Why is it in the news?
- Union Cabinet approved Terms of Reference (ToR) for Sixteenth Finance Commission.
| About Finance Commission (FC) · It is a constitutional body established every fifth year or earlier by the President under Article 280 of the Constitution. · Commission’s role involves addressing vertical imbalances between taxation powers and expenditure responsibilities of the centre and states, and equalization of public services across states. |
Terms of Reference (ToR)
- To be set up for a five-year term starting April 1, 2026.
- Distribution between the Union and States of net proceeds of taxes and allocation between states of such proceeds.
- Principles governing grants-in-aid and revenues of states under Article 275 of the Constitution.
- Measures needed to augment the Consolidated Fund of a State to supplement resources of Panchayats and Municipalities.
- Review present arrangements on financing Disaster Management initiatives.
Process of FC Recommendations
- FC works based on terms of reference set by the finance ministry, approved by the centre.
- Recommendations, upon acceptance by the government, cover a five-year period.
| About 15th FC · Chaired by NK Singh, the 15th FC was set up in 2017. · Made recommendations for the periods 2020-21 and 2021-22 to 2025-26.
Recommendations include: · Vertical devolution, with states’ share in central taxes set at 41%. · Criteria for horizontal devolution based on income distance, area, population (2011), demographic performance, forest and ecology, and tax and fiscal efforts. · Suggested reducing fiscal deficit to 4% of GDP by 2025-26. |
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