Model Question and Answers for APSC | How is the Finance Commission of India constituted? What do you think about athe terms of reference of the recently constituted Finance Commission? Discuss.

Ans: The Finance Commission is constituted by the President under Article 280 of the Constitution, mainly to give its recommendations on the 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 the equalization of all public services across the States.

Terms of reference

• Provide a roadmap for fiscal consolidation for effective financial management.
• Consider the obligation on the part of the federal government and state governments to maintain reasonable levels of overall and consolidated government debt and deficits.
• Encourage greater inclusive growth in the nation while adhering to the values of equity, efficiency, and transparency.
• Look into the possibility of offering grants for revenue Review the current financing arrangements for disaster management initiatives in light of the funds established by the Disaster Management Act of 2005 (53 of 2005), and offer pertinent recommendations.
• Impact of the GST on government finances, including payment of compensation for potential revenue losses for five years and elimination of a number of cesses with money set aside for compensation and other structural reforms.

Assessment of Terms of reference:

• Independent decision-making is de-incentivized by performance- based incentives. Any restrictions on the state's borrowing capacity will have a negative impact on its spending, especially on development, undermining cooperative fiscal federalism.

• It lessens the joint accountability that the Union and the States have and does not hold the Union government responsible for its own fiscal responsibility.

The urgent need is to address stakeholder concerns and develop principles that result in a fair distribution of resources between states and between the centre and states.In addition, the government will need to give a number of policy matters extra attention if it hopes to accomplish the admirable goals that the Finance Commission set forth, such as streamlining the GST, the Direct Tax Code, and improving expenditure results.