16th Finance Commission ToR: More Freedom for Recommendations

New Delhi, Nov 30 (PTI) Finance Secretary T V Somanathan on Thursday said the Terms of Reference of the 16th Finance Commission have been kept short to give the panel more freedom to arrive at their recommendations after hearing out stakeholders.

The Union Cabinet, chaired by Prime Minister Narendra Modi, earlier this week approved the Terms of Reference (ToR) of the 16th Finance Commission, which will make recommendations for the five-year period beginning April 1, 2026.

Talking to reporters, Somanathan said the working group, which was instrumental in framing the ToR, paid attention to the points raised by states and drafted a ToR that is shorter than those of the previous finance commissions.

"… the ToR reflects some of the points made by the states. This gives the commission much more leeway and freedom to take into account all the inputs that they get from different layers of government, different experts, different people who appear before the commission and they can then (pronounce) an award that is within the constitutional frame but takes into account all stakeholders without too much of pre-decided items in the ToR," Somanathan said.

The ToR are neutral, they give every state freedom to make its submission before the commission and for the commission to take all of those submission into account and then pronounce an award or a recommendation that is the "best balance" between the different considerations, he added.

The ToR is short, but is all encompassing, Somanathan said, adding that the commission will listen to every state and the Centre and then arrive at a "balanced award".

The government is expected to soon name the chairperson and members of the 16th Finance Commission.

The commission would submit its report for the five-year period (2026-27 to 2030-31) to the President by October 31, 2025.

Besides suggesting tax devolution between the Centre and states and revenue augmentation measures, the commission would review the present arrangements for financing disaster management initiatives with reference to the funds constituted under the Disaster Management Act, 2005.

Finance Commission is a constitutional body that gives suggestions on Centre-state financial relations.

The erstwhile 15th Finance Commission under N K Singh had recommended that states be given 41 per cent of the divisible tax pool of the Centre during the five-year period 2021-22 to 2025-26, which is at the same level as was recommended by the 14th Finance Commission.

The Finance Commission normally takes about two years to make its recommendations.

The Advance Cell of 16th Finance Commission was formed in the finance ministry on November 21, 2022 to oversee preliminary work, pending the formal constitution of the commission.

Thereafter, a working group headed by the finance secretary and comprising secretaries in the departments of Economic Affairs, Revenue, Financial Services; Chief Economic Adviser; Adviser in Niti Aayog and Additional Secretary (Budget) was set up to assist in the 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, the statement added.