Cabinet approves terms of reference for 16th Finance Commission

The Finance Commission normally takes about two years to make their recommendations.

The cabinet on November 29 approved the terms of reference for the 16th Finance Commission, which will recommend how taxes are shared between the Centre and states and also among states.

The recommendations of the commission, which will be notified in due course, will cover a period of five years starting April 1, 2026.

The terms of reference will include the distribution of the net proceeds of taxes between the Centre and the states and the allocation between the states of the respective shares of such proceeds, the principles, grants-in-aid and the revenues of the states and measures needed to supplement the resources of the panchayats, the statement said.

"The Commission may review the present arrangements on financing Disaster Management initiatives, with reference to the funds constituted under the Disaster Management Act, 2005 (53 of 2005), and make appropriate recommendations thereon," the government said in a statement.

The 16th Finance Commission will make its report available by October 31, 2025, the statement added.

Article 280(1) of the Constitution lays down the modalities for setting up a Finance Commission.

The 15th Finance Commission, chaired by NK Singh, was set up on November 27, 2017 and made recommendations for a period of six years from April 1, 2020. Its recommendations remain valid till the financial year 2025-26.

The finance commission normally takes about two years to make its recommendations. The Constitution says that the finance commission has to be constituted every fifth year or earlier.

Since the recommendations of the 15th commission covered the six-year period up to March 31 2026, the next commission is being proposed to be constituted now.

The Advance Cell of the 16th Finance Commission was formed in the finance ministry on November 21, 2022 to oversee the preliminary work, pending the formal constitution of the commission.

A working group led by finance secretary TV Somanathan was set up to assist in drawing up the terms of reference. Views and suggestions were sought from states and Union Territories and deliberated upon by the group, the statement added.