The government will soon kick off the process to set up the Sixteenth Finance Commission, with the Finance Ministry likely to notify the terms of references for the constitutional body, tasked with recommending the revenue sharing formula between the Centre and States and their distribution among States, towards the latter half of this year.
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The Fifteenth Finance Commission was set up in November 2017 with a mandate to make recommendations for the five-year period from 2020-21. While the Constitution requires a Finance Commission (FC) to be set up every five years, the 15th FC’s mandate was extended by a year till 2025-26, breaking the cycle.
“In the normal course of things, the next Finance Commission should have been appointed by now, but since our report covered six years instead of five, it must be appointed this year,” the 15th FC’s chairperson N.K. Singh told The Hindu. In late 2019, the Commission was asked to give a standalone report for 2020-21 and another report for an extended five-year period till 2025-26.
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The last time an FC was granted a six-year time frame was for the 9th Finance Commission, formed in June 1987. It was asked to submit a single year report for 1989-90 and a five-year report for the five years till 1994-95. These reports were submitted in 1988 and 1990, when the country’s Finance Ministers were S.B. Chavan and Madhu Dandavate, respectively. The Tenth Finance Commission was still constituted in June 1992 within the five-year deadline specified by Article 280 of the Constitution, which has not been the case this time.
“The Commission is usually granted about two years to deliberate on its terms of reference, consult States and frame its recommendations, and the government should ideally have its report by October 2025 to consider it in time for Budget 2026-27 — where it will have to place its action taken report on the Commission’s report,” explained Arvind Mehta, secretary of the 15th FC.
The key challenge
A key new challenge for the 16th FC would be the co-existence of another permanent constitutional body, the GST Council, Mr. Singh pointed out, as the Council’s decisions on tax rate changes could alter the revenue calculations made by the Commission for sharing fiscal resources. “What recourse mechanism can be put in place for the Commission, which is not a permanent body, to revisit its numbers due to the Council’s decisions,” he underlined.
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M. Govinda Rao, member of the 14th Finance Commission, said the government usually takes the Commission’s recommendations on States’ share of tax devolution and the trajectory for fiscal targets into account, and ignores most other suggestions. For instance, the 15th FC has suggested creating a Fiscal Council where Centre and States collectively work out India’s macro fiscal management challenges, but the government has signalled there is no need for it, he pointed out.
As an afterthought, the 15th FC was, in July 2019, given an additional term of reference to determine whether ‘a separate mechanism for funding of defence and internal security ought to be set up’. While the government has accepted the Commission’s recommendation to set up a non-lapsable fund for internal security and defence ‘in principle’, its implementation still has to be worked out, Mr. Singh noted.
While the terms of reference for the Sixteenth FC will be worked out after internal government deliberations steered by the Finance Ministry, the first step towards constituting the Commission will be the appointment of an Officer on Special Duty to drive the process. This officer typically becomes the member-secretary of the Commission, once it is constituted.