Daily Current Afafirs for UPSC : 19 Nov 2025/Article 280(3)(bb) & (c)/State Finance Commission

What’s the News? The 16th Finance Commission (UFC) is likely to suggest the percentage share of Central taxes for States for the next five years and the formula for horizontal distribution among the States as provided by Article 280. The Commission will also seek to recommend measures to bolster the finances of panchayats and municipalities, as required by Article 280(3)(bb) & (c).

About State Finance Commission (SFC):

1. Constitutional Provisions:
The establishment of the State Finance Commission through the 73rd and 74th amendments of 1992 was a milestone in fiscal decentralisation.
Relevant Articles:
Article 243-I (Panchayats):
• Requires each State to establish an SFC every 5 years.
• SFC recommends on principles for:
o Distribution of State revenues between the State and Panchayats,
o Assignment of taxes, duties, tolls and fees to Panchayats,
o Grants-in-aid to present to Panchayats,
o Improving Panchayat finances.
Article 243-Y (Municipalities)
• There are similar requirements for municipalities.
Article 280 (3) (bb) (c)
• It is required for the Union Finance Commission to recommend measures to increase the consolidated fund of States, to supplement Panchayat and Municipal resources based on recognised recommendations sound on the advice of the State Finance Commissions.

Issues relating to State Finance Commissions:

A. The Irregularity of being Constituted & Late Report:
• in many States SFCs (State Finance Commissions) are constituted much later than they should be, or skip being established altogether.
• We see reports submitted also late (often out of date by the time they are presented) and many times are irrelevant.
B. The Poor Quality of Reports
• Many SFCs are:
o Not staffed correctly and lack staff with the requisite technical skills,
o Do not have sufficient information on local finance,
o Lack in the methodology used.
• Some one or all of the above determine whether the report is credible or comparative or not.
C. Low Implementation
• State governments routinely:
o Take action on only select recommendations
o Are inattentive to the state of fiscal devolution or slow to diminish many relevant features.
• As a result, SFCs function primarily as advisory, being utilized only in those cases where something else is not available

Recommended Action Steps:
Ensure SFCs are established in a timely manner and routinely
• SFC formation has to be compulsory and process driven
• Penalties can be imposed for tardiness or allow for automatic establishment through an independent body
Build institutional capacity
A. Provide
o Declared personnel
o Access to state financial information
o Expertise: ( economists, statisticians, public finance experts)
B. National guidelines providing for consistency in methodologies can help with comparability
Increase independence & transparency
A. Appointment through independent collegium
B. Mandatory public access to SFC reports and Action Taken Reports (ATR)
District, regional and solicitation functions linked with revenues
A. States must provide
• Clearly delineated functions of all dimensions of local government
• Indicate adequate revenue access ( property tax, fees, user charges, etc.)
• Avoid unfunded mandates
Increase SFC and UFC coordination & communication
A. The SFC recommendations must be.
• Timely
• Detailed
o That’s based and uses a reliable approach for assessing fiscal needs
B. UFC can establish minimum expectations for the quality of reports received from SFCs
Performance incentive systems
A. Incentives could be utilized for states and local governments that pursued
• SFC recommendations to completion
• increased autonomy of local financing
• improved collection of needed revenues from property taxes and user charges
B. Recommendations can come through a systematic process
Use of technology to better collect & provide reliable data
A. Creation of a digital local finance data portal for timely reporting of Panchayat and Municipal accounts

Conclusion :
State Finance Commissions have been fundamental to fiscal decentralisation but in practice have been severely encumbered with strengths in their establishment, consistency of regularly established commissions and implementation of each commission’s recommendations.