State Finance Commission

State Finance Commission

Subject: Polity

Context:   The Covid crisis has stretched State finances by impacting both GST and cess collections. This, along with the imminent end of GST compensation in July 2022, has forced States to look at other revenue options. Hence, states must raise non-tax revenues. Therefore, strengthening State Finance Commissions will help

Concept:

• Under Article 243-I of the Constitution of India, the governor of a state is required to constitute a Finance Commission every five years. This is in order to decide the resource allocation between the state government and the Panchayati Raj Institutions.
• Article 243-Y also brought city councils or municipalities under the purview of the State Finance Commission.
• A State Finance Commission reviews the financial position of the panchayats in a state and makes recommendations to the Governor about the principles that should govern the distribution of tax proceeds – taxes, duties, levies, toll fee collected by the state between the state and its Panchayati Raj Institutions at all three levels – village level, block level and district level.
• Under Article 243-I of the Indian Constitution, the governor of a state ensures the laying of a State Finance Commission’s recommendations to the table of the state legislature.
• It also includes a memorandum of action taken by the government on the Commission’s report

State Finance Commission recommends the following:

• Taxes, levies and fees levied or appropriated by Panchayats themselves.
• Grants-in-aid to Panchayati Raj Institutions from the consolidated fund of a state.
• Ways to improve the financial position of the Panchayati Raj Institutions.
• Measures for the overall improvement of Panchayat’s finances.

15th Finance Commission report on Functioning of SFC

• According to 15th Finance Commission report, most State governments did not constitute them in time and did not give due importance to strengthening this critical constitutional mechanism. Therefore, States have not got the benefit of a systematic review of their revenue position and recommendations for resource mobilisation.
• The State Finance Commissions need to play a much more critical role in recommending taxes assigned to municipalities and other local governments and related financial relations between the States and their municipalities.
• The State Finance Commissions are not a permanent body; therefore, a lot of time goes towards getting office space, technical manpower, arranging office infrastructure and collecting data on local body finances which lead to considerable delay in filing their reports.
• The State governments should strengthen the State Finance Commissions and ensure they have proper resources, adequate administrative support for their smooth functioning and are provided adequate time for carrying out the task assigned to them so as to ensure timely submission of reports to the government.
• A strengthened State Finance Commission would ensure that States get the benefit of appropriate distribution of resources to their Panchayati Raj institutes and also periodic recommendations for augmenting own source of revenues.