Finance Commission and Centre-State Financial Relations · UPPCS (Uttar Pradesh)

What the official syllabus says

Main Examination, General Studies II:

Role of Finance Commission in Centre-State financial relations.

Article 280: constituted by the President every fifth year or earlier; a chairman and four other members
Qualifications of members laid down by Parliament in the Finance Commission (Miscellaneous Provisions) Act, 1951
Its duties: distribution of the net proceeds of shareable taxes between the Union and the states (vertical devolution) and among the states (horizontal devolution); principles for grants-in-aid to states from the Consolidated Fund of India; measures to augment state funds for panchayats and municipalities, based on State Finance Commission reports; any other matter referred by the President
Article 281: the report and an explanatory memorandum on action taken are laid before Parliament; recommendations are advisory
A quasi-judicial, "balancing wheel of fiscal federalism" role

Taxes levied by the Union but collected and kept by the states (Article 268)
Taxes levied and collected by the Union but assigned to the states (Article 269); IGST on inter-state supplies (Article 269A)
Taxes levied and collected by the Union and shared with the states (Article 270): the divisible pool after the 80th Amendment, 2000
Surcharges for the Union's own purposes (Article 271) and cesses, both outside the divisible pool
Goods and Services Tax: concurrent taxing power (Article 246A), GST Council (Article 279A), compensation to states for five years
Grants-in-aid: statutory grants on Finance Commission advice (Article 275) and discretionary grants (Article 282)
Borrowing by the Union (Article 292) and by the states (Article 293), and the Union's consent for states that owe it money

First Finance Commission (1951) chaired by K. C. Neogy
Fourteenth Finance Commission (2015 to 2020): states' share raised to 42% of the divisible pool; more untied transfers
Fifteenth Finance Commission (2021 to 2026): 41% share (after the reorganisation of Jammu and Kashmir); criteria of income distance, population (2011), area, forest and ecology, demographic performance and tax effort
Grants recommended by recent Commissions: revenue deficit grants, grants to local bodies, disaster management grants, sector-specific and performance-based grants
Sixteenth Finance Commission, chaired by Arvind Panagariya, constituted on 31 December 2023 for the period from 2026 to 2031

Vertical fiscal imbalance: states bear most spending responsibilities but the Union raises most revenue
Growing share of cesses and surcharges, which are not shared with the states
Choice of population census (1971 or 2011) and the concerns of states that controlled population growth
Equity versus efficiency in the horizontal formula; larger transfers to states with lower per-capita income, such as Uttar Pradesh and Bihar
Overlap with other transfer channels: centrally sponsored schemes, earlier plan grants of the Planning Commission
Fiscal responsibility laws (FRBM Act, 2003 and state FRBM Acts), borrowing limits and off-budget borrowings
State Finance Commissions: irregular constitution, delays in acting on their reports

General Studies III: components of government budgets and the financial system.
General Studies VI: public finance and fiscal policy and the state budgets of Uttar Pradesh.
Union and States: Federal Structure: the wider federal picture.