Why in News?

• The government will soon kick off the process to set up the Sixteenth Finance Commission, with the Finance Ministry likely to notify the terms of references for the constitutional body, tasked with recommending the revenue sharing formula between the Centre and States and their distribution among States, towards the latter half of this year.     

About the Finance Commission:

• Article 280 of the Indian Constitution laid down the provisions related to the constitution of the Finance Commission and the Finance Commission Act of 1951 supplemented the provision of the constitution.
• Finance Commission, a quasi-judicial body, recommends President certain measures related to the distribution of financial resources between the union and the states.
• President Constitutes the Finance Commission every 5 years or at such time he considers necessary.
• The constitution authorizes the parliament to determine the qualification of the members of the commission. Parliament is also authorized to determine the manner in which they should be selected.
• So the parliament prescribed that the appointment of the Chairman and the other members of the commission shall be done by the President.
• Moreover, the members of the Finance Commission are eligible for reappointment.

Composition of Finance Commission:

• The Finance Commission is a 5 member body that must have:

• A Chairman;
• Four Other Members.

Key Provisions related to the composition of FC:

• The Chairman of the Finance Commission must be a person having experience in public affairs. The other 4 members must be:

• A high Court Judge or one qualified to be appointed as such;
• A person with special knowledge of the finances and accounts of the government;
• A person with wide experience in financial matters and administration;
• A person with special knowledge of economics.

Duty of the Commission:

• The duty of the commission is to make recommendations to the president as to:
• About the distribution of net proceeds of the taxes between the Union and the States or between the states of the respective shares of such proceeds.
• About the manner which should govern the grants-in-aid of the revenues of the states out of Consolidated Fund of India.
• Regarding the steps required to increase a state’s consolidated fund in order to supplement the resources of the state’s panchayats and muncipalities.
• Any other matter referred to the Finance Commission by the President. The Commission submits its report to the President who lays it before both houses of the parliament.

Borrowing Powers of the Union:

• The Union shall have the unlimited power of borrowing either within India or outside upon the security of revenues of India.
• But the limit to exercise such power of the Union is fixed by parliament from time to time (article 292).

Borrowing Power of the States:

• The borrowing power of the state is subject to a number of constitutional limitations:
• The state cannot borrow outside India.
• The state executive shall have to power to borrow within the territory of India upon the security of revenues of the states. Such borrowings are subject to certain limitations:
• Any limitations imposed by the State Legislature.
• In case, Union has guaranteed an outstanding load of the State, the state cannot raise a fresh loan without the consent of the Union Government.
• The Union Government may offer a loan to a State, under a law made by the parliament.

Financial Control by the Union in Case of Emergencies:

• The normal financial matters between the Centre and the States are subject to be modified in different cases of emergencies.
• Article 354: When the proclamation of emergency [Article 352(1)] is in operation, the President can direct that all or any of the provisions related to the division of taxes between the Union and the States and the grant-in-aid shall be suspended. Such order of the President shall not exceed beyond the expiration of the financial year in which the proclamation ceases to operate.
• When the proclamation of Financial Emergency [Article 360 (1)] is made by the President, it shall be competent for the Union to give directions to the states:

• Must adhere to any financial propriety rules and other protective measures that may be specified in the directions;
• To reduce the salary and allowances of all the persons serving under the affairs of the state, including the judges of the High Court;
• To reserve all money bills and financial bills for the consideration of the President, after getting passed by the legislature of the state.