16th Finance Commission Holds first Meeting

The recently constituted 16th Finance Commission of India held its first meeting on February 16th, 2023 chaired by the Commission’s Chairman Dr. Arvind Panagariya. The meeting discussed the Terms of Reference and decided to initiate wide-ranging consultations with various stakeholders.

About Finance Commission

The Finance Commission is a constitutional body formed every 5 years that recommends formulae for tax revenue sharing arrangements between the Union government and State governments during the next 5-year period.

Key Responsibilities

Some key responsibilities of the Finance Commission are:

  • Decide tax revenue distribution between Centre and States
  • Allocate respective revenue shares among different States
  • Suggest grants-in-aid principles for States
  • Recommend ways to augment funds of local governments like Municipalities

16th Commission Timeframe

The 16th Finance Commission will submit its final recommendations by October 31, 2025 which will apply for 5 years from April 1, 2026 onwards.

Panel Membership

Along with Dr. Panagariya, the high-profile panel includes 3 full-time members – Ajay Narayan Jha, member of 15th FC and former secretary of expenditure, Annie George Mathew, former special secretary of expenditure, and Niranjan Rajadhyaksha, executive director of Artha Global.

Noted banker Soumya Kanti Ghosh has been appointed part-time member.

Meeting Agenda Items

Terms of Reference Discussion

In the first meeting, the Commission discussed at length the Terms of Reference (ToR) approved by the Union Cabinet which define the scope of analysis and contours of recommendations expected from the 16th Commission.

Consultation Plan Formulation

Recognizing need for constructive inputs from diverse governmental and non-governmental stakeholder groups on fiscal considerations impacting Center-State resource sharing, the Commission decided to embark on wide-ranging consultations soon.

Leveraging Research Expertise

The meeting concluded these consultations must be supplemented by focused research from specialized finance think tanks and academic institutions to bolster sound analytical rigour essential for the Commission’s challenging exercise.

Balancing Interests

As devising revenue distribution formula acceptable to all competing interests is complicated, members concurred the recommendations must uphold principles of equity and efficiency reflecting contemporary realities.

15th Finance Commission Report- Highlights

  • The share of states in the central taxes for the 2021-26 period is recommended to be 41%, same as that for 2020-21.  This is less than the 42% share recommended by the 14th Finance Commission for 2015-20 period.  The adjustment of 1% is to provide for the newly formed union territories of Jammu and Kashmir, and Ladakh from the resources of the Centre.
  • For horizontal devolution among states, it has suggested 12.5% weightage to demographic performance, 45% to income, 15% each to population and area, 10% to forest and ecology and 2.5% to tax and fiscal efforts.
  • Performance Based Incentives and Grants to States were announced based on social sector, rural economy, governance and administrative reforms and power sector.

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