The Union Cabinet extended the term of 15th Finance Commission, which is to decide on division of tax and other resources between the centre and the states, by one year to October 30, 2020.

“The Cabinet approved the 15th Finance Commission to submit first report for the first fiscal year 2020-21 and to extend the tenure of 15th Finance Commission to provide for the presentation of the final report covering FYs 2021-22 to 2025-26 by October 30, 2020,” according to an official statement.

The term of the commission, headed by N.K. Singh, was originally set to end in October 2019, but was extended by one month to November 30.

Why the govt decided to give an extension?

The extension of the term will enable the commission to examine various comparable estimates for financial projections in view of reforms and the new realities to finalise its recommendations for the period 2020-2026, it said.

“The commission, on account of the restrictions imposed by the model code of conduct, completed its visit to states only recently. This has had a bearing on the detailed assessments of states requirements,” the statement said. 

The terms of reference for the commission are wide-ranging in nature, as per the statement. “Comprehensively examining their implications and aligning them to the requirements of the states and the central government will require additional time,” it said.

The proposed increase in coverage of the period for which the commission’s recommendations are applicable, will help medium-term resource planning for the state governments and the central government.  

“Making a five-year coverage available for the commission beyond April 1, 2021, will help both state and central governments design schemes with medium- to long-term financial perspective and provide adequate time for mid-course evaluation and correction,” the statement said.  

It is anticipated that the impact of the economic reforms initiated in the current financial year  would be manifested in the data by the end of first quarter 2020-21, it added. 

What is the Finance Commission?

The Finance Commission is constituted by the President under Article 280 of the Constitution, mainly to give its recommendations on distribution of tax revenues between the Union and the states and among the states themselves.

What are its functions?

Two distinctive features of the commission’s work involve redressing the vertical imbalances between the taxation powers and expenditure responsibilities of the Centre and the states respectively and equalistion of all public services across the states.

It makes recommendations on:

* The distribution between the Union and the states of the net proceeds of taxes that are to be, or may be, divided between them and the allocation between the states of the respective shares of such proceeds.

* The principles that should govern the grants-in-aid of the revenues of the states out of the Consolidated Fund of India.

* The measures needed to augment the consolidated fund of a state to supplement the resources of the panchayats in the state on the basis of the recommendations made by the Finance Commission of the state.

* The measures needed to augment the consolidated fund of a state to supplement the resources of the municipalities on the basis of the recommendations made by the Finance Commission of the state.

What are the qualifications required for its members?

As per the provisions contained in the Finance Commission (Miscellaneous Provisions) Act, 1951, and The Finance Commission (Salaries & Allowances) Rules, 1951, the chairman of the commission is selected from among persons who have had experience in public affairs, and the four other members are selected from among persons who...

(a) are, or have been, or are qualified to be appointed as judges of a High Court or

(b) have special knowledge of the finances and accounts of government or

(c) have had wide experience in financial matters and in administration or

(d) have special knowledge of economics

When was the first commission constituted?

The First Finance Commission was constituted by a presidential order under the chairmanship of K.C. Neogy on April 6, 1952.

Do other countries have such commissions?

Most federal systems resolve the vertical and horizontal imbalances through mechanisms similar to the Finance Commission. For example, Australia and Canada.

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