The Finance Commission which was constituted on January 2013 for the period of April 1, 2015 to March 31, 2020, has submitted its reports on December 15, 2014.
The Union government on Tuesday said it has accepted the recommendation of the 14th Finance Commission to share 42% of its net tax revenue with states during the five-year period starting 2015-16, up from the existing 32%.
The move, which comes days before the government's first full-year budget on Saturday, allows greater fiscal policy space to states, even at the cost of leaving less revenue for its own schemes and programmes.
Lets take a look on the various aspects how finance commission functions:
. The Finance Commission looks upon and recommends how the revenues from the Central taxes be divided between the centre and the states. The various forms of tax collected by the centre include Income tax, Customs, excise, service tax etc.
.The centre government also gets revenue from non tax sources like dividends from Public sector Units (PSUs), disinvestment, auction of natural sources like coal, spectrum etc.
.The main criteria while dividing the revenue between centre and the states by the Finance commission is the different needs and capacities across various states in India. It looks into the various components like population, demographic changes, per capita income of the state, and its share in the forest cover. For example if a state has a higher population than the state is obliged to get more share of the revenue.
. Another criterion while determining the sharing pattern is that if there are more poor people in the state then also the state will get an higher amount of Central government's share.
.The Central government shares its revenues with the state government in the form of grants, centrally sponsored schemes, and other types of financial support.
.The Finance Commission is not unique to India as other federal systems around the World also follow the same pattern. Prominent among them are in Australia and Canada which also has a similar body to check the imbalances between provincial governments and the central government.
.The Centre also has expenditures and has to spend a sizeable amount of its revenue on payment of salaries to its employees, pensions to its ex employees, payment of interest on loans to name a few.