The Union Cabinet chaired by the Prime Minister Narendra Modi has approved setting up of 15th Finance Commission (FC). It is a constitutional obligation to set up FC under Article 280 (1) of the Constitution.
The Terms of Reference for 15th FC will be notified in due course of time. In terms of constitutional provisions, setting up 15th FC, its recommendations will cover five years commencing on April 1, 2020.
Article 280(1) of Constitution lays down that FC should be constituted within two years from commencement of Constitution. Thereafter at expiration of every fifth year or at such earlier time as President considers necessary. In keeping with this requirement, practice has generally been to set up next FC within five years of date of setting up of the previous Finance Commission. 14 Finance Commissions have been constituted in the past.
14th Finance Commission
The 14thFinance Commission was set up in January 2013 to make recommendations covering period of five years commencing on April, 2015 to March 2020. It was headed by former RBI Governor YV Reddy. The Commission had submitted its report in December, 2014. The recommendations of 14th FC are valid upto the financial year 2019-20. It had recommended of enhanced devolution — 42% as against 32% — of the taxes from divisible pool to the states.
Article 280 of the Constitution of India provides for FC as a quasi-judicial body. It is constituted by the President of India every fifth year. It consists of a chairman and four other members to be appointed by the president. The recommendations made by FC are only advisory in nature and hence, are not binding on the government. It makes recommendations about the following to the President of India:
- Distribution of net proceeds of taxes between centre and states and allocation between states of respective shares of such proceeds.
- Principles that should govern grants in aid to states by centre.
- Measures needed to augment consolidated fund of states to supplement resources of local governments in states on basis of recommendations made by State Finance Commissions.
- Any other method referred to it by President in interests of sound finance.