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15th Finance Commission: Recommendations, Report, 15th Finance Commission UPSC

By BYJU'S Exam Prep

Updated on: November 14th, 2023

15th Finance Commission (XV- FC or 15- FC) is a constitutional body established in November 2017. The 15th Finance Commission recommendations will cover a period of five years from the year 2021-22 to 2025-26. Under Article 280 of the Constitution, the President of India must constitute a Finance Commission five years or earlier. The 15th Finance Commission, chaired by Mr. N. K. Singh, was required to submit two reports. The first report, consisting of recommendations for the financial year 2020-21, was tabled in Parliament in February 2020. The final report with recommendations for the 2021-26 period was tabled in Parliament on February 1, 2021.

15th Finance Commission is a constitutional body in India responsible for recommending the distribution of financial resources between the central government and the state governments. It plays a crucial role in determining the sharing of taxes, grants, and other fiscal matters, with the aim of promoting cooperative federalism in the country. Understanding the functioning and recommendations of the Finance Commission is vital for aspirants preparing for the UPSC exam, enabling them to grasp the intricacies of India’s economic structure and governance mechanisms.

Finance Commission

The Finance Commission is a constitutional body tasked with determining the method and formula for distributing the tax proceeds between the Centre and states and among the states as per the constitutional arrangement and present requirements. Under Article 280 of the Constitution, the President of India must constitute a Finance Commission five years or earlier.

  • 15th Finance Commission recommendations will cover a period of five years from 2021-22 to 2025-26 and is headed by NK Singh, a senior member of the BJP.
  • The commission was set up to recommend the devolution of taxes and other fiscal matters for five fiscal years commencing 1 April 2020.
  • The commission’s main tasks were to “strengthen cooperative federalism, improve the quality of public spending and help protect fiscal stability“.
  • 15th Finance Commission was constituted against the backdrop of the abolition of the Planning Commission (as also the distinction between Plan and non-Plan expenditure) and the introduction of the Goods and Services Tax (GST), which has fundamentally redefined federal fiscal relations.

Recommendations of the 15th Finance Commission

15th Finance Commission has made several significant recommendations that would be applicable for a period of six years, from 2021 to 2026. These recommendations encompass various aspects of fiscal distribution, economic impact assessment, and incentivizing state governments. Following are the recommendation of 15th Finance Commission:

  • Distribution of Tax Proceeds: The Commission has recommended a fair distribution of tax proceeds between the central government and the states, ensuring a balanced fiscal sharing mechanism.
  • Impact of GST: The Finance Commission emphasizes the need to study the impact of the Goods and Services Tax (GST) on the economy. This assessment aims to understand the implications of GST implementation and its effects on various sectors.
  • Performance-based Incentives: The Commission suggests providing performance-based incentives to state governments. These incentives would be based on their efforts to address issues such as population control, ease of doing business, and other relevant factors.
  • Grants to States: The Finance Commission has proposed the provision of revenue deficit grants, grants to local bodies, and disaster management grants to the states. These grants aim to support the financial needs of the states and ensure effective governance.
  • Sector-specific and Performance-based Grants: In addition to the above, the Commission has also recommended the establishment of a framework for sector-specific and performance-based grants. These grants would encourage states to focus on specific sectors and reward their performance in achieving developmental targets.

Revenue Sharing Formula in 15th FC

Members of 15th Finance Commission

15th Finance Commission’s chairman is Nand Kishore Singh, a senior member of the Bharatiya Janata Party (BJP) since March 2014, with its full-time members being Ajay Narayan Jha, Ashok Lahiri, and Anoop Singh. In addition, the commission also has a part-time member, Ramesh Chand. Shaktikanta Das served as a commission member from November 2017 to December 2018. Following are the Members of 15th Finance Commission:

  • N.K. Singh (Chairman): N.K. Singh, a former bureaucrat and Member of Parliament, served as the Chairman of the 15th Finance Commission. He played a crucial role in leading the commission and overseeing its functions.
  • Shaktikanta Das (Ex-Officio Member): Shaktikanta Das, the Governor of the Reserve Bank of India (RBI), served as an ex-officio member of the 15th Finance Commission. His expertise in financial matters contributed to the commission’s discussions and decisions.
  • Anoop Singh (Part-time Member): Anoop Singh, a distinguished economist, served as a part-time member of the 15th Finance Commission. His experience and insights in the field of economics were valuable in the commission’s deliberations.
  • Ashok Lahiri (Part-time Member): Ashok Lahiri, a renowned economist and former Chief Economic Advisor to the Government of India, served as a part-time member of the 15th Finance Commission. His expertise added depth to the commission’s discussions on fiscal matters.
  • Ramesh Chand (Full-time Member): Ramesh Chand, an agricultural economist and a member of the NITI Aayog (National Institution for Transforming India), served as a full-time member of the 15th Finance Commission. His expertise in the agricultural sector contributed to the commission’s recommendations.

Difference Between Vertical and Horizontal Devolution

According to Article 280 of the Indian Constitution, each Finance Commission must make suggestions and recommendations about sharing the net proceeds of the taxes between the Union and the states and also among various states of the country. The process of devolution of taxes of the union to various states is known as vertical devolution. In contrast, the process of devolution of taxes among various states is known as horizontal devolution.

Vertical Devolution in the 15th Finance Commission

Key highlights of the vertical devolution include:

  • 15th Finance Commission recommended maintaining vertical devolution at 41%.
  • Similar to that of the Fourteenth Finance Commission, it is at the level of 42% of the divisible pool.
  • The change of a percent in the 15th Finance Commission is due to the adjustment required because of the changed status of Jammu and Kashmir, which has now become the Union Territories of Jammu and Kashmir, and Ladakh.

Horizontal Devolution in the 15th Finance Commission

For the horizontal devolution, the commission has suggested the following weights:

  • Income distance – 45%
  • Area – 15%
  • Population – 15%
  • Demographic Performance – 12.5%
  • Forest and Ecology – 10%
  • Tax and Fiscal Efforts – 2.5%

Importance of 15th Finance Commission

The 15th Finance Commission came out when gigantic reforms were being taken to strengthen cooperative federalism. The importance of the 15th Finance Commission is discussed below:

  • Braces the Concept the Cooperative Federalism: The Finance Commission has worked extensively with all levels of government to bring out this report. This has helped in the development of the principle of cooperative federalism.
  • Promotes Fiscal Stability: The Finance Commission has set out a report promoting policies to improve public spending quality. Weights at various levels have been suggested in such a way that promotes fiscal stability in the country.
  • Implementation of Good and Services Tax Reforms: The Finance Commission brought many performance-based incentives which helped in the expansion and deepening of the indirect tax. Over the years, revenue from GST has been growing tremendously.

Concerns Regarding the 15th Finance Commission

The recommendations of the 15th Finance Commission have sparked certain concerns and debates among stakeholders. Some of the concerns revolve around the criteria used for determining fund allocations, the impact on fiscal federalism, and the potential disparities in resource distribution among states. The points mentioned below analyze the concerns of the 15th Finance Commission.

  • The terms referred to for the 15th Finance Commission have raised doubts over the spirit of the cooperative center. The use of the 2011 census for allocating resources between states is the most serious issue. Currently, the census of 1971 is used.
  • The aim and idea of using the most recent census data available is a reasonable point. The proposal for it unleashes immense dispute on the social-political front. The main reason is that it would create disadvantages for the states that have controlled the population for decades.
  • Lower Population Growth is interlinked directly with lower fertility rates. This results from better healthcare facilities, education, and development. Thus, it seems apparent that the States that have developed faster are penalized for their success in development initiatives.

15th Finance Commission UPSC

15th Finance Commission is a constitutional body in India responsible for making recommendations on the distribution of financial resources between the central government and the state governments. It plays a crucial role in determining the sharing of taxes, grants, and other fiscal matters.

To cover 15th Finance Commission in detail, candidates can refer to the Economy Notes for UPSC, and practice the UPSC Previous Year’s Question Papers so that they can assess their exam preparation in a better way.

15th Finance Commission UPSC Questions

15th Finance Commission is a topic covered under the “Indian Economy” section of the UPSC syllabus. This subject holds significant importance as it delves into the fiscal and financial aspects of governance in India. Practicing the provided questions can greatly assist candidates in effectively covering the syllabus. It is highly recommended for candidates to practice these questions in order to enhance their level of preparation.

Question: Which of the following is responsible for appointing the members of the 15th Finance Commission in India? (A) President of India, (B) Prime Minister of India, (C) Ministry of Finance, (D) Chief Justice of India

Answer: (A) President of India

Question: The primary mandate of the 15th Finance Commission in India is to recommend the distribution of which of the following between the central government and the state governments? (A) Legislative powers, (B) Taxation rights, (C) Defense expenditures, (D) Foreign policy decisions

Answer: (B) Taxation rights

Question for UPSC Mains: Discuss the key functions and responsibilities of the 15th Finance Commission in India. Analyze the impact of its recommendations on the fiscal and financial relations between the central government and state governments. How does the Commission ensure a fair distribution of financial resources?

Question for UPSC Mains: Discuss the role and functions of the 15th Finance Commission in India. Explain how it facilitates the distribution of financial resources between the central government and state governments. Analyze the impact of its recommendations on intergovernmental fiscal relations and the overall fiscal federalism in the country.

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