Government to set up 16th Finance Commission in 2023 to suggest tax devolution

The government plans to establish the 16th Finance Commission this year to recommend, among other things, the ratio in which tax is to be distributed between the Centre and states for a five-year period beginning April 1, 2026, according to an official.

The commission’s membership and Terms of Reference (ToR) are being finalized, according to the source.

Finance Commission is a constitutional authority that makes recommendations on financial ties between the Centre and the states.

The previous Finance Commission submitted its report to the President on November 9, 2020, for the five financial years 2021-22 to 2025-26.

The 15th Commission, led by NK Singh, maintained the tax devolution ratio at 42%, the same level proposed by the 14th Commission.

The central government approved the commission’s report, and as a result, the states will get 42% of the Centre’s divisible revenue pool from 2021-22 to 2025-26.

The financial deficit, debt path for the Union and states, and increased borrowing room for states based on achievement in power sector reforms are among the recommendations of the 15th Finance Commission.

According to the consolidation of finances glide path, the government wants to reduce the budget deficit to 4.5 percent of GDP by financial 2025-26.

The current financial deficit is predicted to be 5.9 percent of GDP, down from 6.4 percent in the prior financial year, which ended March 31, 2023.