Article 280

Constitutional, Quasi-Judicial, Non-permanent
Report to President who places it in Parliament along with explanatory memo
Composition

Head: Chairman
Members: 4
Appointed by: President
Term specified by President
Qualification: Constitution authorized Parliament. Accordingly, Finance Commission Act '51

Qualification: Chairman - experience in public affairs, (Need not be a judge)
Members- HC judge/qualified to be HC judge/knowledge of finance, economics & Govt accounts/wide experience in financial matters, administration

Service conditions: Parliament empowered
Eligible for re-appointment

Constitutional mandate

Horizontal and vertical devolution of net proceeds of taxes
Principles governing Grant in aid to states by Centre
Measures to augment CFS to supplement panchayats on recommendation of SFC
Any other by President in interest of sound Finance

Recommendations are advisory
Balancing wheel of Fiscal Federalism
Planning Commission and Finance Commission have overlapping role
FC is Quasi-Judicial because it can summon, request any public record from any office

15 Finance Commissions have been appointed so far:

14th Finance Commission	2013	Y.V. Reddy	2015-20
15th Finance Commission	2017	N.K Singh	2020-26

14th Finance Commission

Mandate:

The Finance Commission is required t recommend the distribution of the net proceeds of taxes of the Union between the Union and the States (commonly referred to as vertical devolution); and the allocation between the States of the respective shares of such proceeds (commonly known as horizontal devolution).

Vertical Devolutions

- Centre share and total state share

Horizontal Devolution

- Share b/w states of the total state share-
Horizontal Distr. Variables:

1) Census 1971: Population

2) Census 2011: Demographic Change

3) Income-Distance from Best States

4) Area

5) Forest-Cover

Note: Fiscal discipline is excluded

Performance Grant and Basic Grant

14th Finance Commission made a new recommendation of Performance Grant in addition to Basic grant

FFC has recommended grants in two parts; a basic grant, and a performance grant, for duly constituted Gram Panchayats and municipalities.
The ratio of basic to performance grant is 90:10 with respect to Panchayats and 80:20 with respect to Municipalities

15th Finance Commission

Mandate

To finalize its tax-devolution formula after factoring in the impact on the Union fiscal situation, keeping in mind “the continuing imperative of t national development programme including New India – 2022< span>” and governme t commitment to compensate states’ loss due to GST
The Commission shall use the population data of 2011 while making its recommendations.
Performance Based incentives

Commission has been asked to propose measurable performance-based incentives in areas such as

Efforts made by the states in expansion and deepening of the tax net under GST,
Progress made in increasing tax/non-tax revenues
Progress made in increasing capital expenditure, eliminating losses of power sector, and improving the quality of such expenditure in generating future income streams;
Improvement in ease of doing business
Promoting savings through adoption of direct benefit transfers
Promoting a digital economy; etc
Efforts and progress made in moving towards replacement rate of population growth, which refers to the total fertility rate that will result in a stable population without increasing or decreasing it.
Sanitation, solid waste management and bringing in behavioral change to end open defecation.
Reign in populist measures
Implementation of flagship central schemes and disaster resilient infrastructure

To examine if a separate mechanism for funding of defence and internal security ought to be set up.

New Term of Reference added recently August 2019

Population 2011	15%
Demographic performance	12.5%
Income distance	45%
Forest cover & Ecology	10%
Tax effort	2.5%
Area	15%

Two new performance based incentives - Tax efforts and Demographic performance

Interim report for 2020-21

Critical of Govt to finance spending through off-budget borrowings and via parastatals
Ex: Govt has been meeting part of the finance requirements of FCI from National Small Savings Fund and this is not included in the fiscal deficit. Loan of 70000 crore raised from NSSF and it does not get reflected in the budget docs.
This is not prudent economics as it artificially show a lesser expenditure and hence a smaller deficit
41% share for States out of the divisible pool of tax collection (now 42%)

J&K state reduced to two UTs

Rationalise centrally sponsored schemes
An overarching fiscal framework for Centre & states, on lines of FRBM Act, to lay down accounting, budgeting and auditing standards to be followed at all levels of government.
Enhanced devolution to local bodies

Final report 21-26

41% vertical share for States out of the divisible pool of tax collection (earlier 42%)
a separate non lapsable Modernisation Fund for Defence an Internal Security (MFDIS

Four specific sources of incremental funding,

transfers from the Consolidated Fund of India
Disinvestment proceeds of defence public sector undertakings (DPSUs),
proceeds from the monetization of surplus defence land, including realisation of arrears of payment for defence land used by the State governments and for public projects and cost recovered from encroached land and
proceeds of receipts from defence land

States are allowing a normal ceiling of net borrowing for the States at 4% of GSDP and are expected to reach a fiscal deficit of 3% of GSDP by 202324, and& nbsp;maintain that level till 2025-26

Income distance

It measures the difference between the per capita GSDP of a state and the per capita GSDP of the state with the highest per capita income.