What is the role of the Finance Commission? | Explained

The story so far: The sixteenth Finance Commission headed by former Niti Aayog Vice-Chairman Arvind Panagariya has begun its work by inviting suggestions from the public on the mandate set for it by the Centre. The Finance Commission is a constitutional body that recommends how tax revenues collected by the Central government should be distributed among the Centre and various States in the country. The Finance Commission decides what proportion of the Centre’s net tax revenue goes to the States overall and how this share for the States is distributed among various States. The 13th, 14th and 15th Finance Commissions recommended that the Centre share 32%, 42% and 41% of funds, respectively, from the divisible pool with States. In fact, it is estimated that if cesses and surcharges that go to the Centre are also taken into account, the share of States in the Centre’s overall tax revenues may fall to as low as 32% under the 15th Finance Commission.