Government clears Terms of Reference of 16th Finance Commission

Government clears Terms of Reference of 16th Finance Commission

Subject: Polity

Section: National body

Context: Government clears Terms of Reference of 16th Finance Commission

More about the news:

• The Union Cabinet approved the terms of reference (ToR) for the Sixteenth Finance Commission, which will recommend the formula for sharing revenues between the Centre and the States for the five-year period beginning on April 1, 2026.
• The government has set a deadline of October 31, 2025, for the panel to submit its recommendations

Terms of Reference for the Sixteenth Finance Commission:

• The Finance Commission shall make recommendations as to the following matters, namely:
  • The distribution between the Union and the States of the net proceeds of taxes which are to be, or may be, divided between them under Chapter I, Part XII of the Constitution 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 and the sums to be paid to the States by way of grants-in-aid of their revenues under article 275 of the Constitution for the purposes other than those specified in the provisos to clause (1) of that article;
  • The measures needed to augment the Consolidated 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.
  • The Commission may review the present arrangements on financing Disaster Management initiatives, with reference to the funds constituted under the Disaster Management Act, 2005 (53 of 2005), and make appropriate recommendations thereon.
• The Commission shall make its report available by 31st day of October, 2025 covering a period of five years commencing on the 1st day of April, 2026.

What is Finance Commission:

• The Finance Commission is a constitutional body for the purpose of allocation of certain revenue resources between the Union and the State Governments.
• It was established under Article 280 of the Indian Constitution by the Indian President.
• It was created to define the financial relations between the Centre and the states.
• It shall be the duty of the Commission to make recommendations to the President in relation to the:
  • the distribution between the Union and the States of the net proceeds of taxes which are to be, or maybe, 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;
  • any other matter referred to the Commission by the President in the interests of sound finance
• The Commission shall determine their procedure and shall have such powers in the performance of their functions as Parliament may by law confer on them.
• The recommendations made by the Finance Commission are of an advisory nature only and therefore, not binding upon the government.
• The first Finance Commission was set up in 1951
• The Fifteenth Finance Commission was constituted on 27 November 2017 under N.K.Singh

What is the Composition of Finance Commission:

• The President shall constitute a Finance Commission which shall consist of a Chairman and four other members to be appointed by the President.
• Qualifications for members of the Finance commission as per Finance commission act,1951:
  • Chairperson – Individual with experience of public affairs
  • Member 1 – High court judge or qualified to be one.
  • Member 2 – special knowledge of finance and accounts of government.
  • Member 3 – special knowledge of economics.
  • Member 4 – wide experience in financial matters and administration.