Current context: 

Opposition-ruled states, particularly those in south India, have alleged that they have not been receiving their fair share under the current financial devolution scheme.

About current context:

  • They have raised concerns about their less proportionate share of receipt in tax revenue compared to their contribution towards tax collection.
  • Article 270 of the Constitution outlines the distribution of net tax proceeds by the Union government between the Centre and the States.
  • The Centre and States share various taxes such as corporation tax, personal income tax, Central GST, and the Centre’s share of the Integrated Goods and Services Tax (IGST).
  • The Sixteenth Finance Commission was constituted on 31st December 2023 with Shri Arvind Panagariya, former Vice-Chairman, NITI Aayog as its Chairman.

What is the basis for allocation?

  • The 15th FC recommended 41% of states from the divisible pool, while horizontal devolution distribution is based on criteria from the 11th to 15th FC.

What is the Finance Commission?

  • The Finance Commission was established under Article 280 of the Indian Constitution.
  • Its primary purpose is to define and regulate the financial relations between the Central Government and the various states. 
  • The Commission ensures a fair distribution of financial resources, taking into account the diverse needs and priorities of different states.

Composition of the Finance Commission:

  • The President of India appoints the Finance Commission every five years or sooner.
  • The Commission typically consists of a chairperson and other members.

Functions of the Finance Commission:

Allocation of Resources:

  • The Commission recommends the distribution of tax revenues between the Centre and the states.
  • It assesses the financial requirements of the states and allocates funds accordingly.


  • The Commission suggests grants-in-aid to states based on their specific needs.
  • These grants support state development programs and address regional disparities.

Review of Fiscal Policies:

  • The Commission evaluates the fiscal policies of both the Centre and the states.
  • It recommends measures to enhance fiscal discipline and resource management.

Disaster Management Financing:

  • The Commission reviews disaster management financing arrangements under the Disaster Management Act, 2005.
  • It ensures that states receive adequate support during emergencies.

Criticism of finance commission:

  • Politicization: Concerns have been raised concerning the possibility of political influence on the commission’s recommendations, considering that members are nominated by the central government. This has the potential to compromise the commission’s neutrality and impartiality in its work.
  • Limited mandate: The commission’s mandate could be expanded to encompass broader fiscal issues like expenditure rationalization, debt management, and resource mobilization, potentially enhancing its impact on India’s financial landscape.
  • Lack of transparency: Critics argue that the commission’s decision-making process lacks transparency, making it challenging to hold them accountable for their recommendations, suggesting that more open processes could boost public trust.


The FC aims to address the revenue-to-expenditure imbalance in the country, proposing a fair sharing mechanism and three reforms to maintain equity and federalism while sharing revenue.

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