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What is Finance Commission Grants & Other Transfers?

Topics Covered: Parliament and State Legislatures – structure, functioning, conduct of business, powers & privileges and issues arising out of these.

What is Finance Commission Grants & Other Transfers?

What to study?

For Prelims and Mains: FC- composition, recommendations, grants and basis for grants.

Context: The Finance Ministry has released Rs 6,195.08 crore revenue deficit grant to 14 states as the third equated monthly instalment to enhance their resources during Covid-19 crisis.

The government on May 11, 2020 had released Rs 6,195.08 crore to 14 states as the second equated monthly instalment of the Post Devolution Revenue Deficit Grant as recommended by the 15th Finance Commission. This would provide them additional resources during the Corona crisis.

The 15th Finance Commission used the following criteria while determining the share of states:

  • 45% for the income distance.
  • 15% for the population in 2011
  • 15% for the area
  • 10% for forest and ecology
  • 12.5% for demographic performance, and
  • 2.5% for tax effort.

For 2020-21, the Commission has recommended a total devolution of Rs 8,55,176 crore to the states, which is 41% of the divisible pool of taxes. This is 1% lower than the percentage recommended by the 14th Finance Commission.

What are the various grants recommended by the 15th Finance Commission?

The Terms of Reference of the Finance Commission require it to recommend grants-in-aid to the States.

These grants include: (i) revenue deficit grants, (ii) grants to local bodies, and (iii) disaster management grants.

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 amongst the States themselves.

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 equalization of all public services across the States.

It is the duty of the Commission to make recommendations to the President as to:

  1. the distribution between the Union and the States of the net proceeds of taxes which are to be, or may be, divided between them and the allocation between the States of the respective shares of such proceeds;
  2. the principles which should govern the grants-in-aid of the revenues of the States out of the Consolidated Fund of India;
  3. 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;
  4. any other matter referred to the Commission by the President in the interests of sound finance.

Composition:

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:

  • are, or have been, or are qualified to be appointed as Judges of a High Court; or
  • have special knowledge of the finances and accounts of Government; or
  • have had wide experience in financial matters and in administration; or
  • have special knowledge of economics.

InstaLinks:

Prelims Link:

  1. FC- composition.
  2. Functions of FC.
  3. Appointment of members and constitution of FC.
  4. Types of FC grants.
  5. Formula used by 15th finance commission.

Mains Link:

Give an account of the composition and functions of the Finance Commission as mentioned in the Constitution of India.

Sources: the Hindu.