16th Finance Commission to be constituted by Finance Ministry this Year

The Finance Ministry informed the Lok Sabha on Monday that the 16th Finance Commission (SFC) would be appointed in the current financial year. The SFC’s proposals will be for a five-year period beginning in FY27.

Responding to a query from Ambedkar Nagar MP Ritesh Pandey, Minister of State for Finance Pankaj Chaudhury said yes. “The terms of reference and other modalities are governed by Article 280 of the Constitution,” Chaudhury said, without answering whether the government is considering addressing the North-South divide in tax devolution and whether the 16th Finance Commission will collaborate with the GST council.

The Finance Ministry has allotted a meager Rs 10 crore in its FY24 Budget for the establishment of attached offices for the 16th Finance Commission.

The Finance Commission is a legally mandated body that meets every five years to develop a formula for distributing net tax proceeds between the Centre and the states, as well as between states and local governments. The 15th Finance Commission, led by NK Singh, was established in November 2017 with the mandate to present a report every two years for the next five years.

However, due to the Covid pandemic, the FFC filed a standalone report for FY21 and a five-year report concluding in FY26. As Jammu and Kashmir was divided into two Union Territories, the FFC reduced the un-tied share of states in net federal taxes to 41% from 42%.

According to D K Srivastava, member of the 12th Finance Commission and chief policy adviser at EY India, there may be references to the overall size of the Indian economy and how states can be aided in meeting that goal. “India’s tax-to-GDP ratio is at an all-time low. The government may request advice from the committee on how to improve the overall tax-to-GDP ratio. The commission may also be asked how to reform the GST and whether some states still need compensation,” he added.