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The government has approved the 'Terms of Reference' for the 16 Finance Commission, which makes recommendations on sharing of tax revenues between the Centre and states.
The recommendations would cover a five-year period commencing April 1, 2026, Information and Broadcasting Minister Anurag Thakur said on Wednesday, giving details about the decisions taken at the Cabinet meeting last evening.
The commission would submit its report by October 31, 2025, Thakur said.
The 15th Finance Commission was constituted on November 27, 2017.
It made recommendations covering a six-year period commencing April 1, 2020 through its interim and final reports.
The recommendations of the 15th Finance Commission are valid up to financial year 2025-26.
Article 280(1) of the Constitutions lays down the modalities for setting up of a Finance Commission to make recommendation on the distribution of net proceeds of taxes between the Union and states; allocation between states of respective shares of such proceeds; grants-in-aid and the revenues of states and measures needed to supplement the resources of 'panchayats' during the award period.
The distribution between the Union and states of the net proceeds of taxes which are to be, or may be, divided between them under Chapter I, Part XII of the Constitution and the allocation between states of the respective shares of such proceeds, are among the terms of reference (ToR) approved by the Cabinet.
Another ToR is about the principles governing the grants-in-aid of the revenues of states out of the Consolidated Fund of India and the sums to be paid to states by way of grants-in-aid of their revenues.
It will also suggest measures needed to augment the Consolidated Fund of a State to supplement the resources of panchayats and municipalities, as per the ToR.
The Finance Commission is to be constituted every fifth year or earlier. However, as the recommendations of the 15th Finance Commission cover the six-year period up to March 31 2026, the new commission is proposed to be constituted now, Thakur said.
The advance cell of the 16th Finance Commission was formed in Ministry of Finance on November 21, 2022, to oversee preliminary work, pending formal constitution of the commission.
Thereafter, a Working Group headed by Finance Secretary and Secretary (Expenditure) and comprising Secretary (Economic Affairs), Secretary (Revenue), Secretary (Financial Services), Chief Economic Adviser, Adviser, NITI Aayog and Additional Secretary (Budget) was set up to assist in formulation of ToRs.
As part of the consultative process, views and suggestions were sought from state governments and Union Territories (with legislature) on the ToRs, and were duly deliberated by the group.