Indian Govt Approves Terms Of Reference For 16th Finance Commission

The Finance Commission provides recommendations about sharing tax revenues between the Centre and states. These recommendations would cover a five-year period starting from April 1, 2026.

The terms would also provide suggestions for measures required to augment the Consolidated Fund of a State to add to the resources of the panchayats and municipalities. 

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The Indian government approved the ‘Terms of Reference’ for the 16th Finance Commission, Union Minister Anurag Thakur informed on Wednesday. Addressing the media, the minister shared the decisions taken at the Cabinet meeting a day earlier and said that the government has approved the terms for the commission.

The Finance Commission provides recommendations about sharing tax revenues between the Centre and states. These recommendations would cover a five-year period starting from April 1, 2026, the Information and Broadcasting Minister Thakur said in the briefing, reported PTI. 

The minister noted that the commission is set to submit its report by October 31, 2025. The 15th Finance Commission was set up on November 27, 2017. It gave recommendations for a six-year period starting April 1, 2020, via its interim and final reports. The recommendations of the earlier commission will be valid till the 2025-26 fiscal year. 

Article 280(1) of the Indian Constitution gives the modalities for establishing a Finance Commission to give recommendations on the distribution of the revenues earned from taxes between the Centre and the states. Additionally, the terms for distribution between states of respective shares of such proceeds, grants-in-aid, and the earnings of states and measures required to supplement the resources of panchayats during the award period are also included in the law. 

The Terms of Reference (ToR) approved by the Cabinet include 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. 

Another ToR talked about the principles overseeing the revenues generated by states from the grants-in-aid out of the Consolidated Fund of India and the sums to be paid to states by way of grants-in-aid of their revenues. The terms would also provide suggestions for measures required to augment the Consolidated Fund of a State to add to the resources of the panchayats and municipalities. 

The Finance Commission is set up every fifth year or earlier. However, Thakur stated, that the recommendations of the 15th Finance Commission cover the six-year period up to March 31, 2026, therefore the new commission is proposed to be constituted now. 

While the advance cell of the latest Commission was set up in the Ministry of Finance on November 21, 2022 to take care of the preliminary work, a Working Group headed by the Finance Secretary and Secretary (Expenditure) and comprising Secretary (Economic Affairs), along with Secretary (Revenue), Secretary (Financial Services), Chief Economic Adviser, Adviser, NITI Aayog and Additional Secretary (Budget) was put in place to help in the formulation of ToRs.