About State Finance Commission (SFCs) 

• Constitution: Article 243I requires Governor to constitute SFC within one year from the commencement of the Constitution (73rd Amendment) Act, 1992.
• Tenure: Every 5 years. 
• Mandate: SFCs to review the financial position of Panchayats (243 I) and municipalities (Article 243 Y) and make suggestions to the Governor about-
  • Distribution of taxes between State and Local Bodies (Panchayats/Municipalities), 
  • Determination of taxes, duties, etc., which may be assigned to or appropriated by State and Local Bodies (LBs), and
  • Grants in aid to LBs by the State.

Concerns associated with the SFC

• Many states haven't established required SFCs on time. E.g. Only 15 States have set up the 5th or the 6th SFCs (15th Finance Commission or FFC report of 2020) 
• Lacks data: States don't provide accurate data about LBs leading to ad-hoc recommendations.
• Delay in Action-taken report (ATR): States frequently fail to draft ATRs that are presented by Governors to legislature.
• Unlike central Finance Commission recommendations, states reject basic SFC requests.

Measure

• FFC in 2020 report recommended that those states not complying with the Constitutional provisions in respect of the SFCs would not be released grants after March 2024. 
  • Following this now all states, except Arunachal Pradesh, have SFCs.