• The 16th Finance Commission headed by Arvind Panagariya set up a five-member advisory council.

• The five-member panel would be headed by Poonam Gupta, Director General of the National Council of Applied Economic Research (NCAER).

• Other members of the advisory council are D.K. Srivastava, Neelkanth Mishra, Pranjul Bhandari, and Rahul Bajoria.

• The advisory council will help to broaden the Finance Commission’s ambit and understanding by seeking the best national and international practices on matters pertaining to fiscal devolution and improving the quality, reach, and enforcement of its recommendations.

• Besides, the advisory council will assist in the preparation of papers or research studies and monitor or assess studies commissioned by the Finance Commission, thereby enhancing its understanding of the issues in its terms of reference.

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.

• The 15th Finance Commission was constituted on November 27, 2017 against the backdrop of the abolition of the Planning Commission (as also of the distinction between Plan and non-Plan expenditure) and the introduction of the Goods and Services Tax (GST), which has fundamentally redefined federal fiscal relations.

• In November 2020, the 15th Finance Commission, led by chairman N.K. Singh, submitted its report for the period 2021-22 to 2025-26 to the then President Ram Nath Kovind. 

• On December 31, 2023, the government appointed former vice chairman of NITI Aayog Arvind Panagariya as the chairman of the 16th Finance Commission.

• Ritvik Ranjanam Pandey was named as the secretary to the Commission.

• Full-time members of the Commission are former expenditure secretary Ajay Narayan Jha, retired bureaucrat Annie George Mathew, and Artha Global executive director Niranjan Rajadhyaksha, while SBI Group chief economic adviser Soumya Kanti Ghosh is a part-time member. 

• The panel will make its recommendations available by October 31, 2025, covering an award period of five years commencing on April 1, 2026.

Terms of Reference for the 16th Finance Commission:

The Finance Commission shall make recommendations as to the following matters:

i) The distribution between the Union and states of the net proceeds of taxes which are to be, or may be, divided between them under Chapter I, Part XII of the Constitution and the allocation between the states of the respective shares of such proceeds.

ii) The principles which should govern the grants-in-aid of the revenues of the states out of the Consolidated Fund of India and the sums to be paid to the states by way of grants-in-aid of their revenues under Article 275 of the Constitution for the purposes other than those specified in the provisos to clause (1) of that Article.

iii) The measures needed to augment the Consolidated Fund of a State to supplement the resources of the panchayats and municipalities in the state on the basis of the recommendations made by the Finance Commission of the State.

iv) The Commission may review the present arrangements on financing disaster management initiatives, with reference to the funds constituted under the Disaster Management Act, 2005, and make appropriate recommendations thereon.

What are the functions of Finance Commission?

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 equalisation 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 Finance 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.

Constitutional provisions under which Finance Commission acts:

• Article 268 - Duties levied by the Union but collected and appropriated by the states.

• Article 269 - Taxes levied and collected by the Union but assigned to the states.

• Article 270 - Taxes levied and collected by the Union and distributed between the Union and the states.

• Article 271 - Surcharge on certain duties and taxes for purposes of the Union.

• Article 274 - Prior recommendation of President required to Bills affecting taxation in which states are interested.

• Article 275 - Grants from the Union to certain states.

• Article 280 - Constituting the Finance Commission.

• Article 281 - Recommendations of the Finance Commission.

• Article 282 - Expenditure defrayable by the Union or a state out of its revenues.

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