Role of the Finance Commission
Introduction to the Finance Commission
The Finance Commission, a constitutional body, advises on the distribution of tax revenues between the Central government and State governments. It is reconstituted every five years and operates independently to ensure equitable fiscal federalism.
Mandate and Function
- Vertical Devolution: Determines the share of Central tax revenue allocated to States. While not based on a fixed formula, recent Commissions have advocated for higher allocations to States.
- Horizontal Devolution: Distributes funds among States based on factors like population, income levels, and geographical considerations.
- The Commission''s recommendations are crucial for maintaining fiscal balance and meeting State expenditure requirements.
Current Commission''s Work
- The 16th Finance Commission, headed by Arvind Panagariya, began its work by inviting public suggestions. It aims to submit recommendations by October 2025.
- These recommendations will govern the distribution of tax revenues from April 2026 for a five-year period.
Issues and Friction
- Distribution Disputes: Tensions arise between the Centre and States over the proportion of tax proceeds allocated to States. States argue for a higher share due to their responsibilities in delivering essential services like education and healthcare.
- Under-Devolution: States often receive less than the recommended share from the divisible pool due to the Centre''s discretion, impacting their fiscal autonomy.
- Cesses and Surcharges: Non-shareable cesses and surcharges constitute a significant portion of the Centre''s revenue, reducing the effective share States receive and creating fiscal disparities.
Impact on Local Bodies
- The 16th Finance Commission aims to enhance the revenue capacities of local bodies such as panchayats and municipalities.
- Currently, local bodies in India receive minimal funding compared to global standards, limiting their ability to deliver effective governance at the grassroots level.
Disparities and Criticisms
- Fiscal Imbalance: Developed States like Karnataka and Tamil Nadu argue they receive less funding than their contributions, leading to perceived inequities in fiscal transfers.
- Independence Concerns: Critics question the independence of the Finance Commission, noting its members are appointed by the Centre, potentially influencing its decisions.
- Governance Impact: The Commission''s recommendations significantly impact governance and development across States, highlighting the need for fair and transparent fiscal policies.
CONCLUSION
The Finance Commission''s role in India''s fiscal federalism is pivotal but fraught with challenges related to revenue distribution and governance effectiveness. Ongoing reforms are necessary to address disparities, enhance fiscal autonomy at all levels, and ensure equitable distribution of resources in line with constitutional mandates.
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