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Sixteenth Finance Commission


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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