Charting the Path for Sixteenth Finance Commission

Context:  The Union government is planning to set up the 16th Finance Commission during the fiscal year 2023-24. More on News:
  • The commission’s main task is to suggest the ratio in which taxes should be divided between the Centre and states for the five-year period starting from April 1, 2026.
  • The members of the commission and its Terms of Reference (ToR) are currently being determined.
About Finance Commission (FC):
  • It is a constitutional body that provides recommendations on Centre-state financial relations.
  • It is established every five years under Article 280 of the Constitution.
Their recommendations cover three main aspects:
  • Vertical Devolution (Union to state transfers): FCs suggest the share of states in the divisible pool of central taxes.
    • The share of taxes is determined by a set of indicators that includes population, per capita income, area, and incentive-related factors such as forest cover and demographic change.
  • Horizontal Distribution ((between states):  Allocation of resources among states based on a formula considering their fiscal needs, capacities, and performance.
  • Grants-in-aid: It also recommend additional transfers to specific states or sectors requiring assistance or reform. For instance, the 13th FC provided grants for justice delivery and the statistical system.
Recommendations are advisory, the Union government typically accepts them with minor modifications.
 News Source: The Hindu

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