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In News:

• The Union government to set up the 16th Finance Commission and the Union Finance Ministry will soon notify the terms of reference for the commission.

Background:

• In 2017, the 15th Finance Commission was set up with a mandate to make recommendations for the five ­year periods from 2020-­21, latter the mandate was extended by a year till 2025-­26.
  • The last time the commission was granted a 6 ­year time frame was for the 9th Finance Commission, formed in 1987.

Finance Commission:

• Indian Constitution under article 280 provides for a Finance Commission as a quasi-judicial body.
  • The Commission is constituted by the president of India every fifth year or at such an earlier time as he considers necessary.
• The Commission consists of a chairman and four other members to be appointed by the president of India.
  • The members hold office for such a period as specified by the president in his order.
  • They are eligible for reappointment.
• Qualification of members: The Constitution authorizes the Parliament of India to determine the qualifications of members of the commission and the manner in which they should be selected.
  • The Parliament has specified certain qualifications for the selection of the chairman and members of the commission.
• The chairman should be a person having experience in public affairs and the four other members should be selected from amongst the following:
  • A judge of a high court or one qualified to be appointed as one.
  • A person who has specialised knowledge of finance and accounts of the government.
  • A person who has wide experience in financial matters and administration.
  • A person who has special knowledge of economics.
• The Commission is required to make recommendations to the Indian president on the following matters:
  • The distribution of the net proceeds of taxes to be shared between the Centre and the states, and the allocation between the states of the respective shares of such proceeds.
  • The principles that should govern the grants-in-aid to the states by the Centre.
  • The measures needed to augment the consolidated fund of a state to supplement the resources of the panchayats and the municipalities in the state.
  • Any other matter referred to it by the president in the interests of sound finance.
• The recommendations made by the Commission are only of advisory nature and are not binding on the government.
  • It is up to the Union government to implement its recommendations on granting money to the states.
• The commission submits its report to the president of India.
  • The President lays it before both Houses of Parliament along with an explanatory memorandum as to the action taken on its recommendations.

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