Finance Commission : Analysis

  • The government will soon constitute the Fifteenth Finance Commission, as per normal practice, a couple of years before the end of the five-year period during which the Commission’s recommendations are valid.
 Constitutions provisions:
  • Article 280 of the Constitution requires that a Finance Commission be constituted to recommend the distribution of the net proceeds of taxes between the Centre and states, and among the states.
  • The framers of the Constitution were seeking to address the vertical imbalance between the taxation powers and expenditure and responsibilities of the federal government and the states, and the horizontal imbalance, or inequality, between states that were at different stages of development.
  • Ensuring inclusiveness is, therefore, a key mandate of the Finance Commission.
  • That means assigning weights to things like population, the fiscal distance between the top ranked states and the others, etc. It is not that the best-performing state will be allocated the highest share – even if delivery execution and governance are better – rather, the effort will be to narrow the development gap between states.
  • The Finance Commission Rules, 1951, lay down the criteria for being members of the constitutional body: those having special knowledge of finance and accounts of government with wide knowledge and experience in financial matters and in administration, or with special knowledge of economics, and those who have been qualified to be appointed as a judge of a High Court.
 Challenges ahead:
  • As the Fifteenth Commission is set to be appointed, the criteria for distribution will be reviewed.
  • The question is whether the commission will take into account the level of collections by each state after the roll out of the GST or not?
  • The challenge this time will be the fact that unlike in the past, the share of net tax proceeds between the central government and states is almost equal.
  • After the last Commission’s recommendation to distribute 42%, raising the bar on higher transfer of resources will have a much bigger impact on the federal government.
  • The twelfth Finance Commission had suggested that it was time now to perhaps look at a Constitutional amendment to fix a ceiling on the distribution of the net tax proceeds, with the Finance Commission arbitrating on distributing tax proceeds among states.
  • The Commission itself reckons that its biggest role has been to uphold the country’s federal structure, and to be an architect of fiscal restructuring – from being mainly an arbitrator between the Centre and states.

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