Source: PIB Relevance: GS II (Constitutional bodies- Federalism- Cooperative federalism) Context: The Sixteenth Finance Commission was constituted on 31.12.2023 with Shri Arvind Panagariya, former Vice-Chairman, NITI Aayog as its Chairman.

The Sixteenth Finance Commission:


Shri Arvind Panagariya, former Vice- Chairman, NITI Aayog

MEMBER (Full time) :

Shri. Ajay Narayan Jha, former member, 15th Finance Commission and former Secretary, Expenditure

MEMBER (Full time) :

Smt. Annie George Mathew, former Special Secretary, Expenditure

MEMBER (Full time) :

Dr. Niranjan Rajadhyaksha, Executive Director, Artha Global

MEMBER (Part time) :

Dr. Soumya Kanti Ghosh, Group Chief Economic Advisor, State Bank of India

The Sixteenth Finance Commission is tasked with making recommendations regarding the following areas:

  • The division of net tax proceeds between the Union and the States, as outlined in Chapter I, Part XII of the Constitution, including how these proceeds are shared among the States;

  • The criteria for determining the grants-in-aid to the States from the Consolidated Fund of India, alongside the amounts to be allocated to the States as grants-in-aid for their revenues under article 275 of the Constitution, excluding the purposes mentioned in the provisos to clause (1) of that article;

  • Strategies to enhance the Consolidated Fund of a State to support the financial needs of Panchayats and Municipalities within the State, based on the State Finance Commission's suggestions.

Finance Commission:

  • Constitutional body: The President of India established the Finance Commission as a constitutional body to provide recommendations on centre-state financial relations.

  • An autonomous authority under the control of the Indian government constitutes the Finance Commission (FC).

  • Article 280: In accordance with Article 280 of the Indian Constitution, it was established by the President of India in 1951.

  • It was established to specify the financial arrangements between the Indian federal government and the several state governments.


  • Authority: Every five years or whenever it is deemed necessary, the President of India appoints a Finance Commission.

  • Composition: The president appoints the chairman and the other four members.

  • Tenure: The commission members are appointed for the time period given in the presidential order. Reappointments are permitted for members.


  • The constitution gives the Parliament the power to decide which members must meet certain requirements and how they will be recruited.

  • The Parliament has established the following guidelines for selecting the members in accordance with these authorities.

  • Experience in public affairs is a prerequisite for the chairman, and the remaining four members should be chosen based on the following standards:

  • a judge of the High Court or someone eligible to be one;

  • a person with specific expertise in government accounting and finance;

  • a person with background in finance and administration;

  • a person with specific expertise in economics.

Removal: they may be removed:

  • If a member is determined to be mentally incompetent,

  • If they are taking part in a heinous deed;

  • If a conflict of interest exists.

Functions of the Finance Commission:

The Finance Commission is tasked with making recommendations to the President on the following matters:

  • Tax Distribution: Shares of the net tax proceeds are distributed between the Union and the States, and each State is allotted a certain part of these proceeds.

  • Guidelines for aid grants: the guidelines that control the federal government’s grant-in aid to the states from the Consolidated Fund of India;

  • Tax Devolution at the State Level: augmenting the state’s consolidated fund to provide panchayats and municipalities with resources in accordance with the state finance commission’s recommendations;

  • Miscellaneous Matter: Any additional matter that the President refers to the Commission for the purpose of sound financial management.

  • Submit report: The President receives a report from the Finance Commission and presents it to the two chambers of Parliament. A memorandum providing an explanation of the activities follows the report.

Powers of the Finance Commission:

  • Powers of Civil Court: Based on the Code of Civil Procedure 1908, the Finance Commission has all the powers of a Civil Court.

  • Evidence Demand: The commission has powers to call witnesses, and ask for the production of a public document or record from any office or court.

Horizontal and vertical tax devolution:

  • Vertical devolution – The distribution of net proceeds of taxes between the Union and States is called vertical devolution.

  • Horizontal devolution – The distribution of net proceeds among states is called horizontal devolution.

 Major Terms of Reference for 16th Finance Commission:

  • Division of Tax Proceeds: Recommending the distribution of taxes between the Union Government and the States under Chapter I, Part XII of the Constitution. This includes the allocation of shares among the States from these tax proceeds.

  • Guidelines for Grants-in-Aid: Determining the guidelines that control grants-in-aid from the Indian Consolidated Fund to the States. In particular, under Article 275 of the Constitution, this includes figuring out how much money should be given to the States as grants-in-aid for uses other than those mentioned in the provisos to clause (1) of that article.

  • Enhancing State Funds for Local Bodies: Identifying ways to improve a state’s Consolidated Fund. The purpose of this is to enhance the resources that Panchayats and Municipalities in the State have access to, in accordance with the suggestions put out by the Finance Commission of the State.

  • Assessment of Funding for Disaster Management: The Commission may examine the current arrangements for funding initiatives pertaining to disaster management. This entails reviewing the funds established by the Disaster Management Act of 2005 and making appropriate suggestions for enhancements or modifications.

Advait IAS