Govt approves terms of reference for 16th Finance Commission

The Union Cabinet has approved terms of reference for the 16th Finance Commission, however, details about the chairperson and members would be announced at a later date, Union Minister Anurag Thakur said on Wednesday.

Apart from recommending the distribution of tax revenues between the Centre and the states and allocation of grants to states, the commission has also been asked to suggest measures to ensure adequate resources to Panchayats and urban local bodies and for disaster management.

The decision was approved by the Union Cabinet chaired by Prime Minister Narendra Modi on Tuesday late evening.

Addressing a media briefing on Wednesday Thakur said the 16th Finance Commission would submit its report by October 2025 and the recommendations will be valid for a five-year period beginning April 2026.

“The Commission will give recommendations after taking feedback and suggestions from states, the centre and union territories,” the minister said.

He said the government would soon appoint a chairperson and members of the 16th Finance Commission.

The Finance Commission is a constitutional body. It is normally constituted at intervals of every five years. However, recommendations of the 15th Finance Commission have been implemented for 6 years due to the pandemic.

The recommendations of the 15th Finance Commission, which was constituted on November 27, 2017, are valid upto the financial year 2025-26. The commission was headed by ex-bureaucrat and former member of parliament N K Singh.

The commission plays a critical role in redressing the vertical imbalances between taxation powers and expenditure responsibilities of the centre and the states, respectively, and equalisation of all public services across the states.

Karnataka and other southern states have been pitching for higher share in taxes. Karnataka’s share in tax devolution got reduced to 3.65% under the 15th Finance Commission from 4.71% under the 14th Finance Commission. The state has implemented new social welfare measures under ‘guarantee schemes’ that is likely to put further stress on the finances.

Like Karnataka, other states have also enhanced spending on social welfare schemes and would be pitching for higher share in tax revenue and demanding special grants. Thus, the commission will face a challenging task of balancing the requirements of the Centre and the state governments.

As per the terms of reference approved by the Union Cabinet, the Commission will make recommendations on distribution of net proceeds of taxes between the union and the states, and the principles which should govern the grants-in-aid of the revenues of the states out of the consolidated fund of India.

The commission has also been asked to suggest measures needed to augment the consolidated fund of a state to supplement the resources of Panchayats and Municipalities in states on the basis of recommendations made by the finance commission of respective states.