'Less is more' - Finance Secretary says 16th Finance Commission's Terms of Reference are final

The finance secretary's comments come after the Cabinet, on November 29, approved the Terms of Reference for the 16th Finance Commission. The commission, which will recommend how taxes are shared between the Centre and states and among states, will have to submit its report by October 2025, with its recommendations expected to take effect from April 1, 2026.

However, some media reports said the Terms of Reference were partial and generic compared to those given to the 15th Finance Commission. Somanathan, while admitting that the terms of the 16th Finance Commission may be shorter compared to some previous ones, added that suggestions of states were taken on board.

"In a sense, one could argue that less is more – in the sense that this actually gives the Commission much more leeway and freedom to take into account all the inputs that they get from different layers of government in India, the different experts, the different people who appear before the Commission. And then they can then fashion an award which is within the constitutional frame but takes into account all the stakeholder feedback without too much of pre-decided items in the Terms of Reference," Somanathan said.

When asked to comment on the complains by some states about how the tax revenue is divided among states, Somanathan said he could not speculate about what the commission may or may not do.

"All I can say is that the Terms of Reference are neutral. They give every state the freedom to make its submission before the Commission and for the Commission to take all of those submissions into account and then pronounce an award or recommendation that is best balanced between the different considerations," the finance secretary said.

Government finances, especially those of states, have come under scrutiny in the post-pandemic period. While deficit numbers have reduced significantly from their peaks, political pressures have led to several parties announcing so-called 'freebies' to woo voters. Some, to successful effect, have also promised a return to the Old Pension Scheme, which is widely seen as being fiscally unsustainable.

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Apart from freebies, some states — especially those from southern India — have raised the issue with the distribution of tax revenue, arguing that they contribute far more to the exchequer than what they get back.

Somanathan also said an announcement on the members and chairman of the 16th Finance Commission was "imminent".