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Context

• The Union government is gearing up to constitute the Sixteenth Finance Commission in November this year.
• It will recommend the formula for sharing revenues between the Centre and the States for the five-year period beginning 2026-27. The Centre is yet to make up its mind on the terms of reference that may be prescribed for it.

Finance Commission

About

• The Finance Commissions are periodically constituted by the President of India under Article 280 of the Indian Constitution.

Mandate

• The Commissions define the financial relations between the central government of India and the individual state governments.

First Commission

• The First Commission was established in 1951 under The Finance Commission (Miscellaneous Provisions) Act, 1951.

Commissions till now

• Fifteen Finance Commissions have been constituted since the promulgation of Indian Constitution in 1950.

Terms of Reference

• Individual commissions operate under the terms of reference which are different for every commission, and they define the terms of qualification, appointment and disqualification, the term, eligibility and powers of the Finance Commission.

Appointment and Composition

• As per the constitution, the commission is appointed every five years and consists of a chairman and four other members.

Most recent Commission

• The most recent Finance Commission was constituted in 2017 and is chaired by N. K.Singh, a former member of the Planning Commission.

Constitutional Provisions

Article 280 of the Indian Constitution defines the scope of the commission:

• The President will constitute a finance commission within two years from the commencement of the Constitution and thereafter at the end of every fifth year or earlier, as deemed necessary by him/her, which shall include a chairman and four other members.
• Parliament may by law determine the requisite qualifications for appointment as members of the commission and the procedure of selection.
• The commission is constituted to make recommendations to the president about the distribution of the net proceeds of taxes between the Union and States and also the allocation of the same among the States themselves.
• It is also under the ambit of the finance commission to define the financial relations between the Union and the States. They also deal with the devolution of unplanned revenue resources.

Functions

• Distribution of 'net proceeds' of taxes between the Center and the States, to be divided as per their respective contributions to the taxes.
• Determine factors governing Grants-in-Aid to the states and the magnitude of the same.
• To make recommendations to the president as to the measures needed to augment the Fund of a State to supplement the resources of the panchayats and municipalities in the state on the basis of the recommendations made by the finance commission of the state.
• Any other matter related to it by the president in the interest of sound finance.

PRACTICE QUESTION Q. Which of the following statements are correct in reference to the Finance Commission? a)    The Finance Commissions are periodically constituted by the Parliament under Article 280 of the Indian Constitution. b)    The commission is appointed every five years and consists of a chairman and four other members. c)    Finance Commissions determine factors governing Grants-in-Aid to the states and the magnitude of the same. d)    Parliament may by law determine the requisite qualifications for appointment as members of the commission and the procedure of selection. 1.    a and c 2.    b and d 3.    b, c and d. 4.    None of the above. Correct Answer: Option 3

https://www.thehindu.com/business/Economy/sixteenth-finance-commission-will-be-constituted-in-november/article66714541.ece