Budget to incorporate recommendations of 16th Finance Commission

The forthcoming Budget would incorporate the recommendations of the 16th Finance Commission which has already submitted its report to President Droupadi Murmu. The Finance Commission, which has been set up under the Constitution, provides a formula for devolution of taxes between Centre and States. Cesses and surcharge levied by Centre are not part of the divisible pool.

The Finance Commission is a constitutional body that gives suggestions on Centre-State financial relations and is set up periodically. The 16th Finance Commission, headed by former Vice Chairman of Niti Aayog Arvind Panagariya, was set up on December 31, 2023.

Led by Panagariya, Finance Commission members - Retired bureaucrat Annie George Mathew, economist Manoj Panda, SBI Group Chief Economic Advisor Soumya Kanti Ghosh and RBI Deputy Governor T Rabi Sankar - and Secretary to the Commission Ritvik Pandey submitted its report to Murmu on November 17, 2025. The Commission also presented a copy of the report to Prime Minister Narendra Modi and Union Finance Minister Nirmala Sitharaman. Although the 16th Finance Commission report has not been made public, the Union Government historically has been accepting the recommendations of the Commission.

The 16th Finance Commission’s recommendations with regard to the formula for sharing taxes for five years starting 2026-27 to 2030-31 would be the key look out once the report is made public. As per the Terms of Reference (ToR), the 16th FC was mandated to give its report covering a period of five years commencing on the 1st day of April, 2026 making recommendations on the distribution of the net proceeds of taxes between the Union and the States as well as the allocation between the States of the respective shares of such proceeds, grants-in-aid to States, review arrangements on financing Disaster Management initiatives, etc.

The erstwhile 15th Finance Commission, under NK Singh, had recommended that States be given 41 per cent of the divisible tax pool of the Centre during the six-year period, i.E., 2020-21 to 2025-26, which is at the same level as was recommended by the 14th Finance Commission.

The 15th Finance Commission (the 15th FC) was constituted on November 27, 2017 for making recommendations for a 5-year period of 2020-21 to 2024-25. On November 29, 2019, the ToR of the 15th FC was amended requiring the Commission to submit 2 reports —  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 6-year period from 2020-21 to 2025-26. The 41 per cent devolution took into account the territorial adjustments following creation of Union Territories of Jammu & Kashmir, and Ladakh.

Historically, finance commissions have determined States’ share in central taxes based on a weighted sum of population, area, demographic performance, fiscal effort, income distance and forest cover.

The issue has long been a point of friction between the Centre and the States, particularly Opposition-ruled ones, which said they have not received their fair share. Southern States have also objected to the use of population as a criterion for devolution, arguing that it penalises them despite their success in controlling population growth.

The 15th Finance Commission had given 15 per cent weight to population, 15 per cent to area, 12.5 per cent to demographic performance, 10 per cent to forest cover and ecology and 2.5 per cent to tax and fiscal efforts The 14th Finance Commission, under former RBI Governor YV Reddy, significantly raised the tax devolution to 42 per cent of the divisible pool, from 32 per cent recommended by the 13th Finance Commission. The 14th FC recommendations were applicable from April 1, 2015, to March 31, 2020.