What are the main differences between the 15th and 16th Finance Commissions?

 

What are the main differences between the 15th and 16th Finance Commissions?

The transition from the 15th to the 16th Finance Commission involves several major shifts in how taxes are shared between the Centre and States, as well as changes to the specific criteria used to determine each state's share.

The primary differences include:

 

1. Changes in Devolution Criteria

• Removal and Addition of Piling Criteria : The 16th Finance Commission has removed "Tax and Fiscal Efforts" as a criterion, which previously rewarded states based on their tax collection efficiency. This has been replaced by "Contribution to GDP," meaning states that contribute more to the national GDP will receive a higher share under this specific parameter.
• Measurement of Demographic Performance: While both commissions include demographic performance, the 15th Commission measured it using the Total Fertility Rate (TFR). In contrast, the 16th Commission measures it based on population growth between 1971 and 2021, rewarding states that have achieved lower population growth.
• Income Distance Calculation: The weightage for Income Distance has been reduced in the 16th Commission. Additionally, while the distance was previously measured against the top-performing state, it is now calculated based on the average per capita GSDP of the top three large states.
• Forest Cover Assessment: The 15th Commission only considered dense and moderately dense forests. The 16th Commission has expanded this to consider the overall forest area.
• Weightage Adjustments: The weightage given to the geographical area of a state has been reduced in the 16th Commission.

2. Fiscal Policy and Grants-in-Aid

• Revenue Deficit Grants: A significant change is the 16th Commission's move to discontinue Revenue Deficit Grants to states.
• Focus of Grants: Grants-in-aid are now specifically focused on Local Government (rural and urban) and Disaster Management. For local bodies, these grants follow an 80:20 rule, where 80% is basic and 20% is performance-based.
• Off-Budget Liabilities: The 16th Commission aims to remove off-budget liabilities to improve fiscal accountability, as these borrowings often do not appear in the fiscal deficit.
• Fiscal Deficit Targets: The commission highlights fiscal deficit targets by 2030 as 3.5% of GDP for the Central Government and 3% for State Governments.

3. Institutional Mechanisms

• The 16th Commission introduces a mechanism to review Centrally Sponsored Schemes.
• There is a new emphasis on the timely establishment of State Finance Commissions to ensure better financial health at the local level.

While the vertical devolution remains centered around 41% for the states (adjusting for the 1% share for Jammu & Kashmir and Ladakh), the internal "divisible pool" excludes the cost of collection and revenue from cess and surcharges, which the Centre does not share with the states

 

UPSC Civil Services Examination, Previous Year Questions (PYQs) 

Prelims

Q. Consider the following:

For the horizontal tax devolution, the Fifteenth Finance Commission used how many of the above as criteria other than population area and income distance (2023) 

A. Only two 

B. Only three 

C. Only four 

D. All five 

Ans: B 

Q. With reference to the Fourteenth Finance Commission, which of the following statements is/ are correct? (2015)

1.        It hSelect the correct answer using the code given below. 

(a) 1 only  

(b) 2 only 

(c) Both 1 and 2  

(d) Neither 1 nor 2 

Ans: (a)