What is on the agenda for the 16th Finance Commission?

Sub: Polity

Sec: Federalism

Context:

The 16th Finance Commission (FC) has begun its work, established under Article 280 of the Indian Constitution, primarily focusing on the devolution of the consolidated fund.

More on news:

Since the 73rd and 74th constitutional amendments, local bodies have gained significant recognition within the federal system.
These amendments introduced sub-clauses 280(3)(bb) and (c), which mandate the FC to recommend measures to augment State consolidated funds for supporting panchayats and municipalities.

What about cities?

The National Commission on Urbanisation in the mid-80s described cities as “engines of growth.”
Cities contribute around 66% of India’s GDP and about 90% of total government revenues.
Cities, thus, are an important spatial zone for the overall development of the country. However, our economic scale is insufficient to meet rising needs.

What about the taxation system?

The introduction of the Goods and Service Tax (GST) has reduced ULBs’ tax revenue (excluding property tax) from about 23% in 2012-13 to around 9% in 2017-18.
IGTs from States to ULBs are very low, with State Finance Commissions recommending only about 7% of States’ own revenue in 2018-19.
Increasing the quantum of IGTs as a percentage of GDP is necessary.
Despite the 74th constitutional amendment’s aim to financially strengthen ULBs, progress over three decades has fallen short.
The 13th Finance Commission observed that parallel agencies and bodies are emasculating local governments both financially and operationally.
Local governments require support from Union and State governments through funds, functionaries, and technical aid.

How important is the Census?

In the absence of the 2021 Census, reliance on 2011 data is inadequate for evidence-based fiscal devolution.
India has approximately 4,000 statutory towns and an equal number of Census towns, with an estimated 23,000 villages, all of which are effectively urban.
These figures must be captured by the 16th FC, including the significant migration to Tier-2 and 3 cities.

About Finance Commission:

The Finance Commission is a constitutional body under Article 280 created every five years to recommend the transfer of financial resources from the Centre to the States.
The Commission also decides the principles on which grants-in-aid will be given to the States.
The State Finance Commission (SFC) is an institution created by the 73rd and 74th Constitutional Amendments (CAs) to rationalize and systematize State/sub-State-level fiscal relations in India.
Article 243I of the Constitution mandated the State Governor to constitute a Finance Commission every five years.
Article 243Y of the Constitution states that the Finance Commission constituted under article 243 I shall also review the financial position of the Municipalities and make recommendations to the Governor.