- The Sixteenth Finance Commission, headed by Arvind Panagariya, has commenced its work by inviting public suggestions on its mandate set by the Centre.
- Constituted in December last year, the commission comprises five members and is expected to submit its recommendations by October 2025.
- These recommendations will be valid for five years starting from April 1, 2026.
- The Finance Commission is a constitutional body under Article 280 of the Indian Constitution that recommends how the Central government’s tax revenues should be distributed between the Centre and the States.
- Although the Centre is not legally bound to implement these suggestions, the commission is reconstituted every five years and typically takes a couple of years to submit its recommendations.
- The commission decides the proportion of the Centre’s net tax revenue allocated to the States (vertical devolution) and the distribution among various States (horizontal devolution).
- Horizontal devolution is based on a formula considering factors like a State’s population, fertility level, income level, and geography.
- The vertical devolution of funds is not based on an objective formula, but recent commissions have recommended increasing the share of tax revenues to States.
- The 13th, 14th, and 15th Finance Commissions recommended sharing 32%, 42%, and 41% of funds, respectively, from the divisible pool with States.
- The Centre can also provide additional grants to States for certain jointly funded schemes.
- As of 2015, only about 3% of public spending in India occurred at the local body level, compared to over half in countries like China.
- Analysts suggest the Centre has devolved an average of only 38% of funds from the divisible pool under the current Fifteenth Finance Commission, against the recommended 41%.
- Cesses and surcharges, which are not shared with States, can constitute up to 28% of the Centre’s tax revenues, leading to significant revenue loss for States.
- This can reduce the effective share of States in the Centre’s overall tax revenues to as low as 32% under the 15th Finance Commission.
Dig Deeper: Read about the State Finance Commission and the Article associated with it.
