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Cabinet Approval for 16th Finance Commission

Published: 30th Nov, 2023

Context:

The Union Cabinet, chaired by Prime Minister Shri Narendra Modi, has approved the Terms of Reference (ToR) for the Sixteenth Finance Commission.

Terms of Reference for the 16th Finance Commission-

  • Distribution of Net Proceeds: Addressing the division of net tax proceeds between the Union and States, along with the allocation among States.
  • Principles for Grants-in-Aid: Defining principles governing grants-in-aid of State revenues from the Consolidated Fund of India.
  • Resource Augmentation: Identifying measures to supplement the Consolidated Fund of a State for empowering Panchayats and Municipalities, aligning with State Finance Commission recommendations.
  • Disaster Management Financing: Reviewing current financing arrangements for Disaster Management initiatives, proposing recommendations based on the Disaster Management Act, 2005.

The Constitution (Article 280) mandates the formation of a Finance Commission every fifth year or earlier, aligning with the fiscal cycle.

Timeline and Deliverables:

  • The 16th Finance Commission is tasked to submit its report by October 31, 2025, covering a five-year period from April 1, 2026.
  • This timeframe ensures a comprehensive assessment of the financial landscape preceding the recommendations.

Finance Commissions: FCs is constitutional bodies set up under Article 280 of the Constitution every five years to make recommendations on the distribution of financial resources between the Union and the states.

Recommendations cover three main aspects:

1. Vertical Devolution:

The share of states in the divisible pool of central taxes.

2.  Horizontal Distribution:

The allocation of resources among states based on a formula that reflects their fiscal needs, capacities and performance.

3. Grants-in-aid:

The additional transfers to specific states or sectors that are in need of assistance or reform.

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