16th Finance Commission ToR: Tax Devolution, Disaster Financing

New Delhi, Nov 29 (PTI) The government has cleared the Terms of Reference of the 16th Finance Commission to suggest the ratio for devolution of taxes between the Centre and states and also review financing disaster management initiatives, for five years beginning April 1, 2026.

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

Besides tax devolution and states' 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.

"The Union Cabinet chaired by Prime Minister Narendra Modi has approved the Terms of Reference for the Sixteenth Finance Commission. The 16th Finance Commission's recommendations, upon acceptance by the government, would cover a period of five years commencing April 1, 2026," the statement said.

The Cabinet meeting was held on Tuesday.

Names of the chairperson and members of 16th Finance Commission would be finalised soon, an official said.

The Terms of Reference (ToR) for 16th Finance Commission will be notified in due course.

The commission shall make recommendations in matters including the distribution between the Union and states of net proceeds of taxes which are to be, or may be, divided between them and the allocation between states of the respective shares of such proceeds.

The commission would advise on the principles which should govern the grants-in-aid of revenues of states out of Consolidated Fund of India and the sums to be paid to states by way of grants-in-aid of their revenues.

It would also suggest measures needed to augment the consolidated fund of a state to supplement the resources of panchayats and municipalities in the state.

"The commission may review the present arrangements on financing disaster management initiatives, with reference to the funds constituted under the Disaster Management Act, 2005, and make appropriate recommendations thereon," the statement added.

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

The erstwhile 15th Finance Commission under NK 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 14th Finance Commission.

As per 15th Finance Commission, Gross Tax Revenue (GTR) for the 5-year period is expected to be Rs 135.2 lakh crore.

Out of that, the divisible pool (after deducting cess and surcharges and the cost of collection) is estimated to be Rs 103 lakh crore.

States' share at 41 per cent of the divisible pool comes to Rs 42.2 lakh crore for the 2021–26 period. The commission had submitted its final report to the President on November 9, 2020.

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.