Charting the path for the Sixteenth Finance Commission

About Finance Commission:

• Article 280 of the Indian Constitution:  It is a constitutional body established every five years by the President of India to specify the financial ties between the Centre and the states.

• The Commission is made up of a chairman and four other members, as stated in the constitution.

Role of Finance Commission:

• The Finance Commission in India plays a crucial role in recommending the distribution of financial resources between the central government and the state governments.

• It assesses the fiscal requirements and expenditure patterns of both the central and state governments, aiming to ensure a balanced fiscal structure and promote cooperative federalism.
• The Finance Commission’s recommendations aid in determining the allocation of funds for various sectors, helping to address regional imbalances and promote equitable development across different states in India.

New Issues for the 16th Finance Commission: 

• FC and GST Council: The GST Council’s decisions on tax rates can affect the revenue projections and calculations made by FCs for sharing fiscal resources.

• Defense and Security: Fifteenth FC  recommended creating a non-lapsable fund for security and defence purposes, which was accepted by the government in principle, but its implementation still has to be worked out.

• COVID-19 effect: The Sixteenth FC will need to consider the pandemic’s effect and consequences on the fiscal performance and situation of the Centre and States, as well as their spending requirements and priorities.

Why in news?

• The Union government is gearing up to constitute the Sixteenth Finance Commission this year for the five-year period beginning 2026-27.