and ensure equalization of public services across states.
3. FC proposes the allocation of taxes, grants, and works based on the finance ministry's terms of reference, after the center's approval.

ToR for 16th FC

1. The distribution of net tax proceeds between the Union and states, as well as their allocation between states, is a crucial aspect of taxation.
2. Article 275 of the Constitution outlines the principles for managing state grants-in-aid and revenues.
3. The text suggests measures to increase the Consolidated Fund of a state to supplement the resources of Panchayats and Municipalities.
4. The commission has the authority to review the current arrangements for financing Disaster Management initiatives.
5. The 16th FC recommendations, if approved by the government, will cover a five-year period starting from April 1, 2026.

15th FC, chaired by NK Singh, set up in 2017, made recommendations for 2020-21 and 2021-22 to 2025-26. Its recommendations include:

1. The vertical devolution plan stipulates that the percentage of states in central taxes should be 41%.
2. Horizontal devolution is based on factors such as income distance, area, population (2011), demographic performance, forest and ecology, and tax and fiscal efforts.
3. The proposal is to decrease the fiscal deficit to 4% of GDP by 2025-26.

 

 

 

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