Sixteenth Finance Commission’s Terms of Reference

The Union Cabinet, under the guidance of Prime Minister Shri Narendra Modi, has given its approval for the Terms of Reference of the Sixteenth Finance Commission. This significant step is part of the constitutional process outlined in Article 280(1), aiming to make recommendations on the distribution of net proceeds of taxes between the Union and the States.

Duration and Coverage

• The recommendations of the 16th Finance Commission, once accepted by the government, will span a period of five years, beginning on April 1, 2026.
• The Fifteenth Finance Commission, constituted on November 27, 2017, had recommendations valid up to the financial year 2025-26.

Key Areas of Focus

The Sixteenth Finance Commission will provide recommendations on:

1. Distribution of Net Proceeds of Taxes:
   • This involves the division of net proceeds of taxes between the Union and the States under Chapter I, Part XII of the Constitution.
   • It also addresses the allocation of respective shares of these proceeds among the States.
2. Grants-in-Aid Principles:
   • The Finance Commission will outline the principles governing grants-in-aid of the revenues of the States from the Consolidated Fund of India.
   • It will specify the sums to be paid to the States as grants-in-aid for purposes other than those outlined in the provisos to clause (1) of Article 275.
3. Resource Augmentation for States:
   • The Commission will suggest measures to augment the Consolidated Fund of a State to enhance the resources of Panchayats and Municipalities based on its recommendations.
4. Review of Disaster Management Financing:
   • The Commission has the authority to review the current arrangements for financing Disaster Management initiatives, considering funds under the Disaster Management Act, 2005 (53 of 2005).

Timeline and Background

• The report of the Sixteenth Finance Commission is expected to be available by October 31, 2025, covering a five-year period starting April 1, 2026.
• The constitution of the 16th Finance Commission follows precedents, where previous commissions were constituted after intervals longer than the usual five years.

Advance Preparations for the 16th Finance Commission

• The Advance Cell of the 16th Finance Commission was established in the Ministry of Finance on November 21, 2022.
• A Working Group, led by key officials and experts, was formed to assist in formulating the Terms of Reference, gathering input through a consultative process with State Governments and Union Territories.

Month: Current Affairs - November, 2023

Category: India Nation & States Current Affairs