UPSC Mains 2018 GS Paper 2 Q14: model answer

Every five years, under Article 280, India decides how to split tax money between the Union and the States. Few constitutional bodies move more money with less noise.

How it is constituted

• Appointed by the President: a chairperson and four members.
• The Finance Commission (Miscellaneous Provisions) Act, 1951 sets qualifications: the chair must have public-affairs experience; members come from the judiciary, finance, administration and economics.
• Its report and an action-taken memorandum are laid in Parliament (Article 281).

Its core mandate

Vertical sharing of the divisible pool, horizontal sharing among States, grants-in-aid under Article 275, and measures to support panchayats and municipalities.

The 15th FC (2017): terms of reference

• Use Census 2011 population instead of 1971.
• Look at the impact of the 14th FC's 42% devolution on the Union's finances.
• Consider performance incentives: population control, GST expansion, Digital India, ease of doing business, sanitation.
• Examine whether revenue deficit grants should continue.
• Later added: defence and internal security funding.

The controversy

Southern States said the 2011 base punished them for controlling population. The 15th FC softened this with a demographic performance criterion (12.5%) and set the share at 41% after J&K became a UT.

The 16th FC today

The 16th FC (Arvind Panagariya) reported in November 2025 for 2026–31. It kept 41%, measured demographic performance by population growth from 1971 to 2011, added a new contribution to GDP criterion (10%), and dropped revenue deficit grants. Local bodies get about ₹7.9 lakh crore.

Way forward

Keep cesses and surcharges, now a large part of Union revenue, within a limit, so the 41% means what it says. Cesses and surcharges have taken a large slice of gross tax revenue in recent years, money the States never see.