FINANCE COMMISSION
Polity
• Article 280 – Establishes Finance Commission (FC)
• Article 281 – Lays down that the President shall lay the FC recommendations before Parliament
• FC is a quasi-judicial body constituted every five years
• Balancing wheel of fiscal federalism
• Recommendations are advisory, not binding
• Chairman + 4 Members (qualifications prescribed)
Composition and Qualifications
• Chairman – must have experience in public affairs
• Four Members –
– A High Court Judge or qualified to be one
– Person with knowledge of government finance and accounts
– Person with experience in financial administration
– Person with special knowledge of economics
• Term determined by the President; reappointment possible
Powers of the Finance Commission
• Possesses powers of a Civil Court under Civil Procedure Code, 1908
• Can summon witnesses, demand documents and public records
• Can ask for any information relevant to its work
• Functions like a civil court while discharging duties
Functions of Finance Commission
• Recommend vertical devolution – distribution of divisible tax pool between Union and States
• Recommend horizontal devolution – distribution among States
• Recommend principles of grants-in-aid to States from Consolidated Fund of India
• Recommend measures to augment State Consolidated Fund for PRIs and ULBs
• Any additional matter referred by the President
15th FINANCE COMMISSION (Key Highlights)
General
• First report: 2020–21
• Final report: 2021–22 to 2025–26
• Title: “Finance Commission in COVID Times”
Vertical Devolution
• Share of States: 41% of divisible tax pool
• Reduced by 1% due to creation of UTs Ladakh & J&K (earlier 42%)
Horizontal Devolution – Criteria and Weightage
• Income distance – 45%
• Population (2011) – 15%
• Area – 15%
• Demographic performance – 12.5%
• Forest & ecology – 10%
• Tax and fiscal effort – 2.5%
Special Grants
• No special grants for 2021–26
• For 2020–21: Special grants of ₹6,764 crore to Karnataka, Mizoram, Telangana
Grants to Local Bodies
• 2020–21: ₹90,000 crore
• 2021–26: ₹4,36,361 crore
• Rural : Urban distribution moves from 67.5:32.5 to 65:35 by 2025–26
• Formula for distribution among states: 90% population + 10% area
Tied and Untied Grants
• Panchayats:
– 60% tied grants for national priorities: drinking water, rainwater harvesting, sanitation
– 40% untied grants under the 11th Schedule (except salaries)
• Conditions for availing grants:
– Online availability of previous year accounts
– For ULBs: Property tax reforms and improved collection
Million-Plus Cities Challenge Fund
• Total: ₹38,196 crore for 2021–26
• Covers 50 million-plus cities
• 1/3rd for ambient air quality improvements
• 2/3rd for water supply, rainwater harvesting, waste management, sanitation
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Subject: Polity
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