Process to set up Sixteenth Finance Commission set to kick off soon

Source: The post is based on the article “Process to set up Sixteenth Finance Commission set to kick off soon” published in The Hindu on 31st January 2023.

What is the News?

The government will soon kick off the process to set up the Sixteenth Finance Commission.

What is the Finance Commission?

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When was the last Finance Commission constituted?

The Fifteenth Finance Commission was set up in 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. This means the report covered a period of six years instead of five.

Note: The last time an FC was granted a six-year time frame was for the 9th Finance Commission, formed in June 1987.

What will be the key challenges before the 16th Finance Commission?

Overlap with GST Council: The key challenge for the 16th FC would be the co-existence of another permanent constitutional body, the GST Council.

– This is because the GST Council’s decisions on tax rate changes could alter the revenue calculations made by the Commission for sharing fiscal resources.

Implementation of its recommendations: Centre usually takes the Finance 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 the Centre and States collectively work out India’s macro-fiscal management challenges, but the government has signalled there is no need for it.

– Moreover, the centre had accepted to set up a non-lapsable fund for internal security and defence ‘in principle’. But its implementation still has to be worked out.