Context:
The 16th Finance Commission, under Chairman Arvind Panagariya, is navigating a politically and fiscally sensitive landscape as it prepares recommendations for FY2026–2031, with an October 31, 2025 deadline. A central theme of its consultations has been the states’ demand for a higher share in central tax devolution, currently pegged at 41%.
The 16th Finance Commission of India
The 16th Finance Commission of India, led by Dr. Arvind Panagariya, is a constitutional body established under Article 280 of the Constitution. Its primary task is to recommend the distribution of tax revenues between the central and state governments for the period commencing April 1, 2026. The Commission also addresses other matters related to grants-in-aid and augmenting state finances.
Key aspects of the 16th Finance Commission:
- Composition:The 16th Finance Commission is chaired by Dr. Arvind Panagariya, with members including Ajay Narayan Jha, Annie George Mathew, Manoj Panda, and Soumya Kanti Ghosh (part-time).
- Mandate:The Commission is tasked with making recommendations on:
- The distribution of net proceeds of taxes between the Union and the States.
- The principles governing grants-in-aid to the States from the Consolidated Fund of India.
- Measures to augment the Consolidated Fund of a State to support local bodies.
Key Highlights
1. Timeline and Outreach
- First meeting: February 14, 2024 (New Delhi)
- State visits: Since June 2024; all but Haryana, Jharkhand, Uttarakhand, and Uttar Pradesh covered
- Next visit: Maharashtra, May 8–9, 2025
States’ Common Demands
- Vertical Devolution:
- Most states demand an increase to 45–50% of the divisible tax pool
- BJP-ruled states like Madhya Pradesh and Odisha have proposed 48–50%
- Congress-ruled and INDIA bloc states strongly advocate 50%
- Inclusion of Cess and Surcharges:
- Widespread criticism that these central levies are not part of the divisible pool
- Result: Shrinking funds available for state-level development
- Many states seek a cap of 5% of gross tax revenue on such levies
- States like Tamil Nadu and Karnataka demand these be brought under the pool if the cap is exceeded
- Performance-Based Devolution:
- Gujarat urges rewards for fiscal discipline and development metrics
- Focus requested on climate change, renewable energy, and sustainability indicators
Southern States: Strong Push for Equity
- Kerala hosted a conclave with finance ministers of Tamil Nadu, Karnataka, Punjab, and Telangana
- Concerns voiced:
- Imbalance between high-contributing states and returns received
- Call for formulae that account for GDP contribution and economic performance
- Karnataka CM Siddaramaiah:
- State contributes ₹4 trillion annually in gross tax revenue
- Receives just ₹45,000 crore in devolution and ₹15,000 crore in grants
- “Only 15 paise for every rupee” argument highlights horizontal imbalance
Commission’s Challenge: Balancing Act
- Needs to balance equity (support for poorer states) with efficiency (rewarding performance)
- Must address:
- Vertical imbalances (Centre vs. states)
- Horizontal imbalances (between states)
- Trust deficit between Centre and some Opposition-led states
BS
