15 th Finance Commission Report

15 వ ఆర్ధిక సంఘం నివేదిక

 Finance Commission
Article Composition:
280 Determined by the Parliament.

Appointment: Qualifications
President of India. Parliament

Tenure and Service Conditions Removal

Appointed once in 5 years. Temporary body

Post Retirement Employment Issue in Current Affairs

No Restrictions.
What is the Finance Commission?
Ans. The Finance Commission is constituted by the President under article 280 of the
Constitution, mainly to give its recommendations on distribution of tax revenues between
the Union and the States and amongst the States themselves.
Two distinctive features of the Commission’s work involve redressing the vertical
imbalances between the taxation powers and expenditure responsibilities of the centre
and the States respectively and equalization of all public services across the States.
What are the functions of the Finance Commission?

Ans. It is the duty of the Commission to make recommendations to the President as to—
✓ the distribution between the Union and the States of the net proceeds of taxes which are
to be, or may be, divided between them and the allocation between the States of the
respective shares of such proceeds;
✓ the principles which should govern the grants-in-aid of the revenues of the States out of
the Consolidated Fund of India;
✓ the measures needed to augment the Consolidated Fund of a State to supplement the
resources of the Panchayats in the State on the basis of the recommendations made by the
Finance Commission of the State;
✓ the measures needed to augment the Consolidated Fund of a State to supplement the
resources of the Municipalities in the State on the basis of the recommendations made by
the Finance Commission of the State;
✓ any other matter referred to the Commission by the President in the interests of sound
finance.
✓ The Commission determines its procedure and have such powers in the performance of
their functions as Parliament may by law confer on them.
Who appoints the Finance Commission and what are the qualifications for
Members?
Ans. The Finance Commission is appointed by the President under Article 280 of the
Constitution. As per the provisions contained in the Finance Commission [Miscellaneous
Provisions] Act, 1951 and The Finance Commission (Salaries & Allowances) Rules, 1951, the
Chairman of the Commission is selected from among persons who have had experience in
public affairs, and the four other members are selected from among persons who--
(a) are, or have been, or are qualified to be appointed as Judges of a High Court; or
(b) have special knowledge of the finances and accounts of Government; or
(c) have had wide experience in financial matters and in administration; or
(d) have special knowledge of economics
How are the recommendations of Finance Commission implemented?
Ans. The recommendations of the Finance Commission are implemented as under:-
Those to be implemented by an order of the President:
The recommendations relating to distribution of Union Taxes and Duties and Grants-in-
aid fall in this category.
Those to be implemented by executive orders:
Other recommendations to be made by the Finance Commission, as per its Terms of
Reference
When was the first Commission Constituted and how many Commissions have been
Constituted so far?
Ans. The First Finance Commission was constituted vide Presidential Order dated
22.11.1951 under the chairmanship of Shri K.C. Neogy on 6th April, 1952. Fifteenth
Finance Commissions have been Constituted so far at intervals of every five years.

Is the Finance Commission unique to India?

Ans. Most federal systems resolve the vertical and horizontal imbalances through
mechanisms similar to the Finance Commission. For example Australia and Canada.
 Guide to SFC in
Importance of augmenting the
local body
Finance resources
Commission
Efficient Balancing
allocation of Importance
Fiscal of FC wheel of
resources Federalism

Examining
the emerging
fiscal issues
 Finance Commission

Devolution
FC of Taxes
Transfers
Grants
Financial
Devolution Centre
By the Vertical Devolution
Finance
Commission States

Horizontal Devolution

State 1 State 2 State 28

Vertical Devolution (Devolution of Taxes of the Union to States):
✓ It has recommended maintaining the vertical devolution at 41% - the same as in
its interim report for 2020-21.
✓ It is at the same level of 42% of the divisible pool as recommended by
the 14th Finance Commission.
✓ It has made the required adjustment of about 1% due to the changed status of the
erstwhile State of Jammu and Kashmir into the new Union Territories of Ladakh and
Jammu and Kashmir.
Fiscal Space for Centre:
Total 15th Finance Commission transfers (devolution + grants) constitutes about 34% of
estimated Gross Revenue Receipts to the Union, leaving adequate fiscal space to meet its
resource requirements and spending obligations on national development priorities.
Horizontal Devolution
(Allocation Between
the States):
 Lets Understand The Words-
Population:
The population of a State represents the needs of the State to undertake expenditure for
providing services to its residents.
It is also a simple and transparent indicator that has a significant equalising impact.
Area:
The larger the area, greater is the expenditure requirement for providing comparable
services.
Forest and Ecology:
By taking into account the share of dense forest of each state in the aggregate dense
forest of all the states, the share on this criteria is determined.
Forest and Ecology:
By taking into account the share of dense forest of each state in the aggregate dense forest
of all the states, the share on this criteria is determined.
Income Distance:
Income distance is the distance of the Gross State Domestic Product (GSDP) of a particular
state from the state with the highest GSDP. To maintain inter state equity, the states with
lower per capita income would be given a higher share.
Tax Effort:
This criterion has been used to reward states with higher tax collection efficiency.
It has been computed as the ratio of the average per capita own tax revenue and the
average per capita state GDP during the three-year period between 2016-17 and 2018-19.
Demographic Performance:
✓ It rewards efforts made by states in controlling their population.
✓ This criterion has been computed by using the reciprocal of the total fertility ratio of each
state, scaled by 1971 population data.
✓ This has been done to assuage the fears of southern States about losing some share in
tax transfers due to the reliance on the 2011 Census data instead of the 1971 census,
which could penalise States that did better on managing demographics.
✓ States with a lower fertility ratio will be scored higher on this criterion.
✓ The Total Fertility Ratio in a specific year is defined as the total number of children that
would be born to each woman if she/they were to pass through the childbearing years
bearing children according to a current schedule of age-specific fertility rates.
Finance Commission Grants

Revenue Deficit

FC Grants
Grants

Performance Based
Grants and Incentives

Grants to Local
Government
Revenue Deficit Grants to States:
✓ Revenue deficit grants emanate from the requirement to meet the fiscal needs of the
States on their revenue accounts that remain to be met, even after considering their
own tax and non-tax resources and tax devolution to them.
Revenue Deficit is defined as the difference between revenue or current expenditure
and revenue receipts, that includes tax and non-tax.
✓ It has recommended post-devolution revenue deficit grants amounting to about Rs. 3
trillion over the five-year period ending FY26.
✓ The number of states qualifying for the revenue deficit grants decreases from 17 in
FY22, the first year of the award period to 6 in FY26, the last year.
Performance Based Incentives and Grants to States:
These grants revolve around four main themes.
1. The first is the social sector, where it has focused on health and education.
2. Second is the rural economy, where it has focused on agriculture and the
maintenance of rural roads.
3. Third, governance and administrative reforms under which it has recommended
grants for judiciary, statistics and aspirational districts and blocks.
4. Fourth, it has developed a performance-based incentive system for the power
sector, which is not linked to grants but provides an important, additional borrowing
window for States.
FC Grants to Local Governments

FC Grants to Local
Governments
Basic Grants

Performance
Based Grants
Grants to Local Governments:
✓ Along with grants for municipal services and local government bodies, it
includes performance-based grants for incubation of new cities and health grants to
local governments.
✓ In grants for Urban local bodies, basic grants are proposed only for cities/towns having a
population of less than a million.
Million-Plus Cities Challenge Fund (MCF):
For Million-Plus cities, 100% of the grants are performance-linked through the Million-Plus
Cities Challenge Fund (MCF).
MCF amount is linked to the performance of these cities in improving their air quality and
meeting the service level benchmarks for urban drinking water supply, sanitation and solid
waste management.
 Defense And Internal Security Modernization Fund
✓ The 15th FC has recommended ₹1.5 lakh crore be shifted from the Consolidated Fund of
India over five years.
✓ The commission has suggested this to come from Gross revenue receipts and not Gross
tax revenue, thus not impacting divisible pool of tax or cess, surcharge or defence tax.
✓ It is to fix mismatch between the procurement cycle and the financial allocations for
defence on an annual basis.
✓ To provide stability on availability of resources for meeting capital expenditure for Defence
and thus strengthening security.
✓ Apart from the Consolidate Fund it will be boosted by monetisation of idle assets of the
defence ministry (It holds huge parcel of land and other assets)
Finance Commission on GST-
✓ Multiple slab rates are really not optimal, but having one single rate may not be optimal
too.
✓ To do away with inverted duty structures without raising the overall incidence of the
GST, center needs to rationalise it and move in the direction of being genuinely revenue
neutral.
✓ Set up a consultative mechanism between the GST Council and the Finance Commission
— both are constitutional bodies with the Council existing in perpetuity and the
Commission being a non-permanent body, that is appointed every five years.
Criticism on Population as
a criteria
Finance Commission

Criticism
on FC
Just a
recommendatory Cess is not
body- Many added in
suggestions on Fiscal divisible
deficit etc are not
implemented pool of taxes
All The Best