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Informist, Monday, Oct. 13, 2025

 

NEW DELHI – President Droupadi Murmu has approved a month's extension to the 16th Finance Commission to submit its report, the finance ministry said in a gazette notification dated Friday. The 16th Finance Commission, chaired by Arvind Panagariya, will now have to submit its report by Nov. 30, according to the notification.

 

As per the terms of reference, the 16th Finance Commission is mandated to determine the formula for states' share of central taxes and the grants-in-aid for five years starting 2026-27 (Apr-Mar). The commission had already visited all states and Union territories by June, and a majority of them, including Bharatiya Janata Party-led state governments, have reportedly sought a 50% share in central taxes. 

 

The 15th Finance Commission had recommended that 41% of the divisible pool be devolved to states. The share of states was 1 percentage point lower than the ratio mandated by the 14th Finance Commission to adjust for the reorganisation of Jammu & Kashmir and Ladakh into Union territories. 

 

According to the Budget for FY26, the Centre is projected to transfer INR 14.22 trillion to states as their share in taxes, out of the INR 42.70 trillion total tax that the government aims to collect this fiscal year. The devolution of central taxes is much lower than 41% of the total tax collected as the Centre administers a host of cesses and surcharges that are not part of the divisible pool and hence not shared with states.

 

Finance commissions determine states' share based on a weighted sum of population, area, forest cover, fiscal effort, income distance and demographic performance. This has, in fact, been a bone of contention between the Centre and states, especially Opposition-led ones, which argue that they have not been given their due share. Also, the use of population as a metric to decide the devolution has irked many southern states, as they have done a better job in keeping population growth under control.

 

The 15th Finance Commission, headed by N.K. Singh, had given 15% weight to population, 15% to area, 12.5% to demographic performance, 10% to forest cover and ecology and 2.5% to tax and fiscal efforts. 

 

The 16th Finance Commission is likely to "broadly" stick to the current 41% vertical tax devolution ratio to balance political considerations and fiscal imperatives, a senior government official had told Informist in June, adding that it would likely overhaul the horizontal devolution structure. "The Centre has a narrow scope to tweak the vertical ratio, there will only be 1-2?viation from the current level," the official had said.  End

 

Reported by Priyasmita Dutta

Edited by Nishant Maher

 

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