Punjab yet to form Seventh State Finance Commission, risks losing local body grants

The Sixth State Finance Commission was constituted by the previous Congress government in Punjab on July 3, 2018, and submitted its report to the then governor on March 29, 2022. In accordance with constitutional provisions, the formation of the Seventh State Finance Commission became due in 2023-24

Chandigarh

Nearly six months after the 16th Finance Commission submitted its report, the Punjab government is yet to constitute the Seventh State Finance Commission (SFC) for recommending the devolution of state’s tax revenues and their apportionment between the panchayati raj institutions and municipal bodies in the state.

Nearly six months after the 16th Finance Commission submitted its report, the Punjab government is yet to constitute the Seventh State Finance Commission (SFC) for recommending the devolution of state’s tax revenues and their apportionment between the panchayati raj institutions and municipal bodies in the state.

The state government is constitutionally required to establish the SFC every five years. Under Article 243-I of the Constitution, “the governor shall, as soon as may be within one year from the commencement of the Constitution (73rd Amendment) Act, 1992, and thereafter at the expiration of every 5th year, constitute a Finance Commission to review the financial position of the panchayats, and to make recommendations to the Governor as to the principles which should govern the distribution between the State and the panchayats of the net proceeds of the taxes, duties, tolls and fees leviable by the state.”

The Sixth State Finance Commission was constituted by the previous Congress government in Punjab on July 3, 2018, and submitted its report to the then governor on March 29, 2022. In accordance with constitutional provisions, the formation of the Seventh State Finance Commission became due in 2023-24.

The State Finance Commission is a constitutional body responsible for reviewing the financial position of PRIs and urban local bodies and for recommending transfer of resources from the state to rural and urban local bodies. Successive finance commissions have also recognised the role of the State Finance Commission in promoting fiscal decentralisation and greater financial autonomy at the local government level.

‘State Finance Commission constitution a prerequisite for grants’

In its report submitted to the President last November, the Sixteenth Finance Commission, headed by economist Dr Arvind Panagariya, strongly urged all states to comply with the constitutional timelines for constituting state finance commissions. It recommended that states ensure the formation of commissions immediately after the expiry of five years from the constitution of the previous commission and ensure laying of action taken reports (ATRs) before the state legislature within six months of submission of the state finance commission report. The 16th Finance Commission further suggested that compliance with these conditions — one of the three entry-level requirements — would be a prerequisite for states to claim local body grants from the award period beginning 2026-27.

While the Punjab government tabled the report of the Sixth State Finance Commission along with its ATR in the state assembly on June 20, 2023, no announcement has been made regarding the constitution of the new commission to date.

Officials familiar with the matter said the file for constituting the Seventh State Finance Commission was pending with the chief minister’s office. “There have been instances in the past where some states delayed the establishment of proper commissions, affecting their functioning. The Fifteenth Finance Commission had also taken serious note of the delay over constituting state commissions. The delay may impact the release of grants,” a former finance secretary of the state said.

Additional chief secretary, finance, Alok Shekhar did not respond to HT’s calls and messages.

₹16,320cr grants recommended for local bodies

The Sixteenth Finance Commission, in its report, recommended grants worth ₹16,320 crore for rural and urban local bodies for the five-year period beginning April 1, 2026. Of this, ₹8,486 crore have been recommended for rural local bodies (RLBs) and ₹7,834 crore for urban local bodies (ULBs). These grants are divided into basic and performance-linked components. The allocation for RLBs comprises a basic grant of ₹6,789 crore and a performance-linked grant of ₹1,697 crore, while for ULBs, the corresponding figures are ₹6,267 crore and ₹1,567 crore, respectively.

Union finance minister Nirmala Sitharaman, who tabled the commission’s report in the Lok Sabha on February 1, announced in her budget speech that the government had accepted its recommendations.