What to expect from the Sixteenth Finance Commission?

livemint.com:

NEW DELHI : The government on Sunday named former vice chairman of Niti Aayog and Columbia University professor Arvind Panagariya as the chairman of the Sixteenth Finance Commission (SFC), a constitutional body. Mint takes a look at what to expect from the SFC. Finance commissions are independent constitutional bodies with a key role to play in the division of the Centre’s net tax proceeds between Central and state governments keeping in mind the fiscal needs of the states.

All central taxes other than those meant for states and the specific surcharges and cesses levied by the Centre form part of this divisible pool of tax revenue. The finance commissions decide the extent of the Centre’s revenue to be shared with the states and the formula for dividing it among states. The commission is a key pillar of fiscal federalism.

Revenue sharing among states is a controversial subject as resources are finite. The parameters have to accommodate the interests of all states while factoring in their various stages of development. When the Fifteenth Finance Commission was set up, one of the terms of reference was to use the population data of the 2011 census.

Karnataka and Tamil Nadu complained saying that would reduce allocations for them as they had been successful in their population stabilisation initiatives. The panel then gave weight to population and ‘population performance’ for an equitable allocation. The Centre has kept the terms of reference of the SFC short and direct rather than prescriptive.

The panel has been asked to also suggest ways to augment the consolidated funds of states to supplement the resources of local bodies such as panchayats. In addition, the SFC may lay down the principles for grants-in-aid. Panagariya