Cabinet approves Terms of Reference for the Sixteenth Finance Commission Posted On: 29 NOV 2023 2:27PM by PIB Delhi
The Union Cabinet chaired by the Prime Minister, Shri Narendra Modi has approved the Terms of Reference for the Sixteenth Finance Commission.
The Terms of Reference for the Sixteenth Finance Commission will be notified in due course of time. The 16th Finance Commission’s recommendations, upon the acceptance by the government, would cover the period of five (5) years commencing April 1, 2026.
Article 280(1) of the Constitutions lays down that the modalities for setting up of a Finance Commission to make recommendation on the distribution of net proceeds of taxes between the Union and the States, allocation between the States of respective shares of such proceeds; grants- in-aid and the revenues of the States and measures needed to supplement the resources of the Panchayats during the award period.
The Fifteenth Finance Commission was constituted on November 27, 2017. It made recommendations covering the period of six years commencing on 1st April, 2020 through its Interim and Final Reports. The recommendations of the Fifteenth Finance Commission are valid upto the financial year 2025-26.
Terms of Reference for the Sixteenth Finance Commission:
The Finance Commission shall make recommendations as to the following matters, namely:
The distribution between the Union and the States of the net proceeds of taxes which are to be, or may be, divided between them under Chapter I, Part XII of the Constitution and the allocation between the States of the respective shares of such proceeds;
The principles which should govern the grants-in-aid of the revenues of the States out of the Consolidated Fund of India and the sums to be paid to the States by way of grants-in-aid of their revenues under article 275 of the Constitution for the purposes other than those specified in the provisos to clause (1) of that article; and
The measures needed to augment the Consolidated Fund of a State to supplement the resources of the Panchayats and Municipalities in the State on the basis of the recommendations made by the Finance Commission of the State.
The Commission may review the present arrangements on financing Disaster Management initiatives, with reference to the funds constituted under the Disaster Management Act, 2005 (53 of 2005), and make appropriate recommendations thereon.
The Commission shall make its report available by 31st day of October, 2025 covering a period of five years commencing on the 1st day of April, 2026.
Background:
The Fifteenth Finance Commission (the 15th FC) was constituted on 27.11.2017 for making recommendations for a five-year period of 2020-21 to 2024-25. On 29.11.2019, the ToR of the 15th FC was amended requiring the Commission to submit two reports, namely a first report for financial year 2020-21 and a final report for an extended period of 2021-22 to 2025-26. As a result, the 15th FC made its recommendations for a six-year period from 2020-21 to 2025-26.
The Finance Commission normally takes about two years to make their recommendations. As per the clause (1) of article 280 of the Constitution, the Finance Commission is to be constituted every fifth year or earlier. However, as the recommendations of the 15th FC cover the six-year period up to 31st March 2026, the 16th FC is proposed to be constituted now. This will enable the Finance Commission to consider and appraise the finances of the Union and the States for the period immediately, preceding the period of its recommendations. In this context, it is pertinent to mention that there are precedents where the Eleventh Finance Commission was constituted six years after the Tenth Finance Commission. Similarly, the Fourteenth Finance Commission was constituted five years and two months after the Thirteenth Finance Commission.
The Advance Cell of the 16th FC was formed in Ministry of Finance on 21.11.2022, to oversee preliminary work, pending formal constitution of the Commission.
Thereafter, a Working Group headed by Finance Secretary and Secretary (Expenditure) and comprising of Secretary (Economic Affairs), Secretary (Revenue), Secretary (Financial Services), Chief Economic Adviser, Adviser, NITI Aayog and Additional Secretary (Budget) was set up to assist in formulation of the Terms of Reference (ToRs). As part of the consultative process, views and suggestions were sought from the State Governments and the Union Territories (with legislature) on the ToRs, and were duly deliberated by the Group.
Municipal Administration and Urban Development Department –Action Taken Report on the Recommendations of the First State Finance Commission – Orders Issued.
MUNICIPAL ADMINISTRATION & URBAN DEVELOPMENT (UBS) DEPARTMENT
In consonance with the Constitutional provisions of the 73rd Amendment Act,1992, and the powers conferred under Article 243-I of the Constitution of India read with sub-section (1) of Section 235 of the Telangana Panchayat Raj Act, 1994, as adapted in Telangana State vide GO.Ms.No.9, PR&RD (Mandal) Dept., Dt:12-09-2014, the Governor of Telangana constituted the First State Finance Commission for the State of Telangana vide GO.Ms.No.31, PR&RD (Pts.III) Deptt., Dt:16-03-2015.
2. Further, as per Article 243Y of Constitution of India the Finance Commission constituted under article 243-I of the Constitution of India read with clause (30) of Section 2 & sub-section (1) of Section 113A of the Telangana Municipalities Act, 2019 shall also review the financial position of the Municipalities and make recommendations to the Governor.
3. Accordingly, the First State Finance Commission has submitted its report with(37) recommendations, out of which (8) recommendations pertains to Financial and (29)recommendations pertains to Non-Financial.
4. Government Vide G.O.Rt.No.299, PR&RD (GPF) Dept., Dt.11.07.2023 have constituted a Committee under the Chairperson of Chief Secretary and 3 Members to examine the recommendations of the First State Finance Commission and to submit the draft Action Taken Report.
5. The Committ ee meeting was held on 08.09.2023 in the chambers of Chief Secretary. During the meeting, recommendations were discussed and accordingly Draft Action Taken Report was prepared.
6. The Draft Action Taken Report on the recommendations of First State Finance Commission have been placed before the Council of Ministers on 04.02.2024 for its approval before placing the same before the State Legislature. The Council of Ministers have approved the Action taken report as in Annexure-I & II.
7. The Departments in Secretariat/HODs noted in the address entries are requested to issue necessary follow up orders or instructions for implementation of these recommendations.
(BY ORDER AND IN THE NAME OF THE GOVERNOR OF TELANGANA)
M.DANA KISHORE
PRINCIPAL SECRETARY TO GOVERNMENT
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To
The MA&UD / PR&RD, RWS/ TR&B/Revenue (Excise)/ Industries & Commerce Departments.
The Commissioner of Printing Stationary and Store Purchase, Hyderabad
The Commissioner &Director of Municipal Administration, Hyderabad.
[P.T.O.]
//2//
The Commissioner, Greater Hyderabad Municipal Corporation, Hyderabad.
The Commissioner, Hyderabad Metro Water Supply and Sewerage Board, Hyd.
The Commissioner, TSIRD, Hyderabad.
The Commissioner & Inspector General, Registration and Stamps, Hyderabad.
The Commissioner of Transport, Hyderabad.
The Principal Chief Conservator of Forests, Telangana, Hyderabad
The Engineer-in-Chief, Public Health, Hyderabad
All the District Collectors in the State.
All the Additional Collectors Local Bodies in the State
All the Municipal Commissioners of Municipalities in the State
Copy to:
The Principal Accountant General (A&E/Audit-I & II), Hyderabad.
The Director of Treasuries & Accounts, Telangana, Hyderabad.
The Finance and Planning (FW. EXPR. PR.) Department, Telangana Secretariat,Hyderabad.
The Director, Local Fund Audit , Hyderabad.
All Audit Officers in the State.
The Director General, National Institute of Urban Management, Hyderabad
The Director General, MCRHRDI, Hyderabad
The Director, Regional Center for Urban and Environmental Studies, Hyderabad
The G.A.(Cabinet) Department, Secretariat, Hyderabad.
All the Concerned Sections in MA&UD Department.
SF/SC.
// FORWARADED:: BY ORDER//
ASSISTANT DIRECTOR
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Annexures to G.O. Ms. No. 13, MA&UD (UBS) Department, dated 06-02-2024
Annexure- I
Financial Recommendations of the First State Finance Commission (Urban)
Commission recommends to transfer 11% of State Own Net Revenue based on respective Revised Estimates for last financial year, every financial year during the 5 years period commencing from financial year 2020-21 to 2024-25. Here, State Own Net Revenue means Revenue from all Taxes, Duties, Tolls and Fees and including GST compensation if any received from Government of India but minus cost of collecting these revenues which is taken as 1%. Out of this devolution, 61% will be earmarked for Rural Local Bodies (Percentage of Rural population as per Census 2011) and 39% to Urban local bodies.
Decision of the Government:Accepted.
Commission recommends continuation of existing Assigned Revenue of Profession Tax, Seigniorage Fee and Transfer Duty (Entertainment Tax already subsumed in GST) and transfer 95% of each of Assigned revenues to local bodies.
Decision of the Government:Not accepted.
Commission recommends for incurring required expenditure additionally from consolidated fund of the State for Construction of offices for newly created ZPPs,MPPs, GPs and ULBs, over a period of next three years.
Decision of the Government: Accepted.
To ensure equity and take care of local bodies which have very little or no scope in assigned revenues, it is recommended to put all assigned revenues in a divisible pool and divide the revenue among all local bodies based on the formula for division of share in State Own Net Revenue
Decision of the Government:Accepted as this provision is made in the TMA, 2019.
9.5. Formula for Distribution of Revenue among Local Bodie
Decision of the Government:
Will be examined.
9.6. Transfer of Funds in 10 Equal Monthly Installments:
Decision of the Department: Accepted.
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9.8. Revolving Innovation Project Funds for Rural and Urban Local Bodies (referred in
para 9.5 (9) and (11):
Five percent (5%) of funds earmarked for devolution to rural and urban local bodies respectively every year shall be transferred to respective Revolving Funds (non-lapsable fund) at the beginning of each financial year. These two funds will be operated by Commissioner Panchayat Raj and Commissioner and Director
Municipal Administration respectively. Respective local bodies can apply upto a
maximum of 50% of estimated project cost as interest free loan repayable over5
years. The projects which directly brings in Cost Reduction or Enhancement of
Revenue Generation will only qualify for such loan. In rare case when repayment
is delayed, the respective HoD can deduct the installment at source while
releasing SFC grant. The respective HoDs may frame appropriate guidelines for
operating the fund.
Proposal of the Department: Accepted
M. DANA KISHORE
PRINCIPAL SECRETARY TO GOVERNMENT
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Annexure – II
Non-Financial Recommendations of the First State Finance Commission (Urban)
9.9.2. State Finance Commission subject under Finance Department:
Presently SFC subject is under PR Department. SFC’s main role is to recommend on
financial devolution to PR local bodieslike ZPPs, MPPs and GPs which comes under
Panchayat Raj & Rural Development Department; andUrban LocalBodies which comes
under Municipal Administration & Urban Development Department. Hence it will be
better if SFC subject is brought under Finance Department
Decision of the Department: Accepted.
9.9.3. Timely constitution of SFC every fifth year:
Recommended that SFC must be constituted with its Chairman and Members at least
two years prior to end of current SFC award period so that new award is ready as soon
as current award period ends. SFC must be asked to give its recommendation within
two-year time frame allotted to it and Government must thereafter issue necessary
orders on the recommendations of SFC, as accepted by Government, within 3 months
of the submission of SFC report. It will help local bodies to get their due share from
prevailing States’ Own Tax Revenues.
Proposal of the Department:
Accepted.
9.9.4. Monitoring of implementation of SFC recommendations on regular basis:
Recommended that Government should create an independent Section in Finance
Department for monitoring transfer of Funds to Local bodies and furnish quarterly report
to Chief Secretary. C&AG may also be requested to give its observation on
implementation of SFC recommendations in its annual report to Legislature. This
section in Finance Department will also provide necessary administrative memory for
next SFC. Such arrangement will help in ensuring that local bodies get their due share
of resources in time so as to function as centres of Self Governance.
Proposal of the Department: Accepted
9.9.5. Tax administration and Revision of Taxes, Fees and Water charges bylocal
bodies on annual basis:
Recommended that Taxes, Fee and Water charges etc should be reviewed every year
as part of annual budget exercise and revision if any made, should be made applicable
from 1st of April of that financial year. To ensure that annual exercise is taken up every
year as part of budget exercise, it is also recommended that Local body shall not
increase taxes, Fees and Water charges etc by more than 10%, cumulative, in any one
financial year.
Existing Property Tax Board may be renamed as Local Body Regulatory Board and
activated for suggesting annual revision as part of Budget exercise, in Property tax,
Building Permission Fee, Other taxes, Other Fees and Water Charges etc in addition to
its other functions.
Decision of the Department: Not accepted.
However, the proposed change in nomenclature for the Property Tax Board is
accepted
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9.9.6. Simplification and transparency in levy of Property Taxes:
Local Bodies should explore levy of Property Tax based on Plinth area multiplied by
Standard Property Tax Rate per Sft. for that Road/Area notified by Local Body every
year on the recommendation of Property Tax Board. Such a system will bring certainty
in tax levy and reduce scope for subjectivity in tax levy.
Decision of the Department:
Section 93(1) of the New Municipalities Act, 2019 and rules made thereunder facilitates
capital value based property tax assessment. Hence, the provisions of the Act will be
followed, instead of the recommendations.
9.9.7. Resurvey of all Tax Incident points:
In order to capture all points where Tax is to be levied, local body must do
comprehensive survey of all tax incident points, new and existing, every five years like
revision of electoral rolls. 5% of Survey work should be super checked by senior team
for its correctness and fairness. New electricity connections issued list be obtained from
local DISCOM on monthly basis and cross checked with Property Tax Register for
detecting un-assessed properties on continuous basis. DISCOM may be asked to put
online report on new connections released on their website so that such information can
be accessed by local bodies without any human intervention.
Decision of the Department: Accepted.
9.9.10. Local Bodies to obtain list of Profession Tax Payers from Commercial Tax
Department on annual basis and make annual field survey for detecting un-assessed
cases to bring to the knowledge of Commercial Tax Department.
Decision of the Department: Not accepted.
9.9.11. Rental on Local Bodies Properties:
Recommended that Local Body enter into lease agreement with Lessee for a period not
exceeding five years with absolutely no provisions for its extension. New agreement
should be entered on expiry of lease period based on current rental values prevailing in
the area. Although lease period may be up to five years but lease agreement must have
provision for enhancing rent on 1st April of every year by 5% on rent paid in previous
month i.e. in March month. It will give buoyancy in rental income.
Decision of the Department: Accepted as it is already under implementation.
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9.9.12. Revenue from Parking Fee:
Recommended that Local body should follow Tender cum Auction method with
minimum amount for awarding Parking Contract. Auction should be conducted among
Highest three bidders only. Contract period should not exceed 12 months and no
provision for its extension on any ground. This exercise should be done every year in
the month of January/February so that new contract is made effective from 1st April.
Decision of the Department: Accepted.
9.9.13. Revenue from renting out space for Advertisement: Same procedure as that for
Parking area could be followed.
Decision of the Department: Accepted
9.9.14. Maintenance of Public Conveniences and Facilities on Contract basis:
It is suggested that Local Bodies to explore maintenance of Public Toilets and other
public facilities on Annual Maintenance Contract basis. There should be formal
arrangement for daily inspection of these facilities by appropriate level of staff of Local
Body with endorsement in inspection register and reduction in payment if facility is not
maintained properly. Mobile App for taking feedback from citizens and reduction in
payment to agency based on negative Feedback from Citizens.
Decision of the Department: Accepted
9.9.15. Mechanism for Monitoring and Comparison of Expenditure and Revenue across
Local Bodies:
Decision of the Department: Accepted
9.9.16. Computerisation of Accounts of all Local bodies:
Decision of the Department: It is already under implementation. Accepted.
9.9.17. Computerisation of all Taxes and Fees related activities so that citizen can make
payment of all Taxes and Fees, etc., online.
Decision of the Department: Both assessment and collection of all taxes and fees in ULBs in the State is already computerized. The recommendation is accepted
9.9.18. Transparency in Collection and Utilisation of Resources:
Decision of the Department: Both assessment and collection of all taxes and fees in ULBs in the State is already computerized. Hence, the recommendation is accepted.
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9.9.20. Use of Solar Power:
All local bodies must install Grid Connected solar power plants within 3 years to meet at
least 80% of their power requirements from Solar power. It will help in reducing their
expenditure on Electricity and also protect environment against climate change due to
global warming. They must also move to LED lighting and BLDC fans to conserve
power.
Decision of the Department: Accepted.
9.9.21. Water Meters for all Connections including Public Taps:
To ensure efficient use of scarce drinking water resource, it is recommended that all
water connections must have Water Meters installed even if Local body plans to provide
Free Water to citizens. Water Meter must also be installed for Public Taps to account for
every liter of scarce resource like drinking water.
Decision of the Department: Partially accepted with the decision to install meters for all non-domestic connections.
9.9.22. Safe Piped drinking water for all: It is the first primary duty of any Municipality and Gram Panchayat to provide safe drinking water to all its citizens at their door steps. Hence All local bodies must prepare plan for supplying adequate safe piped drinking water to all citizens at their door steps within next 2 years.
Decision of the Department: Accepted.
9.9.23. Solid Waste Management:
Municipalities and GPs must strive to achieve in next 5 years 100% Solid Waste
Collection from house to house and disposal as suggested above. Wet Waste
composting machines can also be encouraged at Bulk Waste generator level/Resident
Welfare Association (RWA) level by offering incentives or subsidy or reduction in
Property Tax. Local Bodies should also explore engaging the services of reputed third
party on contract basis for collection of segregated waste every day from each house
and from bulk waste generators.
Decision of the Department:
All these activities are being practiced in all ULBs across the State and the statedobjective of 100% achievement in next five years is accepted.
9.9.24. Power generation from Waste:
To generate power from waste even if it is to be subsidised by local body in the interest
of environment and quality of life for its citizens.
Decision of the Department:
It is under implementation in GHMC area. For other ULBs a cluster based approach will
be taken up. Hence accepted.
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9.9.25. Sewerage Line coverage and Recycling of Sewerage water for industrial and
non-drinking water use:
Municipalities and GPs must prepare plan for treating and recycling at least 75% of its
sewerage waste water in next 5 years and 100% in next 10 years.
Decision of the Department:
Accepted.
9.9.26. Public Road maintenance:
Provision of good roads is what citizen expects from local body. Urban Local Bodies
and GPs must have plan in place to re-carpet all main roads every year and all other
roads once in two years.
Decision of the Department:
Not accepted.
9.9.27. Make your city Green:
To combat climate change which is looking very real now and to protect environment
from pollution, all local bodies should plan to increase green cover in their jurisdiction.
Decision of the Department:
Accepted.
9.9.28. Accountability in spending Public Funds / Annual Audit of Local Bodies:
State Government must prepare Calendar for annual audit of all Local bodies such that
all physical visits for annual audits of previous financial year are completed by end of
October month of current financial year and audit reports are communicated to all local
bodies before close of current financial year.
To put in place formal system for regular monitoring of rectification of defects pointed
out in audit. It will require focused and continuous efforts to take up this challenge to
ensure effective and efficient utilization of public resources. Common observations of
audit should also be used as feedback for planning for training the staff in domain
knowledge in that specific area.
Decision of the Department:
Already under implementation. Accepted.
9.9.29. Capacity building of Local Body staff:
Service of TSIRD and MCR HRD Institute, Hyderabad may be utilised to train them
extensively on regular basis. Based on Feedback from Audit reports, special training
programme may also be structured for identified weak areas.
