●  The Sixteenth Finance Commission (XVIFC), chaired by Dr. Arvind Panagariya, has been established to make recommendations for a five-year period starting April 1, 2026.

●  The commission invites suggestions and views from the public, organisations, and individuals on the specified terms of reference and its general approach.

● Constitutional Body: The Finance Commission is a constitutional body established under Article 280 of the Indian Constitution.

● Composition: It typically consists of a chairman and four other members appointed by the President of India.

● Five-Year Cycle: The Commission is constituted every five years to make recommendations on fiscal matters.

● Tax Revenue Distribution: Its primary function is to recommend the distribution of tax proceeds between the central government and the state governments.

● Assessment of Finances: The Commission assesses the financial position of both the central and state governments.

● Principles for Distribution: Recommendations are made based on principles such as population, income levels, area, infrastructure, and fiscal discipline.

● Grant-in-Aid: It advises on grants-in-aid to states and measures to augment their resources.

● Other Referrals: The Commission also examines any other related issues referred to it by the President.

● Recommendations Submission: After deliberations, its recommendations are submitted to the President for consideration.

● Parliamentary Presentation: The President lays the Commission’s recommendations before both houses of Parliament.

● Non-binding Recommendations: While its recommendations are not binding, they significantly influence fiscal policies and federal relations.

● Promotion of Cooperative Federalism: Through its work, the Finance Commission contributes to fostering cooperative federalism and equitable development across Indian states.

● The Terms of Reference (ToR) for the Sixteenth Finance Commission (XVIFC) outline its scope and responsibilities.

● It includes distributing net tax proceeds between the Union and States and allocating shares among States under Chapter I, Part XII of the Constitution.

● The XVIFC determines principles for grants-in-aid from the Consolidated Fund of India to States and sums under Article 275 for specified purposes.

● It also suggests measures to enhance State Consolidated Funds to support Panchayats and Municipalities based on State Finance Commission recommendations.

● Additionally, the commission reviews financing arrangements for Disaster Management initiatives, making recommendations under the Disaster Management Act, 2005.

● The XVIFC’s report is expected by October 31, 2025, covering a five-year period from April 1, 2026.

PYQ:

Q.1 How have the recommendations of the 14th Finance Commission of India enabled the States to improve their fiscal position? (150 words/10m) (UPSC CSE (M) GS-2 2021)

Q.2 How is the Finance Commission of India constituted? What do you know about the terms of reference of the recently constituted Finance Commission? Discuss.
(250 words/15m) (UPSC CSE (M) GS-2 2018)

Q.3 Discuss the recommendations of the 13th Finance Commission which have been a departure from the previous commissions for strengthening the local government finances. (200 words/10m) (UPSC CSE (M) GS-2 2013)