Why in news? The Union government will soon start off the process to set up the 16th Finance Commission with finance ministry

Highlights

• The 15th Finance Commission was set up in 2017 with a mandate to make recommendations for the five-year period from 2020-21
• In the normal course of things, the next Finance Commission should have been appointed by now, but since current FC report covered six years instead of five,
• While the Constitution requires a Finance Commission (FC) to be set up every five years, the 15th FC’s mandate was extended by a year till 2025-26, breaking the cycle.

Six year time frame

• In late 2019, the commission was asked to give a standalone report for 2020-21 and another report for an extended five-year period till 2025-26.
• The last time an FC was granted a six-year time frame was for the 9th Finance Commission, formed in 1987. It was asked to submit a single year report for 1989-90 and a five-year report for the five years till 1994-95.

Why there was a period of extension ?

• The extension of the term will enable the Commission to examine various comparable estimates for financial projections in view of reforms and the new realities to finalize its recommendations for the period 2020-2026
• The cabinet decision does not fall foul of the Constitution.
• Decision was taken to factor in Jammu and Kashmir’s new status.

The key challenge

• A key new challenge for the 16th FC would be the co-existence of another permanent constitutional body, the GST Council, as the Council’s decisions on tax rate changes could alter the revenue calculations made by the Commission for sharing fiscal resources.

About Finance Commission

• Commission is periodically constituted by the President under Article 280 of the Indian Constitution as quasi-judicial body
• It is to define the financial relations between the central government and the individual state governments.
• As per the constitution, the commission is appointed every five years and consists of 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.

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.