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Finance Commission – Issues related to devolution of resources

Sixteenth Finance Commission submits its report for 2026-31 to the President 

Prelims Only | Polity | Mains Paper 2: Indian Constitution - historical underpinnings, evolution, features, amendments, significant provisions and basic structure

Why in the News?

The Sixteenth Finance Commission (16th FC), chaired by Arvind Panagariya, has formally submitted its report to the President of India on 17 November 2025.

Recommendations will be made public once tabled in Parliament under Article 281.

Back2Basics: Finance Commission

  • Constitutional Body: Established under Article 280 of the Constitution to define financial relations between the Union and the States.
  • Appointment: Constituted every 5 years or earlier by the President.
  • Composition: A Chairperson and 4 members, all appointed by the President.
  • Qualifications (under Finance Commission Act, 1951):
    • Chairperson must have experience in public affairs.
    • Members must be persons with expertise as:
      1. a High Court judge,
      2. an expert in government finance and accounts,
      3. a specialist in financial administration,
      4. an economist.
  • Functions: Recommends
    • Distribution of net proceeds of central taxes between Centre & States (vertical devolution);
    • Allocation of States’ share across individual States (horizontal distribution);
    • Principles governing grants-in-aid under Article 275;
    • Measures to augment State resources to support Panchayats and Municipalities;
    • Any additional financial matter referred by the President.
  • Submission & Tabling: Submits report to President; President lays it before both Houses of Parliament along with an explanatory memorandum.
  • Purpose: Ensures cooperative fiscal federalism, balanced revenue distribution, financial stability, and predictable Union–State relations.

About Sixteenth Finance Commission:

  • Constitution & Basis: Constituted by the President of India under Article 280(1) in November 2024 to examine Union and State finances and recommend tax-sharing for the period 1 April 2026 to 31 March 2031.
  • Chairperson & Members: Chaired by Dr. Arvind Panagariya with members Annie George Mathew, Dr. Manoj Panda, T. Rabi Sankar, Dr. Soumyakanti Ghosh, and Secretary Ritvik Pandey.
  • Report Submission: Submitted its report to the President on 17 November 2025; copies also presented to the Prime Minister and the Union Finance Minister.
  • Term of Work: Mandated to submit the report by 31 October 2025, covering a five-year award period starting FY 2026-27.
  • Mandate (Terms of Reference): Recommend
    • Vertical devolution – share of States in the Centre’s divisible pool;
    • Horizontal distribution – breakup of the States’ share across individual States;
    • Principles for grants-in-aid to States under Article 275;
    • Measures to augment State resources to support Panchayats and Municipalities;
    • Review of financing arrangements for Disaster Management, including National and State Disaster Response Funds;
    • Any other matter referred by the President.
  • Method of Work: Analysed finances of Union & States; held extensive consultations with
    • Central government, all State governments,
    • Local governments (urban & rural),
    • Chairpersons of previous Finance Commissions,
    • Multilateral institutions, academic & research bodies,
    • Advisory Council and domain experts.
  • Structure of Report: Final output organised in two volumes – Volume I (recommendations) and Volume II (annexures and analytical backup).
[UPSC 2023] Consider the following:

1. Demographic performance 2. Forest and ecology 3. Governance reforms 4. Stable government 5. Tax and fiscal efforts

For the horizontal tax devolution, the Fifteenth Finance Commission used how many of the above as criteria other than population area and income distance?

Options: (a) Only two (b) Only three* (c) Only four (d) All five

 

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