Context: The Centre has appointed Arvind Panagariya, a renowned trade economist and former Niti Aayog vice chairman, as the chairman of the Sixteenth Finance Commission.

 About Finance Commission

• The Finance Commission (FC) of India was established by the President in 1951 according to Article 280 of the Indian Constitution.
• Its primary purpose is to define and regulate the financial relations between the central government and the individual state governments.
• The Finance Commission (Miscellaneous Provisions) Act, 1951, further details the qualifications, appointment, disqualification, term, eligibility, and powers of the Finance Commission
• Comprising a chairman and four other members, the FC is appointed every five years
• Since its inception with the First FC, changes in India’s macroeconomic landscape have significantly influenced the Commission’s recommendations

Constitutional provisions:

• Article 268 enables the Centre to levy duties, with the collection and retention carried out by the States.
• Article 280 outlines the composition, member qualifications, and terms of reference of the Finance Commission (FC).
• Article 280 mandates the FC to recommend the distribution of net tax proceeds between the Union and States, as well as the allocation among States. It also addresses financial relations between the Union and States and the devolution of unplanned revenue Resources.

Functions:

• Tax Devolution: The Finance Commission recommends the distribution of net tax proceeds between the Center and States.
• Grants-in-Aid: The Commission establishes principles for grants to States.
• Augmenting State Funds: It advises on measures to increase the Consolidated Funds of States to support local bodies and panchayats, aligning with recommendations from State Finance Commissions.
• Other Financial Functions: The Commission addresses additional financial matters referred by the President.

Members of Finance Commission

• Structure and Standards: The Finance Commission (Miscellaneous Provisions) Act, 1951, establishes a structured format and adheres to global standards for the Finance Commission.
• Qualifications and Powers: The Act outlines rules regarding members' qualifications, disqualification, appointment, term, eligibility, and powers.
• Composition: The Chairman is selected for their expertise in public affairs, while other members are chosen based on their judicial experience, knowledge of government finances, administrative and financial expertise, or special economic knowledge.

Challenges of 16th Finance Commission:

• Overlap with GST Council: The presence of the GST Council, a permanent constitutional body, poses a challenge for the 16th Finance Commission.
• Conflict of Interest: The decisions made by the GST Council regarding tax rates may affect the revenue-sharing calculations of the Finance Commission, creating a potential conflict of interest.
• Feasibility of Recommendations: Although the Central government frequently adopts the Finance Commission's recommendations on tax devolution and fiscal targets, other proposed measures may not receive the same level of consideration.