Context: Recently, Fifteenth Finance Commission submitted its Report for the period 2021-22 to 2025-26 to the President of India.

• The main report is titled as “Finance Commission in Covid Times”.
• The use of Scales on the cover to indicate the balance between the States and the Union.

Key Points

• The Commission was asked to give its recommendations on many unique and wide-ranging issues in its terms of reference.
• Apart from the vertical and horizontal tax devolution, local government grants, disaster management grant, the Commission was also asked to examine and recommend performance incentives for States in many areas like the power sector, adoption of DBT, solid waste management, etc.
• The Commission was also asked to examine whether a separate mechanism for funding of defence and internal security ought to be set up and if so how such a mechanism could be operationalised.

This Report has been organised in four volumes

• Volume I and II, as in the past, contain the main report and the accompanying annexes.
• Volume III is devoted to the Union Government and examines key departments in greater depth, with the medium-term challenges and the roadmap ahead.
• Volume IV is entirely devoted to the States. The Commission has analysed the finances of each State in great depth and has come up with State-specific considerations to address the key challenges that individual States face.

The Report will be available in the public domain once it is tabled in the Parliament by the Union Government along with explanatory memorandum/action taken report on the recommendations contained in the Report.
About Finance Commission

• The Finance Commission (FC) was established by the President of India in 1951 under Article 280 of the Indian Constitution.
• It was formed to define the financial relations between the central government of India and the individual state governments.
• The Finance Commission (Miscellaneous Provisions) Act, 1951 additionally defines the terms of qualification, appointment and disqualification, the term, eligibility and powers of the Finance Commission.
• As per the Constitution, the FC is appointed every five years and consists of a chairman and four other members.
• Since the institution of the First FC, stark changes in the macroeconomic situation of the Indian economy have led to major changes in the FC’s recommendations over the years.

Constitutional Provisions

• Several provisions to bridge the fiscal gap between the Centre and the States were already enshrined in the Constitution of India, including Article 268, which facilitates levy of duties by the Centre but equips the States to collect and retain the same.

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 the 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.

Need of Finance Commission

• As a federal nation, India suffers from both vertical and horizontal fiscal imbalances.
• Vertical imbalances between the central and state governments result from states incurring expenditures disproportionate to their sources of revenue, in the process of fulfilling their responsibilities.
• However, states are better able to gauge the needs and concerns of their inhabitants and therefore more efficient at addressing them.
• Horizontal imbalances among state governments result from differing historical backgrounds or resource endowments and can widen over time.
• The first FC was established in 1951 by Dr B.R. Ambedkar, the then-incumbent law minister, to address these imbalances.

Important functions

• Distribution of net proceeds of taxes between 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.

Members of the Finance Commission

• The Finance Commission (Miscellaneous Provisions) Act, 1951 was passed to give a structured format to the finance commission and to bring it to par with world standards.
• It laid down rules for the qualification and disqualification of members of the commission, and for their appointment, term, eligibility and powers.

The Chairman of a finance commission is selected from people with experience of public affairs. The other four members are selected from people who:

• Are, or have been, or are qualified, as judges of a high court,
• Have knowledge of government finances or accounts, or
• Have had experience in administration and financial expertise; or
• Have special knowledge of economics