Q7.How is the Finance Commission of India constituted? What do you know about the terms of reference of the recently constituted Finance Commission? Discuss.

The Finance Commission (FC) is a quasi-judicial constitutional body, constituted by the President under Article 280, typically every five years. It recommends the distribution of financial resources between the Union and State governments and among States.

The FC comprises a Chairman and four members, appointed by the President. Parliament prescribes their qualifications: the Chairman should have public affairs experience, while members require expertise in High Court judiciary, government finance and accounts, financial administration, or economics.

The ToR guide the Commission's recommendations. For the 15th FC, key mandates included:

• Vertical and horizontal devolution of Union taxes between the Union and States, and among States.
• Principles for grants-in-aid to States and local bodies from the Consolidated Fund of India.
• Examining GST's impact on the economy.
• Using 2011 population data for devolution.
• Recommending performance-based incentives for States (e.g., ease of doing business, health, education).
• Considering funding for defense and internal security.

These ToR enable the FC to recommend a balanced approach to fiscal federalism. They address the evolving financial landscape, promote fiscal discipline, and ensure equitable resource distribution, strengthening Union-State financial relations.

The Finance Commission, through its constitutional mandate and comprehensive terms of reference, is crucial for fostering cooperative fiscal federalism and ensuring financial stability across India.